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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8611
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U S WEST, INC.
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A DELAWARE CORPORATION I.R.S. EMPLOYER
IDENTIFICATION
NO. 84-0926774
7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111
TELEPHONE NUMBER (303) 793-6500
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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U S WEST Communications Group Common Stock New York Stock Exchange
($0.01 per share, par value) Pacific Stock Exchange
U S WEST Media Group Common Stock New York Stock Exchange Pacific
($0.01 per share, par value) Stock Exchange
Liquid Yield Option Notes, due 2011 New York Stock Exchange
(convertible to common stock under certain circumstances)
Trust Originated Preferred Securities ("TOPrS") [Service Mark] New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
At January 31, 1996, 474,269,030 shares of U S WEST Communications Group
common stock and 472,654,874 shares of U S WEST Media Group common stock were
outstanding.
At January 31, 1996, the aggregate market value of the U S WEST
Communications Group voting stock held by non-affiliates was approximately
$16,439,488,720, and the aggregate market value of the U S WEST Media Group
voting stock held by non-affiliates was approximately $9,917,108,166.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ____
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's 1995 Annual Report to Shareowners are
incorporated by reference into Parts I, II and IV.
Portions of the Registrant's definitive Proxy Statement dated March 16,
1995, to be issued in connection with the 1996 Annual Meeting of Shareowners are
incorporated by reference into Parts II and III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
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TABLE OF CONTENTS
PART I
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ITEM PAGE
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1. Business............................................................................................ 1
2. Properties.......................................................................................... 7
3. Legal Proceedings................................................................................... 8
4. Submission of Matters to a Vote of Security Holders................................................. 8
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters........................... 9
6. Selected Financial Data............................................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 9
8. Consolidated Financial Statements and Supplementary Data............................................
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 9
PART III
10. Directors and Executive Officers of the Registrant.................................................. 9
11. Executive Compensation.............................................................................. 10
12. Security Ownership of Certain Beneficial Owners and Management...................................... 10
13. Certain Relationships and Related Transactions...................................................... 10
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 10
Independent Accountants' Report..................................................................... 15
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PART I
ITEM 1. BUSINESS
GENERAL
U S WEST, Inc. ("U S WEST" or the "Company") is incorporated under the laws
of the State of Delaware and has its principal executive offices at 7800 East
Orchard Road, Englewood, Colorado 80111, telephone number (303) 793-6500. U S
WEST is a diversified global communications company, and conducts its operations
through U S WEST Communications Group ("Communications Group") and U S WEST
Media Group ("Media Group"). (Financial information concerning U S WEST's
operations is set forth in the Consolidated Financial Statements and Notes
thereto, which begin on page B-29.) U S WEST and its subsidiaries had 61,047
employees at December 31, 1995.
COMMUNICATIONS GROUP. The major component of the Communications Group is U
S WEST Communications, Inc. ("U S WEST Communications"), which provides
telecommunications services to more than 25 million residential and business
customers in the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming (collectively, the "Communications Group Region"). U S WEST
Communications serves approximately 80 percent of the Communications Group
Region's population and approximately 40 percent of its geographic area.
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 directory and
information services businesses, including telephone directories.
RECENT DEVELOPMENTS
AGREEMENT TO ACQUIRE CONTINENTAL CABLEVISION, INC. On February 27, 1996, U
S WEST announced a definitive agreement under which Continental Cablevision,
Inc. ("Continental") will be merged with and into the Company. Continental, the
nation's third-largest cable operator, serves 4.2 million U.S. customers, passes
more than seven million U.S. households and owns significant other domestic and
international assets. The Company will purchase all of Continental's stock for
approximately $5.3 billion, and will assume Continental's debt and other
obligations, which amount to approximately $5.5 billion. Consideration of the
$5.3 billion in equity will consist of approximately $1 billion in U S WEST
preferred stock, convertible to Media Stock; $2.8 billion to $3.3 billion in
shares of Media Stock; and, at U S WEST's option, between $1 billion and $1.5
billion in cash. The transaction, which is expected to close in the fourth
quarter, is subject to a number of conditions, including regulatory and other
approvals such as that of Continental's shareholders. There can be no assurance
that these conditions will be satisfied.
RECAPITALIZATION PLAN. On October 31, 1995, the shareholders of U S WEST,
Inc., a Colorado corporation ("U S WEST Colorado") voted to approve a proposal
(the "Recapitalization Plan") adopted by the Board of Directors to reincorporate
from Colorado to Delaware and create two classes of common stock that are
intended to reflect separately the performance of the communications and
multimedia businesses. Under the Recapitalization Plan, shareholders approved an
Agreement and Plan of Merger between U S WEST Colorado and U S WEST, pursuant to
which U S WEST continues as the surviving corporation. In connection with the
merger, the Certificate of Incorporation of U S WEST has been amended and
restated to, among other things, designate two classes of common stock of U S
WEST, one class of which is authorized as U S WEST Communications Group Common
Stock ("Communications Stock"), and the other class is authorized as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado converted into one share of Communications
Stock and one share of Media Stock.
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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 and certain other
subsidiaries of the Communications Group, and the multimedia businesses of the
Media Group.
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. U S WEST
Communications comprised approximately 97 percent of the revenues and 98 percent
of the assets of the Communications Group in 1995.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc., a
publisher of White and Yellow Pages telephone directories and other information
services including database marketing and other interactive 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.
Dividends paid to the holders of Communications Stock are currently $0.535
per share per quarter. Dividends on the Communications Stock will be paid at the
discretion of the Board of Directors of U S WEST, based primarily upon the
financial condition, results of operations and business requirements of the
Communications Group and the Company as a whole. With regard to the Media Stock,
the Board of Directors of U S WEST 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.
TELECOMMUNICATIONS ACT OF 1996. On February 1, 1996, the House of
Representatives and the Senate approved a final bill that is intended to promote
competition between local telephone companies, long-distance carriers and cable
television operators. This bill was signed into law on February 8, 1996, and
replaces the antitrust consent decree that broke up the "Bell System" in 1984.
Major provisions of the legislation include the pre-emption of state regulations
that prohibit competition. The Act allows local telephone companies,
long-distance carriers and cable television companies to enter each other's
lines of business. To participate in the interLATA long-distance business within
their regions, the Regional Bell Operating Companies must first open their local
networks to facilities-based competition by satisfying a detailed list of
requirements, including interconnection and number portability. The legislation
also eliminates within three years most regulation of cable television rates.
The Act lifts the ban on cross-ownership between cable television and telephone
companies, permitting the Regional Bell Operating Companies to enter into the
cable business within their respective service territories, but prohibits them
from doing so through the purchase of existing cable companies, except in rural
communities. The legislation reaffirms the concept of universal service and
directs the Federal Communications Commission and the states to determine
universal service funding policy. The Federal Communications Commission and
state regulators have been given the responsibility to interpret and oversee the
implementation of this legislation.
COMMUNICATIONS GROUP
OPERATIONS. The principal types of telecommunications services offered by
the Communications Group are (i) local service, (ii) exchange access service
(which connects customers to the facilities of interLATA service providers), and
(iii) intraLATA long-distance network service. For the year ended December 31,
1995, local service, exchange access service and intraLATA long distance network
service accounted for 46%, 33% and 13%, respectively, of the sales and other
revenues of the Communications Group. At December 31, 1995, U S WEST
Communications had approximately 14,847,000 telephone network access lines in
service, a 3.6% increase over year end 1994. Excluding the effect of the sale of
approximately 95,000 rural telephone access lines during 1995, access lines
increased 4.2% over year end 1994. In 1995, revenues from a single customer,
AT&T, accounted for approximately
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11% of the sales and other revenues of the Communications Group, and 9% of the
sales and other revenues of U S WEST. The Communications Group expensed $22
million, $31 million and $42 million for research and development costs in 1995,
1994 and 1993, respectively.
U S WEST Communications incurred capital expenditures of approximately $2.7
billion in 1995 and expects to incur approximately $2.5 billion in 1996. The
1995 capital expenditures of U S WEST Communications were substantially devoted
to the continued modernization of telephone plant, to improve customer services
and to accommodate additional line capability in several states.
DEVELOPMENT OF BROADBAND NETWORK. A market trial for a broadband network
capable of providing voice, data and video services to customers commenced in
the Omaha area in August, 1995. The Communications Group does not intend to
expand this service offering beyond the Omaha area because of service cost and
pricing issues. The Communications Group does plan to continue to provide the
system that delivers basic, premium and pay-per-view video services in the Omaha
area. The Communications Group is evaluating the relative costs of alternative
video technologies, as well as the near-term feasibility of interactive
services. To satisfy anticipated demand for combined video and telephony
services on a cost-effective basis, the Communications Group's strategy may
include selective investments in wireless cable technologies.
THE RESTRUCTURING PLAN. U S WEST announced in 1993 that U S WEST
Communications would implement a plan (the "Restructuring Plan") designed to
provide faster, more responsive customer service and improved repair
capabilities while reducing the cost of providing these services. As part of the
Restructuring Plan, the Communications Group is developing new systems and
enhanced system functionality that will enable it to monitor networks to reduce
the risk of service interuptions, activate telephone service on demand, rapidly
design and engineer products and services for customers, and centralize its
service centers. The Communications Group has consolidated its 560 customer
service centers into 26 centers in ten cities and plans on reducing its work
force by approximately 10,000 employees in connection with the Restructuring
Plan. Work force reductions under the Restructuring Plan will be partially
offset by the effects of higher than anticipated volumes of business and the
achievement of customer service objectives. All service centers are operational
and supported by new systems and system functionality. The Restructuring Plan is
expected to be substantially completed by the end of 1997. Implementation has
been affected by growth in the business and related service issues, new business
opportunities, revisions to system delivery schedules and productivity issues
caused by the major rearrangement of resources due to restructuring. These
issues will continue to affect the timing of employee separations. See "Costs
and Expenses" and "Restructuring Charge" under Management's Discussion and
Analysis of Financial Condition and Results of Operations on p. B-9 and p. B-10.
REGULATION. U S WEST Communications is subject to varying degrees of
regulation by state commissions with respect to intrastate rates and service,
and access charge tariffs. U S WEST is also subject to the jurisdiction of the
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 by
the FCC 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. The price cap index for
most services is annually adjusted for inflation, productivity level and
exogenous costs, and has resulted in reduced access prices paid by interexchange
carriers to local telephone companies. The interim order also provides for three
productivity options, including a no-sharing option, and for increased
flexibility for adjusting prices downward in response to competition. In 1995,
the Communications Group selected the lowest productivity option while, prior to
this interim order, the Communications Group used an optional higher
productivity factor in determining prices. Consequently, the Communications
Group expects the order to have no significant near-term impact.
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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. State and local regulatory authorities may also regulate certain
terms and conditions of the offering of wireless services, such as the siting
and construction of transmitter towers, antennas and equipment shelters and
zoning and building permit approvals. See "Competitive and Regulatory
Environment" under Management's Discussion and Analysis of Financial Condition
and Results of Operations on p. B-22.
COMPETITION. The Communications Group faces competition in the local
exchange business, exchange access and intraLATA long-distance markets,
primarily from competitive access providers ("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.
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, 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 business 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 adoption of the Telecommunications Act of 1996 will have an impact on
the competition faced by the Communications Group. See "Recent Developments --
Telecommunications Act of 1996," and "Competitive and Regulatory Environment"
under Management's Discussion and Analysis of Financial Condition and Results of
Operations on p. B-22.
MEDIA GROUP
OPERATIONS. 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 directory and
information services businesses. For the year ended December 31, 1995, domestic
and international directory and information services businesses accounted for
10% of the sales and other revenues of U S WEST. The Media Group expensed $3
million, $6 million and $5 million for research and development costs in 1995,
1994 and 1993, respectively.
CABLE AND TELECOMMUNICATIONS. 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 cable systems in the Atlanta, Georgia
metropolitan area (the "Atlanta Systems") and its investment in Time Warner
Entertainment Company L.P. ("TWE" or "Time-Warner Entertainment"), the second
largest provider of cable television services in the United States.
On February 27, 1996, U S WEST announced a definitive agreement to merge
with Continental Cablevision, Inc. for a combination of cash, U S WEST preferred
stock (convertible to Media Stock)
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and shares of Media Stock valued at $5.3 billion. The transaction also involves
an assumption of debt and other obligations amounting to approximately $5.5
billion. See "Recent Developments -- Agreement to Acquire Continental
Cablevision, Inc."
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.
U S WEST International, through subsidiaries, owns a 26.8 percent interest
in TeleWest plc ("TeleWest"), the largest provider of combined cable television
and residential and business telecommunications services in the United Kingdom.
In 1995, TeleWest Communications plc merged its cable television and telephony
interests with SBC CableComms (UK) to form TeleWest. An affiliate of Tele-
Communications, Inc., ("TCI International") also owns a 26.8 percent interest in
TeleWest, with the remaining interests held by the public.
WIRELESS COMMUNICATIONS. U S WEST NewVector Group, Inc. ("NewVector")
provides cellular services to customers over wireless networks in 26
metropolitan service areas and 28 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 December 31,
1995, NewVector had approximately 1,463,000 cellular customers, a 51 percent
increase from December 31, 1994.
In 1994, the Company entered into a definitive agreement with AirTouch
Communications to combine their domestic cellular assets. AirTouch's initial
equity ownership of the joint venture will be approximately 70 percent and the
Media Group's will be approximately 30 percent. The combination will take place
in two phases. During Phase I, which U S WEST entered effective November 1,
1995, the two companies are operating their cellular properties separately. A
Wireless Management Company ("WMC") has been formed and is providing centralized
services to both companies on a contract basis. In Phase II, AirTouch and U S
WEST will contribute their domestic cellular assets to the WMC. The recent
passage of the Telecommunications Act of 1996 has removed significant regulatory
barriers to completion of Phase II of the business combination, and the Company
expects that Phase II closing could take place by the end of 1996 or in early
1997.
U S WEST has entered into a venture with AirTouch Communications, Bell
Atlantic and NYNEX Corporation to form a strategic national wireless alliance. U
S WEST has entered into a separate venture with the same partners to provide
personal communications services ("PCS"). This PCS venture, known as PCS
PrimeCo, acquired rights to 11 licenses in 1995 in the Federal Communications
Commission's auction of PCS radio spectrum. The 11 licenses cover 57 million
people in Chicago, Dallas, Honolulu, Houston, Jacksonville, Miami, Milwaukee,
New Orleans, Richmond, San Antonio and Tampa.
U S WEST International owns interests in wireless communications systems or
investments in several countries, including the United Kingdom, Malaysia,
Russia, Hungary, the Czech Republic, the Slovak Republic and Japan.
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.
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DIRECTORY AND INFORMATION SERVICES. 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 more than 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 development of new directory features, and the development and
packaging of new information products, such as local audiotext services.
Marketing Resources' yellow pages directory advertising business had revenue
growth of approximately 6.4 percent in 1995.
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 communications, entertainment, information and transaction services
over networks operated by the Media Group and others, including the networks of
the Communications Group in the Communications Group Region.
U S WEST International owns 100 percent of Thomson Directories, which it
acquired in 1994. Thomson Directories annually publishes 156 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. U S
WEST International also owns 100 percent of Polska, which publishes 32
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 television and satellite programming. U S WEST International
has the right to appoint one representative to Flextech's board of directors.
REGULATION. The products and services of the Media Group are subject to
varying degrees of regulation. Under the Telecommunications Act of 1996, the
regulation of cable television rates will be discontinued effective March 31,
1999, or earlier if competition exists. The same Act also (i) eliminates certain
cross-ownership restrictions among cable operators, broadcasters and
multichannel, multipoint distribution system operators, (ii) removes barriers to
competition with local exchange providers, and (iii) eliminates restrictions
that previously applied to the Media Group relating to long-distance services.
Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services, franchise renewal and imposition of franchise fees.
The Media Group is 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. 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 RBOC's, 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
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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.
U S WEST Multimedia will be offering telecommunications services in
competition with the dominant local exchange carriers ("LECs"), CAPs and other
potential providers of telephone services in local domestic markets, including
the interexchange carriers such as AT&T, MCI Communications and Sprint Corp. The
degree of competition will be dependent upon the state and federal regulations
concerning entry, interconnection requirements, and the degree of unbundling of
the LECs' networks. Competition will be based upon price, service quality and
breadth of services offered. TeleWest's telecommunications services compete with
domestic telephone companies in the United Kingdom, such as British
Telecommunications plc.
New Vector'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 a 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.
Marketing Resources' directory publishing businesses continue to face
significant competition from local and national publishers of directories, as
well as other advertising media such as newspapers, magazines, broadcast media,
direct mail and operator assisted services. Directory listings are now offered
in electronic data bases through telephone company and third party networks. As
such offerings expand and are enhanced through interactivity and other 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.
See "Competitive and Regulatory Environment" under Management's Discussion
and Analysis of Financial Condition and Results of Operation on p. B-22.
ITEM 2. PROPERTIES.
The properties of U S WEST do not lend themselves to description by
character and location of principal units. At December 31, 1995, the majority of
U S WEST property was utilized in providing telecommunications services by U S
WEST Communications. Substantially all of U S WEST Communications' central
office equipment is located in owned buildings situated on land owned in fee,
while many garages and administrative and business offices are in leased
quarters.
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ITEM 3. LEGAL PROCEEDINGS.
U S WEST and its subsidiaries are subject to claims and proceedings arising
in the ordinary course of business. While complete assurance cannot be given as
to the outcome of any contingent liabilities, in the opinion of U S WEST, any
financial impact to which U S WEST and its subsidiaries are subject is not
expected to be material in amount to U S WEST's operating results or its
financial position.
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against U
S WEST on October 11, 1995, alleging misrepresentation, breach of contract and
other misconduct on the part of U S WEST. Time Warner's countersuit seeks a
reformation of the Time Warner Entertainment partnership agreement, an order
that enjoins U S WEST from breaching the partnership agreement and unspecified
compensatory damages. U S WEST has denied each of the claims in Time Warner's
countersuit. Trial for this action concluded on March 22, 1996. A ruling by the
Delaware Chancery Court is expected in June 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF U S WEST
Pursuant to General Instructions G(3), the following information is included
as an additional item in Part I:
<TABLE>
<CAPTION>
DATE ASSUMED
PRESENT
POSITION AGE POSITION
--------------------------------------------------------- --- ---------------
<S> <C> <C> <C>
James T. Anderson Acting Executive Vice President & Chief Financial Officer 56 1984(1)
Charles M. Lillis Executive Vice President & President and Chief Executive 54 1987(2)
Officer, U S WEST Media Group
Richard D. McCormick Chairman of the Board, Chief Executive Officer & 55 1986(3)
President
Charles P. Russ, III Executive Vice President-Law and Human Resources, General 51 1992
Counsel & Secretary
James H. Stever Executive Vice President - Public Policy 52 1993
Solomon D. Trujillo Executive Vice President & President and Chief Executive 44 1995(4)
Officer, U S WEST Communications, Inc.
</TABLE>
- ------------------------------
(1)
Mr. Anderson was elected Acting Executive Vice President and Chief Financial
Officer effective October 6, 1995; he has been Vice President and Treasurer
since 1984.
(2)
Mr. Lillis was elected President and Chief Executive Officer, U S WEST Media
Group effective August 22, 1995.
(3)
Mr. McCormick was appointed Chief Executive Officer on January 1, 1991, and
was elected Chairman of the Board effective May 1, 1992.
(4)
Mr.Trujillo was elected President and Chief Executive Officer of U S WEST
Communications, Inc. effective July 1, 1995, and Executive Vice President, U S
WEST, Inc. effective October 6, 1995. Previously, Mr. Trujillo was President
and Chief Executive Officer of U S WEST Marketing Resources Group, Inc.
Executive Officers are not elected for a fixed term of office, but serve at
the discretion of the Board of Directors.
8
<PAGE>
Each of the above executive officers has held a managerial position with U S
WEST or an affiliate of U S WEST since 1991, except for Mr. Russ. Mr. Russ was
Vice President, Secretary and General Counsel of NCR Corporation from February,
1984 to June, 1992.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in Note 21, Quarterly
Financial Data, on page B-63. The U.S. markets for trading in U S WEST common
stock are the New York Stock Exchange and the Pacific Stock Exchange. As of
December 31, 1995, U S WEST Communications Group common stock was held by
approximately 775,125 shareholders of record and U S WEST Media Group common
stock was held by approximately 770,346 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA.
Reference is made to the information set forth on pages B-1 through B-2.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to the information set forth on pages B-3 through B-26.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the information set forth on pages B-29 through B-63.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Coopers & Lybrand L.L.P. has served as the Company's independent auditor,
and Arthur Andersen LLP has served as the primary auditing firm for major
subsidiaries within U S WEST Media Group, since 1984. In view of the Company's
new targeted stock structure, the Company determined, following a recommendation
of the Audit Committee, that it will be more efficient and effective for the
Company to have a single firm perform the auditing function for the entire
business.
During the Company's two most recent fiscal years ended December 31, 1995
and December 31, 1994, the reports of Coopers & Lybrand L.L.P. on the Company's
financial statements contained no adverse opinion or disclaimer of opinion, nor
were they qualified or modified as to uncertainty, audit scope or accounting
principles. In addition, during such fiscal years and the interim periods
thereafter: (1) no disagreements with Coopers & Lybrand L.L.P. have occurred on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand L.L.P., would have caused it to make
reference to the subject matter of the disagreement in connection with its
report on the Company's financial statements; (2) no reportable events involving
Coopers & Lybrand L.L.P. have occurred that must be disclosed under applicable
securities laws; and (3) the Company has not consulted with Arthur Andersen LLP
on items that concerned the application of accounting principles to a specific
transaction, either completed or proposed, or on the type of audit opinion that
might be rendered on the Company's financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to executive officers is
set forth in Part I, page 8, under the caption "Executive Officers of U S WEST."
The information required by this item with respect to Directors is included
in the U S WEST definitive Proxy Statement dated April 8, 1996 ("Proxy
Statement") under "Election of Directors" on pages 4 through 6 and is
incorporated herein by reference.
9
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Proxy Statement
under "Executive Compensation" on pages 8 through 20 and "Compensation of
Directors" on pages 3 and 4 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Proxy Statement
under "Securities Owned by Management" on page 4 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
PAGE
NUMBER
----------------------
<S> <C> <C>
(1) -- Report of Independent Accountants........................................ B-27
(2) -- Consolidated Financial Statements:
Consolidated Statements of Operations -- for the years ended December 31,
1995, 1994 and 1993..................................................... B-29 through B-30
Consolidated Balance Sheets as of December 31, 1995 and 1994............. B-31
Consolidated Statements of Cash Flows -- for the years ended December 31,
1995, 1994 and 1993..................................................... B-32
Notes to Consolidated Financial Statements............................... B-33 through B-63
(3) -- Consolidated Financial Statement Schedule:
Report of Independent Accountants........................................ --
II -- Valuation and Qualifying Accounts.................................. S-1
(4) -- U S WEST Communications Group Combined Financial Statements:.............
Report of Independent Accountants........................................ C-16
Combined Statements of Operations -- for the years ended December 31,
1995, 1994 and 1993..................................................... C-17
Combined Balance Sheets as of December 31, 1995 and 1994................. C-18
Combined Statements of Cash Flows -- for the years ended December 31,
1995, 1994 and 1993..................................................... C-19
Notes to the Combined Financial Statements............................... C-20 through C-38
(5) -- U S WEST Media Group Combined Financial Statements:
Report of Independent Accountants........................................ D-22
Combined Statements of Operations -- for the years ended December 31,
1995, 1994 and 1993..................................................... D-23
Combined Balance Sheets as of December 31, 1995 and 1994................. D-24
Combined Statements of Cash Flows -- for the years ended December 31,
1995, 1994 and 1993..................................................... D-25
Notes to the Combined Financial Statements............................... D-26 through D-55
</TABLE>
10
<PAGE>
Financial statement schedules other than those listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not required or
applicable.
(b) Reports on Form 8-K:
U S WEST filed the following reports on Form 8-K during the fourth
quarter of 1995:
(i) report dated October 6, 1995, reporting the resignation of Richard
B. Cheney from the U S WEST board of directors and filing a Form of
Underwriting Agreement and a Form of Note concerning the 6 3/4% Notes due
October 1, 2005, issued by U S WEST Capital Funding, Inc.;
(ii) report dated October 27, 1995, relating to a release of earnings
for the period ended September 30, 1995, reporting a change in U S WEST's
certifying accountant, and filing a Form of Note, a Form of Distribution
Agreement, a Form of Fixed-Rate Medium-Term Note, and Form of Floating Rate
Medium-Term Note concerning the U S WEST Capital Funding, Inc. 6.31% Notes
due November 1, 2005, unconditionally guaranteed as to payment of principal
and interest by U S WEST, Inc.; and
(iii) report dated November 2, 1995, filing a Form of Fixed Rate Global
Note and a Form of Floating Rate Global Note concerning the $500,000,000 U S
WEST Capital Funding, Inc. Medium-Term Notes due nine months or more from
the date of issue, unconditionally guaranteed as to payment of principal,
premium, if any, and interest, by U S WEST, Inc.
(c) Exhibits:
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission ("SEC"), are incorporated herein by reference as
exhibits hereto.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <C> <S>
(3a) -- Restated Certificate of Incorporation of U S WEST, Inc. (originally incorporated May 12, 1995 under
the same name) executed October 31, 1995 (Annex II to Registration Statement No. 33-59315).
3b -- Bylaws of U S WEST, Inc. as amended March 15, 1996.
(4a) -- Form of Amended and Restated Rights Agreement between U S WEST, Inc. and State Street Bank and Trust
Company, as Rights Agent (Exhibit 4-A to Registration Statement No. 33-59315)
4b -- No instrument which defines the rights of holders of long and intermediate term debt of U S WEST,
Inc. and all of its subsidiaries is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees to furnish a copy of any
such instrument to the SEC upon request.
(10a) -- Reorganization and Divestiture Agreement dated as of November 1, 1983, between American Telephone and
Telegraph Company and its affiliates, U S WEST, Inc., The Mountain States Telephone and Telegraph
Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and NewVector
Communications, Inc. (Exhibit 10a to Form 10-K, date of report March 8, 1984, File No. 1-3501).
(10b) -- Shared Network Facilities Agreement dated as of January 1, 1984, between American Telephone and
Telegraph Company, AT&T Communications of the Midwest, Inc., The Mountain States Telephone and
Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company
(Exhibit 10b to Form 10-K, date of report March 8, 1984, File No. 1-3501).
(10c) -- Agreement Concerning Termination of the Standard Supply Contract effective December 31, 1983, between
American Telephone and Telegraph Company, Western Electric Company, Incorporated, The Mountain States
Telephone and Telegraph
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and Central
Services Organization (Exhibit 10d to Form 10-K, date of report March 8, 1984, File No, 1-3501).
<C> <C> <S>
(10d) -- Agreement Concerning Certain Centrally Developed Computer Systems effective December 31, 1983,
between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The
Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific
Northwest Bell Telephone Company and Central Services Organization (Exhibit 10e to Form 10-K, date of
report March 8, 1984, File No. 1-3501).
(10e) -- Agreement Concerning Patents, Technical Information and Copyrights effective December 31, 1983,
between American Telephone and Telegraph Company and U S WEST, Inc. (Exhibit 10f to Form 10-K, date
of report March 8, 1984, File No. 1-3501).
(10f) -- AMPS Software Agreement effective December 31, 1983, between American Telephone and Telegraph Company
and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 28, 1984, File No.
1-8611).
(10g) -- Agreement Concerning Contingent Liabilities, Tax Matters and Termination of Certain Agreements dated
as of November 1, 1983, between American Telephone and Telegraph Company, U S WEST, Inc., The
Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific
Northwest Bell Telephone Company and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date
of report March 8, 1984, File No. 1-3501).
(10h) -- Agreement Concerning Trademarks, Trade Names and Service Marks effective December 31, 1983, between
American Telephone and Telegraph Company, American Information Technologies Corporation, Bell
Atlantic Corporation, BellSouth Corporation, Cincinnati Bell, Inc., NYNEX Corporation, Pacific
Telesis Group, The Southern New England Telephone Company, Southwestern Bell Corporation and U S
WEST, Inc. (Exhibit 10i to Form 10-K, date of report March 8, 1984, File No. 1-3501).
(10i) -- U S WEST, Inc. Short-Term Incentive Plan (Exhibit 10i to Form 10-K filed March 19, 1993, File No.
1-8611).
(10j) -- Financial Counseling Program for Officers of U S WEST (Exhibit 10-ee to Registration Statement No.
2-87861).
(10k) -- U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration
Statement No. 2-87861).
(10l) -- Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance
(Exhibit 10-gg to Registration Statement No. 2-87861).
(10m) -- Extract from the U S WEST Management Pension Plan regarding limitations on and payments of pension
amounts which exceed the limitations contained in the Employee Retirement Income Security Act
(Exhibit 10-hh to Registration Statement No. 2-87861).
(10n) -- U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March 29,
1989, File No. 1-8611).
(10o) -- Amended U S WEST Deferred Compensation Plan (Annex X to Registration Statement No. 33-59315).
(10p) -- Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March 5,
1992, File No. 1-8611).
(10q) -- Amended U S WEST 1994 Stock Plan (Annex IX to Registration Statement No. 33-59315).
(10r) -- Shareholders' Agreement dated as of January 1, 1988 among Ameritech Services, Inc., Bell Atlantic
Management Services, Inc., BellSouth Services Incorporated, NYNEX
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
Service Company, Pacific Bell, Southwestern Bell Telephone Company, The Mountain States Telephone and
Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company
(Exhibit 10r to Form SE filed March 5, 1992, File No. 1-8611).
<C> <C> <S>
(10s) -- U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to
Registration Statement No. 2-87861).
(10t) -- U S WEST Mid-Career Pension Plan (Exhibit 10u to Form 10-K, date of report March 29, 1989, File No.
1-8611).
10u -- Form of U S WEST, Inc. Non-Qualified Stock Option Agreement.
10v -- Form of U S WEST, Inc. Restricted Stock Agreement.
(10w) -- Employment letter from Richard D. McCormick to Charles P. Russ, III dated May 11, 1992 (Exhibit 10w
to Form 10-K, date of report March 7, 1995).
(10x) -- Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and U S
WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993).
10y -- Form of U S WEST, Inc. Executive Change of Control Agreement.
10z -- Form of Change of Control Agreement for Chief Executive Officer.
10aa -- Form of Group Executive Change of Control Agreement.
10ab -- Form of Executive Severance Agreement.
(10ac) -- U S WEST, Inc. Executive Long-Term Incentive Plan (Exhibit 10ad to Form 10-K, date of report March 7,
1995).
(10ad) -- U S WEST, Inc. Executive Short-Term Incentive Plan (Exhibit 10ae to Form 10-K, date of report March
7, 1995).
10ae -- Agreement and Plan of Merger between U S WEST, Inc. and Continental Cablevision Inc., dated February
27, 1996.
10af -- Stockholders' Agreement among certain stockholders of Continental Cablevision, Inc. and U S WEST,
Inc. dated February 27, 1996.
11 -- Statement Re Computation of Per Share Earnings.
12 -- Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial Services,
Inc.
21 -- Subsidiaries of U S WEST, Inc.
23 -- Consent of Independent Accountants.
24 -- Powers of Attorney.
27 -- Financial Data Schedule.
99 -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 1995,
to be filed by amendment.
</TABLE>
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Englewood, State of Colorado, on March 28, 1996.
U S WEST, Inc.
By: /s/ JAMES T. ANDERSON
-----------------------------------
James T. Anderson
ACTING EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Richard D. McCormick* Chairman of the Board, President and Chief
Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ James T. Anderson Acting Executive Vice President and Chief
Financial Officer
DIRECTORS:
/s/ Remedios Diaz-Oliver*
/s/ Grant A. Dove*
/s/ Allan D. Gilmour*
/s/ Pierson M. Grieve*
/s/ Shirley M. Hufstedler*
/s/ Allen F. Jacobson*
/s/ Richard D. McCormick*
/s/ Marilyn C. Nelson*
/s/ Frank Popoff*
/s/ Jerry O. Williams*
*By /s/ JAMES T. ANDERSON
--------------------------------------
James T. Anderson
(FOR HIMSELF AND AS ATTORNEY-IN-FACT)
</TABLE>
Dated March 28, 1996
14
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Our report on the consolidated financial statements of U S WEST, Inc., 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, is included on page B-45 of this Form 10-K. In
connection with our audits of such consolidated financial statements, we have
also audited the related consolidated financial statement schedule listed in the
index on page S-1 of this Form 10-K for the years ended December 31, 1995, 1994
and 1993.
In our opinion, the consolidated financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
15
<PAGE>
U S WEST, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED CHARGED TO BALANCE AT
BEGINNING TO OTHER END OF
OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Year 1995.............................................. $ 62 $ 122(a) $ 13 $ 109(b) $ 88
Year 1994.............................................. 54 91(a) 3 86(b) 62
Year 1993.............................................. 59 83(a) 1 89(b) 54
RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING, INCLUDING
FORCE AND FACILITY CONSOLIDATION
Year 1995.............................................. 702 -- -- 334 368
Year 1994.............................................. 935 -- -- 233 702
Year 1993.............................................. -- 1,000 -- 65 935
RESERVES RELATED TO 1991 BUSINESS RESTRUCTURING, INCLUDING
FORCE REDUCTIONS AND THE WRITE OFF OF CERTAIN INTANGIBLE
ASSETS
Year 1995.............................................. -- -- -- -- --
Year 1994.............................................. 95 -- -- 95 --
Year 1993.............................................. 215 -- -- 120 95
CAPITAL ASSETS SEGMENT:
REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR
LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT
Year 1995.............................................. 119 -- -- 49 70
Year 1994.............................................. 336 -- -- 217 119
Year 1993.............................................. 402 120(c) -- 186 336
</TABLE>
- ------------------------------
Note: Certain reclassifications within the schedule have been made to conform to
the current year presentation.
(a) Does not include amounts charged directly to expense. These amounts were
$6, $10 and $10 for 1995, 1994 and 1993, respectively.
(b) Represents credit losses written off during the period, less collection of
amounts previously written off.
(c) Provision for estimated loss on disposal of the capital assets segment of
$100 and an additional provision of $20 to reflect the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates.
S-1
<PAGE>
U S WEST, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales and other revenues................................... $ 11,746 $ 10,953 $ 10,294 $ 9,823 $ 9,528
Income from continuing operations (1)...................... 1,329 1,426 476 1076 840
Net income (loss) (2)...................................... 1,317 1,426 (2,806) (614) 553
Total assets............................................... 25,071 23,204 20,680 23,461 23,375
Total debt (3)............................................. 8,855 7,938 7,199 5,430 5,969
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company-guaranteed debentures............................. 600 -- -- -- --
Preferred stock subject to mandatory redemption............ 51 51 -- -- --
Shareowners' equity........................................ 7,948 7,382 5,861 8,268 9,587
Earnings per common share (continuing
operations) (1,4)......................................... -- 3.14 1.13 2.61 2.09
Earnings (loss) per common share (1,4)..................... -- 3.14 (6.69) (1.49) 1.38
Weighted average common shares outstanding (thousands)
(4)....................................................... -- 453,316 419,365 412,518 401,332
Dividends per common share (4)............................. -- $ 2.14 $ 2.14 $ 2.12 $ 2.08
Number of common shareowners (4)........................... -- 816,099 836,328 867,773 899,092
Return on common shareowners' equity (5)................... 17.2% 21.6% -- 14.4% 5.7%
Percentage of debt to total capital (3).................... 50.7% 51.6% 55.1% 39.6% 38.4%
Capital expenditures (3)................................... $ 3,140 $ 2,820 $ 2,441 $ 2,554 $ 2,425
Employees.................................................. 61,047 61,505 60,778 63,707 65,829
PRO FORMA INFORMATION -- COMMUNICATIONS GROUP: (4)
Earnings per common share................................ $ 2.50
Dividends per common share............................... 2.14
Average common shares outstanding (thousands)............ 470,716
Number of common shareowners............................. 775,125*
PRO FORMA INFORMATION --
MEDIA GROUP: (4)
Earnings per common share................................ $ 0.29
Average common shares outstanding (thousands)............ 470,549
Number of common shareowners............................. 770,346*
</TABLE>
- ------------------------------
* Actual
(1)
1995 income from continuing operations includes a gain of $95 ($0.20 per Media
share) from the merger of U S WEST's joint venture interest in TeleWest plc
with SBC CableComms (UK), a gain of $85 ($0.18 per Communications share) on
the sales of certain rural telephone exchanges and $17 ($0.01 per
Communications share and $0.02 per Media share) for expenses associated with
the November 1, 1995 recapitalization. 1994 income from continuing operations
includes a gain of $105 ($0.23 per share) on the partial sale of U S WEST's
joint venture interest in TeleWest plc, a gain of $41 ($0.09 per share) on the
sale of the Company's paging operations and a gain of $51 ($0.11 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
a charge of $54 ($0.13 per share) for the cumulative effect on deferred taxes
of the 1993 federally mandated increase in income tax rates. 1991 income from
continuing operations was reduced by a restructuring charge of $230 ($0.57 per
share).
(2)
1995 net income was reduced by extraordinary items of $12 ($0.02 per
Communications share and $0.01 per Media share) for the early extinguishment
of debt. 1993 net income was reduced by extraordinary charges of $3,123 ($7.45
per share) for the discontinuance of Statement of Financial Accounting
Standards ("SFAS") No. 71 and $77 ($0.18 per share) for the early
extinguishment of debt. 1993 net income also includes a charge of $120 ($0.28
per share) for U S WEST's decision to discontinue the operations of its
B-1
<PAGE>
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 ($0.09 per share),
$103 ($0.25 per share) and $(287) ($0.71 per share) in 1993, 1992 and 1991,
respectively.
(3)
Capital expenditures, debt and the percentage of debt to total capital
excludes the capital assets segment, which has been discontinued and is held
for sale.
(4)
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share have been
presented on a pro forma basis to reflect the two classes of stock as if they
had been outstanding since January 1, 1995. For periods prior to the
recapitalization, the average common shares outstanding are assumed to be
equal to the average common shares outstanding for U S WEST, Inc.
(5)
1995 return on shareowners' equity is based on income before extraordinary
items. 1993 return on shareowners' equity is not presented. Return on
shareowners' equity for fourth-quarter 1993 was 19.9 percent based on income
from continuing operations. 1992 return on shareowners' equity is based on
income before the cumulative effect of change in accounting principles.
B-2
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THE RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate in
Delaware and create two classes of common stock. Under the Recapitalization
Plan, shareholders approved an Agreement and Plan of Merger between U S WEST
Colorado and U S WEST, Inc., a Delaware corporation ("U S WEST" or the
"Company"), pursuant to which U S WEST continues as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST has
been amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock") and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock").
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
THE COMMUNICATIONS GROUP
The Communications Group primarily provides regulated communications
services to more than 25 million residential and business customers in the
Communications Group Region (the "Region"). The Region includes the states of
Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North
Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Services offered by
the Communications Group include local telephone services, exchange access
services (which connect customers to the facilities of carriers, including
long-distance providers and wireless operators), and long-distance services
within Local Access and Transport Areas ("LATAs") in the Region. The
Communications Group provides other products and services, including custom
calling features, voice messaging, caller identification, high-speed data
applications, customer premises equipment and certain communications services to
business customers and governmental agencies both inside and outside the Region.
The Telecommunications Act of 1996, enacted into law on February 8, 1996, will
dramatically alter the competitive landscape of the telecommunications industry
and will further change the nature of services the Communications Group will
offer. These future service offerings include interLATA long-distance service,
wireless services, cable television and interconnection services provided to
competing providers of local services.
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 directory and information services businesses.
The Media Group's cable and telecommunications businesses include U S WEST's
investment in Time Warner Entertainment Company L.P. ("TWE" or "Time Warner
Entertainment"), the second largest provider of cable television services in the
United States, its cable systems in the Atlanta, Georgia metropolitan area ("the
Atlanta Systems"), and international cable and telecommunications investments,
including TeleWest plc ("TeleWest"). In 1995, TeleWest Communications plc merged
its cable television and telephony interests with SBC CableComms (UK) to form
TeleWest, the largest provider of combined cable and telecommunications services
in the United Kingdom. The Media Group also owns interests in cable and/or
telecommunications properties in the Netherlands, Sweden, Norway, Hungary, Czech
Republic, Malaysia and Indonesia.
The Media Group provides domestic wireless communications services,
including cellular services, in 13 western and midwestern states to a rapidly
growing customer base. The Media Group also provides
B-3
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
wireless communications services internationally through its Mercury One 2 One
("One 2 One") joint venture, the world's first personal communications service
located in the United Kingdom. The Media Group also owns interests in wireless
properties in Hungary, the Czech and Slovak Republics, Russia, Malaysia, India
and Poland.
The Media Group's directory and information services businesses develop and
package content and information services, including telephone directories,
database marketing and other interactive services in domestic and international
markets. The Media Group publishes more than 300 White and Yellow Pages
directories in 14 western and midwestern states and nearly 200 directories in
the United Kingdom and Poland. The Media Group also has a 50 percent interest in
Listel, Brazil's largest telephone directory publisher.
AIRTOUCH MERGER
During 1994, U S WEST 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 U S WEST. The combination will take place
in two phases. During Phase I, which U S WEST entered effective November 1,
1995, the two companies are operating their cellular properties separately. A
Wireless Management Company (the "WMC") has been formed and is providing
centralized services to both companies on a contract basis. In Phase II,
AirTouch and U S WEST will contribute their domestic cellular assets to the WMC.
In this phase, the Company will reflect its share of the combined operating
results of the WMC using the equity method of accounting. The recent passage of
the Telecommunications Act of 1996 has removed significant regulatory barriers
to completion of Phase II of the business combination. U S WEST expects that
Phase II closing could take place by the end of 1996 or early 1997.
PERSONAL COMMUNICATIONS SERVICES
U S WEST partnered with AirTouch Communications, Bell Atlantic and NYNEX to
form a strategic national wireless alliance and formed a venture to provide
personal communications services ("PCS"). This venture, PCS PrimeCo, purchased
11 licenses in the Federal Communication Commission's (the "FCC") PCS auction,
covering 57 million people in Chicago, Dallas, Honolulu, Houston, Jacksonville,
Miami, Milwaukee, New Orleans, Richmond, San Antonio and Tampa.
SUBSEQUENT EVENT
On February 27, 1996, the Company announced a definitive agreement to merge
with Continental Cablevision, Inc. ("Continental"). Continental, the nation's
third-largest cable operator, serves 4.2 million domestic customers, passes more
than seven million domestic homes and holds significant other domestic and
international properties. U S WEST will purchase all of Continental's stock for
approximately $5.3 billion and will assume Continental's debt and other
obligations, which amount to approximately $5.5 billion. Consideration for the
$5.3 billion in equity will consist of approximately $1 billion in U S WEST
preferred stock, convertible to Media Stock; and, at U S WEST's option, between
$1 billion and $1.5 billion in cash, and $2.8 billion to $3.3 billion in shares
of Media Stock. The transaction, which is expected to close in the fourth
quarter of 1996, is subject to a number of conditions and approvals, including
approvals from Continental shareholders and local franchising and government
authorities.
Continental's 4.2 million domestic customers are highly clustered in five
large markets -- New England, California, Chicago, Michigan, Ohio and Florida.
Upon closing, U S WEST will own or share management of cable systems in 60 of
the top 100 American markets and serve nearly one of every three cable
households. In addition, Continental has interests in cable properties in
Australia, Argentina and Singapore; a 10 percent interest in PRIMESTAR (a direct
broadcast satellite service); telephone access businesses in Florida and
Virginia; and interests in programming that include Turner Broadcasting System,
E! Entertainment Television, the Golf Channel, and the Food Channel.
B-4
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
Comparative details of income from continuing operations for 1995 and 1994
follow:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
PERCENT --------------------
OWNERSHIP 1995 1994 $ %
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Communications Group: (1)
U S WEST Communications, Inc................................... 100 $ 1,219 $ 1,175 $ 44 3.7
Other operations............................................... 100 (35) (25) (10) (40.0)
--------- --------- --------- ---------
Total Communications Group................................... 1,184 1,150 34 3.0
Media Group: (2)
Consolidated:
Directory and information services........................... 100 240 247 (7) (2.8)
Wireless communications...................................... 100 62 67 (5) (7.5)
Cable and telecommunications................................. 100 (7) (2) (5) --
Unconsolidated equity investments:
Time Warner Entertainment (3)................................ 25.5 (32) (30) (2) (6.7)
TeleWest..................................................... 26.8 53 76 (23) (30.3)
One 2 One.................................................... 50.0 (81) (58) (23) (40.0)
Other (4)...................................................... (90) (24) (66) --
--------- --------- --------- ---------
Total Media Group............................................ 145 276 (131) (47.5)
--------- --------- --------- ---------
Income from continuing operations................................ $ 1,329 $ 1,426 $ (97) (6.8)
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma earnings per common share from continuing operations:
(5)
Communications Stock........................................... $ 2.52 --
Media Stock.................................................... 0.30 --
Earnings per common U S WEST share (5)........................... -- $ 3.14
</TABLE>
- ------------------------------
(1)
1995 Communications Group income from continuing operations includes a gain of
$85 ($0.18 per Communications share) on the sales of certain rural telephone
exchanges and $8 ($0.01 per Communications share) for costs associated with
the Recapitalization Plan. 1994 Communications Group income from continuing
operations includes a gain of $51 ($0.11 per U S WEST share) on the sales of
certain rural telephone exchanges.
(2)
1995 Media Group income from continuing operations includes a gain of $95
($0.20 per Media share) from the merger of TeleWest with SBC CableComms (UK)
and $9 ($0.02 per Media share) for costs associated with the Recapitalization
Plan. 1994 Media Group income from continuing operations includes a gain of
$105 ($0.23 per U S WEST share) from the partial sale of the Company's joint
venture interest in TeleWest and a gain of $41 ($0.09 per U S WEST share) from
the sale of the Company's paging operations.
(3)
Percent ownership represents pro-rata priority capital and residual equity
interests.
(4)
Primarily includes interest expense and divisional expenses associated with
equity investments.
(5)
Earnings per common share from continuing operations have been presented on a
pro forma basis as if the Communications Stock and Media Stock had been
outstanding since January 1, 1995. For periods prior to the recapitalization,
the average common shares outstanding are assumed to be equal to the average
common shares outstanding for U S WEST, Inc.
COMMUNICATIONS GROUP
The Communications Group's 1995 income from continuing operations, excluding
the effects of one-time items described in Note 1 to the table above, was
$1,107, an increase of $8, or 0.7 percent, compared with $1,099 in 1994, also
excluding the effects of one-time items. Total revenue growth of 3.4 percent was
largely offset by significantly higher costs incurred to improve customer
service and meet greater than
B-5
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
expected business growth. Net income growth will also be limited in 1996 while
the Communications Group continues to commit significant resources to meet
customer service objectives and broaden its range of product and service
offerings.
Excluding the effects of one-time items described in Note 1 to the table
above, pro forma earnings per Communications Group common share from continuing
operations were $2.35 in 1995.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancings resulted in extraordinary charges of
$8, net of tax benefits of $5.
MEDIA GROUP
During 1995, income from continuing operations declined 55 percent, to $59,
excluding the effects of the one-time items described in Note 2 to the table
above. The decline is due primarily to higher equity losses related to
international growth initiatives and increased amortization and interest
expense. Interest expense increases relate to debt issued in connection with the
Atlanta Systems acquisition and expansion of international investments. The
declines were partially offset by improvement in the domestic cellular and
Yellow Pages operations.
Excluding the effects of one-time items described in Note 2 to the table
above, pro forma earnings per Media Group common share from continuing
operations were $0.12 in 1995.
During 1995, the Media Group incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by TWE.
SALES AND OTHER REVENUES
An analysis of the change in U S WEST's consolidated sales and other
revenues follows:
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group.............................................. $ 9,484 $ 9,176 $ 308 3.4
Media Group....................................................... 2,374 1,908 466 24.4
Intergroup eliminations........................................... (112) (131) 19 14.5
--------- --------- --------- ---------
Total......................................................... $ 11,746 $ 10,953 $ 793 7.2
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
COMMUNICATIONS GROUP OPERATING REVENUES
An analysis of changes in Communications Group operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1995 1994 CHANGES REFUNDS DEMAND OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service.............................. $ 4,344 $ 4,067 $ 35 $ (10) $ 273 $ (21) $ 277
Interstate access.......................... 2,378 2,269 (66) (2) 191 (14) 109
Intrastate access.......................... 747 729 (31) 8 36 5 18
Long-distance network...................... 1,189 1,329 (23) (1) (54) (62) (140)
Other services............................. 826 782 -- -- -- 44 44
--------- --------- --- --- ----- --- ---------
Total Communications Group................. $ 9,484 $ 9,176 $ (85) $ (5) $ 446 $ (48) $ 308
--------- --------- --- --- ----- --- ---------
--------- --------- --- --- ----- --- ---------
<CAPTION>
%
---------
<S> <C>
Local service.............................. 6.8
Interstate access.......................... 4.8
Intrastate access.......................... 2.5
Long-distance network...................... (10.5)
Other services............................. 5.6
---------
Total Communications Group................. 3.4
---------
---------
</TABLE>
Approximately 97 percent of the revenues of the Communications Group are
attributable to the operations of U S WEST Communications, Inc. ("U S WEST
Communications"), of which approximately 59 percent are derived from the states
of Arizona, Colorado, Minnesota and Washington. Approximately 29 percent of the
access lines in service are devoted to providing services to business customers.
The access
B-6
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
line growth rate for business customers, who tend to be heavier users of the
network, has consistently exceeded the growth rate of residential customers.
During 1995, business access lines grew 5.4 percent while residential access
lines increased 2.8 percent.
The primary factors that influence changes in revenues are customer demand
for products and services, price changes (including those related to regulatory
proceedings) and refunds. During 1995, revenues from new product and service
offerings were $534, an increase of 58 percent compared with 1994. These
revenues primarily consist of caller identification, voice messaging, call
waiting and high-speed data network transmission services.
Local service revenues include local telephone exchange, local private line
and public telephone services. In 1995, local service revenues increased
principally as a result of higher demand for new and existing services, and
demand for second lines. Local service revenues from new services increased $92,
or 78 percent, compared with 1994. Reported total access lines increased
511,000, or 3.6 percent, of which 161,000 were second lines. Second line
installations increased 25.5 percent compared with 1994. Access line growth was
4.2 percent adjusted for the sale of approximately 95,000 rural telephone access
lines during the last 12 months.
Access charges are collected primarily from 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 33 percent of
access revenues and 11 percent of total revenues are derived from providing
access services to AT&T.
Higher revenues from interstate access services were driven by an increase
of 9.2 percent in interstate billed access minutes of use. The increased
business volume more than offset the effects of price reductions and refunds.
The Communications Group reduced prices for interstate access services in both
1995 and 1994 as a result of Federal Communications Commission ("FCC") orders
and competitive pressures. Intrastate access revenues increased primarily due to
the impact of increased business volume and multiple toll carrier plans,
partially offset by the impact of rate changes.
Long-distance revenues are derived from calls made within the LATA
boundaries of the Region. During 1995 and 1994, long-distance revenues were
impacted by the implementation of multiple toll carrier plans ("MTCPs") in
Oregon and Washington in May and July 1994, respectively. The MTCPs essentially
allow independent telephone companies to act as toll carriers. The 1995 impact
of the MTCPs was long-distance revenue losses of $62, partially offset by
increases in intrastate access revenues of $12 and decreases in other operating
expenses (i.e. access expense) of $42 compared with 1994. These regulatory
arrangements have decreased annual net income by approximately $10. Similar
changes in other states could occur, though the impact on 1996 net income would
not be material.
Excluding the effects of the MTCPs, long-distance revenues decreased by 5.9
percent in 1995, primarily due to the effects of competition and rate
reductions. Long-distance 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. A portion of revenues
lost to competition, however, is recovered through access charges paid by the
interexchange carriers. Erosion in long-distance revenue will continue due to
the loss of 1+ dialing in Minnesota, effective in February 1996, and in Arizona,
effective in April 1996. Annual long-distance revenue losses could approximate
$30 as a result of these changes. The Communications Group is partially
mitigating competitive losses through competitive pricing of intraLATA
long-distance services.
Revenues from other services primarily consist of billing and collection
services provided to interexchange carriers, voice messaging services,
high-speed data transmission services, sales of service agreements related to
inside wiring and the provision of customer premises equipment.
B-7
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 1995, revenues from other services increased $44, primarily as a
result of continued market penetration in voice messaging services and sales of
high-speed data transmission services. Revenue growth from other services is
also attributable to maintenance contracts for inside wire services and a large
contract related to a wire installation project. These increases were partially
offset by a decrease of $20 in revenues from billing and collection services.
The decline in billing and collection revenues is primarily related to lower
contract prices and a decrease in the volume of services provided to AT&T.
MEDIA GROUP SALES AND OTHER REVENUES
An analysis of the Media Group's sales and other revenues follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.......................................................... $ 1,058 $ 997 $ 61 6.1
International..................................................... 122 78 44 56.4
--------- --------- --------- ---------
1,180 1,075 105 9.8
Wireless communications:
Cellular service.................................................. 845 633 212 33.5
Cellular equipment................................................ 96 120 (24) (20.0)
Paging sales and service (1)...................................... -- 28 (28) --
--------- --------- --------- ---------
941 781 160 20.5
Cable and telecommunications........................................ 215 18 197 --
Other............................................................... 38 34 4 11.8
--------- --------- --------- ---------
Total Media Group................................................... $ 2,374 $ 1,908 $ 466 24.4
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
(1)
The Company's paging business was sold in June 1994. Results reflect
operations for the six months ending June 30, 1994.
Media Group sales and other revenues increased 15 percent, to $2,374 in
1995, excluding the effects of the 1994 Atlanta Systems acquisition and paging
sale. The increase was primarily due to strong growth in cellular service
revenue.
DIRECTORY AND INFORMATION SERVICES Revenues related to Yellow Pages
directory advertising increased 6.4 percent to $1,026 in 1995, due to price
increases of 4.5 percent, higher revenue per advertiser and an increase in
Yellow Pages advertising volume.
International directory publishing revenues increased $44 in 1995, primarily
due to U S WEST's May 1994 purchase of Thomson Directories in the United
Kingdom. The remaining increase is due to an increase in advertisers and revenue
per advertiser.
WIRELESS COMMUNICATIONS Cellular service revenues increased 34 percent, to
$845 in 1995, due to a 51 percent increase in subscribers during the last twelve
months (with 20 percent of the additions occurring in December), partially
offset by a 13 percent drop in average revenue per subscriber to $60.00 per
month. The increase in subscribers relates to continued growth in demand for
wireless services. The Media Group anticipates continued growth in its
subscriber base, although at slightly decreased rates.
New distribution programs are being developed which increase availability of
cellular products and simplify the cellular service activation process. These
programs have contributed to the shift in the customer base from businesses to
consumers. This shift, combined with competitive pressures on pricing, will
cause the average revenue per subscriber to continue to decline.
B-8
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Cellular equipment revenues decreased 20 percent, to $96 in 1995, as a
result of lower cellular equipment costs. These lower equipment costs are being
passed on to retailers and to new customers. The Media Group expects this trend
to continue in 1996 as the cost of equipment continues to decline and as
penetration into the consumer market increases.
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 in 1994.
CABLE AND TELECOMMUNICATIONS Domestic cable and telecommunications revenues
increased $197 in 1995, due to the December 1994 acquisition of the Atlanta
Systems.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses........................................... $ 4,071 $ 3,779 $ 292 7.7
Other operating expenses............................................ 2,323 2,203 120 5.4
Taxes other than income taxes....................................... 416 412 4 1.0
Depreciation and amortization....................................... 2,291 2,052 239 11.6
Interest expense.................................................... 527 442 85 19.2
Equity losses in unconsolidated ventures............................ 207 121 86 71.1
Other income (expense) -- net....................................... (36) 25 (61) --
</TABLE>
EMPLOYEE-RELATED EXPENSES
Employee-related expenses include basic salaries and wages, overtime,
benefits (including pension and health care), payroll taxes and contract labor.
During 1995, improving customer service was the Communications Group's first
priority. Overtime payments and contract labor expense associated with customer
service initiatives at the Communications Group increased employee-related costs
by approximately $168 compared with 1994. Expenses related to the addition of
approximately 1,700 employees in 1995 and 1,000 employees in 1994 at the
Communications Group also increased employee-related costs. These expenses were
incurred to handle the higher than anticipated volume of business and to meet
new business opportunities. Partially offsetting these increases was a $34
reduction in the accrual for postretirement benefits, a $22 decrease in travel
expense and reduced expenses related to employee separations under reengineering
and streamlining initiatives. The Communications Group will continue to add
employees to address customer service issues and growth in the core business.
Costs related to these work-force additions will partially offset the benefits
of employee separations achieved through restructuring. (See "Restructuring
Charge.")
Employee-related expenses also increased due to the 1994 purchases of the
Atlanta Systems and Thomson Directories, and growth initiatives in the directory
and information services segment.
OTHER OPERATING EXPENSES
Other operating expenses include access charges (incurred for the routing of
long-distance traffic through the facilities of independent companies), network
software expenses, wireless marketing and operating costs, and marketing and
related costs associated with publishing activities. The increase in other
operating expenses is primarily attributed to the Media Group's 1994 purchases
of the Atlanta Systems and Thomson Directories and expansion of the cellular
customer base.
During 1995, other operating expenses decreased at the Communications Group
primarily due to the effects of the multiple toll carrier plans and a reduction
in expenses related to project funding at Bell Communications Research, Inc.
("Bellcore"), of which U S WEST Communications has a one-seventh ownership
interest. These decreases in other operating expenses were partially offset by
increases in costs associated with increased sales of products and services,
including bad debt expense.
B-9
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
TAXES OTHER THAN INCOME TAXES
Taxes other than income taxes, which consist primarily of property taxes,
were relatively flat compared with 1994. Increased taxes associated with the
domestic cellular operations were offset by lower taxes at the Communications
Group. Lower taxes at the Communications Group were primarily due to favorable
property tax valuations and mill levies as compared with 1994. As a result of
these valuations and mill levies, 1995 fourth-quarter accruals at the
Communications Group decreased by $20 compared with fourth-quarter 1994.
DEPRECIATION AND AMORTIZATION
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base at the Communications Group,
expansion of the Media Group's domestic cellular network and the purchase of the
Atlanta Systems. These increases were partially offset by the effects of the
sales of certain rural telephone exchanges at U S WEST Communications.
INTEREST EXPENSE AND OTHER
Interest expense increased primarily as a result of increased debt financing
at the Communications Group, the December 1994 acquisition of the Atlanta
Systems, new domestic and international investments and a reclassification of
debt from net investment in assets held for sale. The average borrowing cost was
6.7 percent in 1995, compared with 6.6 percent in 1994. (See "Liquidity and
Capital Resources.")
Equity losses increased $86 in 1995, primarily due to costs related to the
expansion of the network and additional financing costs at TeleWest and
additional costs associated with the significant increase in customers at One 2
One. Start-up and other costs associated with new international cable and
telecommunications investments primarily located in the Czech Republic and
Malaysia contributed to the increase. These increased losses were partially
offset by earnings in the European wireless operations. Losses related to
domestic investments in TWE and PCS PrimeCo also increased. The Media Group
expects the PCS partnership to experience several years of operating losses
associated with the start-up phase of the PCS business.
The decrease in other income is largely attributable to $17 of costs
associated with the Recapitalization Plan in 1995, increased minority interest
expense associated with domestic cellular operations and a 1994 gain on sale of
nonstrategic operations.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
(DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes................................................ $ 825 $ 857 $ (32) (3.7)
Effective tax rate........................................................ 38.3 37.5 -- --
</TABLE>
The increase in the effective tax rate reflects the impacts of goodwill
amortization related to the acquisition of the Atlanta Systems, higher state and
foreign income taxes, and expenses associated with the Recapitalization Plan.
Additionally, a tax benefit was recorded in 1994, related to the sale of paging
assets, which contributed to the increase in the effective tax rate. These
impacts were partially offset by lower pretax income and the effects of a
research and experimentation credit, and adjustments for prior periods.
RESTRUCTURING CHARGE
U S WEST's 1993 results reflected a $1 billion restructuring charge
(pretax). 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, 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 products and
B-10
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
services for customers, and centralize its service centers. The Company has
consolidated its 560 customer service centers at U S WEST Communications into 26
centers in 10 cities and plans on reducing its work force by approximately
10,000 employees. All service centers are operational and supported by new
systems and enhanced system functionality.
The Restructuring Plan is expected to be substantially complete by the end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the business and related service issues, new business opportunities, revisions
to system delivery schedules and productivity issues caused by the major
rearrangement of resources due to restructuring. These issues will continue to
affect the timing of employee separations.
The Company estimates that full implementation of the 1993 Restructuring
Plan will reduce employee-related expenses by approximately $400 per year. The
savings related to work-force reductions will be offset by the effects of
inflation and a variety of other factors. These factors include costs related to
the achievement of customer service objectives and increased demand for existing
services. (See "Employee-Related Expenses.")
Following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
1996 1997
1993 ACTUAL 1994 ACTUAL 1995 ACTUAL ESTIMATE ESTIMATE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash expenditures:
Employee separation (1)................................ $ -- $ 19 $ 76 $ 36 $ 129
Systems development.................................... -- 127 145 128 --
Real estate............................................ -- 50 66 14 --
Relocation............................................. -- 21 24 20 15
Retraining and other................................... -- 16 23 22 4
----- ----- ----- ----- -----
Total cash expenditures.................................. -- 233 334 220 148
Asset write-down......................................... 65 -- -- -- --
----- ----- ----- ----- -----
Total 1993 Restructuring Plan............................ 65 233 334 220 148
Remaining 1991 plan employee costs (1)................... -- 56 -- -- --
----- ----- ----- ----- -----
Total.................................................... $ 65 $ 289 $ 334 $ 220 $ 148
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<CAPTION>
TOTAL
---------
<S> <C>
Cash expenditures:
Employee separation (1)................................ $ 260
Systems development.................................... 400
Real estate............................................ 130
Relocation............................................. 80
Retraining and other................................... 65
---------
Total cash expenditures.................................. 935
Asset write-down......................................... 65
---------
Total 1993 Restructuring Plan............................ 1,000
Remaining 1991 plan employee costs (1)................... 56
---------
Total.................................................... $ 1,056
---------
---------
</TABLE>
- ------------------------------
(1)
Employee separation costs, including the balance of a 1991 restructuring
reserve at December 31, 1993, aggregate $316.
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Systems 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. 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.
EMPLOYEE SEPARATION Under the Restructuring Plan, the Company anticipates
the separation of 10,000 employees. Approximately 1,000 employees that were
originally expected to relocate have chosen separation or other job assignments
and have been replaced. This increased the number of employee separations to
10,000 from 9,000, and increased the estimated total cost for employee
separations to $316 from $286, as compared with the original estimate. The $30
cost associated with these additional employee separations was reclassified from
relocation to the reserve for employee separations during 1995.
B-11
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Annual employee separations and employee-separation amounts under the
Restructuring Plan follow:
<TABLE>
<CAPTION>
1994 1995
---------------------- ---------------------- 1996 1997
ESTIMATE ACTUAL(1) ESTIMATE ACTUAL ESTIMATE(2) ESTIMATE(2) TOTAL
----------- --------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Employee separations:
Managerial............................ 1,061 497 612 682 202 1,357 2,738
Occupational.......................... 1,887 1,683 1,638 1,643 798 3,138 7,262
----------- --------- ----------- --------- ----------- ----------- ---------
Total................................... 2,948 2,180 2,250 2,325 1,000 4,495 10,000
----------- --------- ----------- --------- ----------- ----------- ---------
----------- --------- ----------- --------- ----------- ----------- ---------
<CAPTION>
1994 1995
---------------------- ---------------------- 1996 1997
ESTIMATE ACTUAL(1) ESTIMATE ACTUAL ESTIMATE(2) ESTIMATE(2) TOTAL
----------- --------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Employee separation amounts:
Managerial............................ $ 25 $ 5 $ 22 $ 30 $ 12 $ 56 $ 103
Occupational.......................... 15 14 54 46 24 73 157
----------- --------- ----------- --------- ----------- ----------- ---------
Total................................. 40 19 76 76 36 129 260
Remaining 1991 reserve................ 56 56 -- -- -- -- 56
----------- --------- ----------- --------- ----------- ----------- ---------
Total................................... $ 96 $ 75 $ 76 $ 76 $ 36 $ 129 $ 316
----------- --------- ----------- --------- ----------- ----------- ---------
----------- --------- ----------- --------- ----------- ----------- ---------
</TABLE>
- ------------------------------
(1)
Includes the remaining employees and the separation amounts associated with
the balance of a 1991 restructuring reserve at December 31, 1993.
(2)
A significant number of the employee reductions originally scheduled for 1996
will be delayed while the Company focuses on overtime and contract-labor
expenses. The Restructuring Plan is expected to be substantially complete by
the end of 1997.
Compared with the original estimates, employee reduction and separation
amounts shown above have been reduced by 1,600 employees and $51 in 1996, and
increased by 4,495 employees and $129 in 1997.
SYSTEMS DEVELOPMENT The existing information management systems were
largely developed to support a monopoly environment. These systems were
inadequate due to the effects of increased competition, new forms of regulation
and changing technology that have driven consumer demand for products and
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 initial strategy which placed more
emphasis on the development of new systems.
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
customer calls to be directed to those service representatives who can meet
their requirements. This process will provide enhanced information to the
service representatives regarding the customer requests and the ability of
the Communications Group to fulfill them.
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.
B-12
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Certain of the new systems and enhanced system functionality have been
implemented in the service centers and have simplified the labor-intensive
interfaces between systems processes in existence prior to the Restructuring
Plan. Enhanced system functionality introduced under the Restructuring Plan
since its inception includes the following:
- The ability to determine facilities' availability while the customer is
placing an order;
- Automated engineering of central office facilities and automated updating
of central office facilities' records;
- The ability to track the status of complex network design jobs from the
customer's perspective; and
- Systems that accurately diagnose network problems and prepare repair
packages to correct the problems identified.
The direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
1994 1995
------------------------ ------------------------ 1996
ESTIMATE ACTUAL ESTIMATE ACTUAL ESTIMATE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Service delivery......................................... $ 35 $ 21 $ 21 $ 19 $ 44
Service assurance........................................ 45 12 24 22 26
Capacity provisioning.................................... 17 57 92 85 42
All other................................................ 28 37 24 19 16
----- ----- ----- ----- -----
Total.................................................... $ 125 $ 127 $ 161 $ 145 $ 128
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<CAPTION>
TOTAL
---------
<S> <C>
Service delivery......................................... $ 84
Service assurance........................................ 60
Capacity provisioning.................................... 184
All other................................................ 72
---------
Total.................................................... $ 400
---------
---------
</TABLE>
Systems expenses charged to current operations consist of costs associated
with the information management function, including planning, developing,
testing and maintaining databases for general purpose computers, in addition to
systems costs related to maintenance of telephone network applications. Other
systems expenses are for administrative (i.e. general purpose) systems which
include customer service, order entry, billing and collection, accounts payable,
payroll, human resources and property records. Ongoing systems costs at U S WEST
Communications comprised approximately six percent of total operating expenses
in 1995, 1994 and 1993. The Company expects systems costs charged to current
operations as a percent of total operating expenses to approximate the current
level throughout 1996. Systems costs could increase relative to other operating
costs as the business becomes more technology dependent.
B-13
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
PROGRESS UNDER THE RESTRUCTURING PLAN
Following is a reconciliation of restructuring reserve activity since
December 1993:
<TABLE>
<CAPTION>
RESERVE RESERVE
BALANCE 1994 BALANCE 1995 CHANGE IN
12/31/93 ACTIVITY 12/31/94 ACTIVITY ESTIMATE
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Employee separation:
Managerial......................................... $ 80 $ 5 $ 75 $ 30 $ 23
Occupational....................................... 150 14 136 46 7
----- ----- ----- ----- -----
Total employee separation............................ 230 19 211 76 30
Systems development:
Service delivery................................... 73 21 52 19 11
Service assurance.................................. 64 12 52 22 (4)
Capacity provisioning.............................. 179 57 122 85 5
All other.......................................... 84 37 47 19 (12)
----- ----- ----- ----- -----
Total systems development............................ 400 127 273 145 --
Real estate.......................................... 130 50 80 66 --
Relocation........................................... 110 21 89 24 (30)
Retraining and other................................. 65 16 49 23 --
----- ----- ----- ----- -----
Total 1993 Restructuring Plan........................ 935 233 702 334 --
Remaining 1991 plan expenditures..................... 56 56 -- -- --
----- ----- ----- ----- -----
Total................................................ $ 991 $ 289 $ 702 $ 334 $ --
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<CAPTION>
RESERVE
BALANCE
12/31/95
-----------
<S> <C>
Employee separation:
Managerial......................................... $ 68
Occupational....................................... 97
-----
Total employee separation............................ 165
Systems development:
Service delivery................................... 44
Service assurance.................................. 26
Capacity provisioning.............................. 42
All other.......................................... 16
-----
Total systems development............................ 128
Real estate.......................................... 14
Relocation........................................... 35
Retraining and other................................. 26
-----
Total 1993 Restructuring Plan........................ 368
Remaining 1991 plan expenditures..................... --
-----
Total................................................ $ 368
-----
-----
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
SEPARATIONS AT
1994 SEPARATIONS 1995 SEPARATIONS DECEMBER 31, 1995
----------------- ----------------- ---------------------
<S> <C> <C> <C>
Employee separations:
Managerial............................................ 497 682 1,179
Occupational.......................................... 1,683 1,643 3,326
----- ----- -----
Total................................................... 2,180 2,325 4,505
----- ----- -----
----- ----- -----
</TABLE>
B-14
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS -- 1994 COMPARED WITH 1993
Comparative details of income from continuing operations for 1994 and 1993
follow:
<TABLE>
<CAPTION>
INCREASE
PERCENT (DECREASE)
OWNERSHIP 1994 1993 $
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Communications Group: (1)
U S WEST Communications, Inc......................................... 100 $ 1,175 $ 435 $ 740
Other operations..................................................... 100 (25) (44) 19
--------- --------- -----
Total Communications Group......................................... 1,150 391 759
Media Group: (2)
Consolidated:
Directory and information services................................. 100 247 220 27
Wireless communications............................................ 100 67 (43) 110
Cable and telecommunications....................................... 100 (2) -- (2)
Unconsolidated equity investments:
Time Warner Entertainment (3)...................................... 25.5 (30) (19) (11)
TeleWest........................................................... 37.8 76 (21) 97
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
--------- --------- -----
--------- --------- -----
Earnings per common U S WEST share from continuing operations.......... $ 3.14 $ 1.13 $ 2.01
</TABLE>
- ------------------------------
(1)
1994 income from continuing operations includes a gain of $51 ($0.11 per
share) on the sales of certain rural telephone exchanges. 1993 income from
continuing operations was reduced by $534 ($1.28 per share) for a
restructuring charge and $54 ($0.13 per share) for the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates.
(2)
1994 income from continuing operations includes a gain of $105 ($0.23 per
share) on the partial sale of U S WEST's joint venture interest in TeleWest,
and a gain of $41 ($0.09 per share) for the sale of the Company's paging
operations. 1993 income from continuing operations was reduced by $76 ($0.18
per share) for a restructuring charge.
(3)
Percent ownership represents pro-rata priority capital and residual equity
interests.
(4)
Primarily includes interest expense and divisional expenses associated with
equity investments.
COMMUNICATIONS GROUP
The Communications Group's 1994 income from continuing operations was
$1,099, an increase of $120, or 12.3 percent, over 1993, excluding the one-time
effects described in Note 1 to the table above. The increase was primarily
attributable to increased demand for telecommunications services.
In 1993, U S WEST Communications incurred extraordinary charges for the
discontinuance of Statement of Accounting Standards ("SFAS") No. 71, "Accounting
for the Effects of Certain Types of Regulation," and the early extinguishment of
debt. An extraordinary, noncash 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
B-15
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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).
MEDIA GROUP
During 1994, income from continuing operations decreased 19 percent, to
$130, excluding the effects of the one-time items described in Note 2 to the
table above. The decline in income 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.
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 Company 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 prior 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.
SALES AND OTHER REVENUES
An analysis of the change in U S WEST's consolidated sales and other
revenues follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group............................................... $ 9,176 $ 8,870 $ 306 3.4
Media Group........................................................ 1,908 1,549 359 23.2
Intergroup eliminations............................................ (131) (125) (6) (4.8)
--------- --------- --------- ---
Total.............................................................. $ 10,953 $ 10,294 $ 659 6.4
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP OPERATING REVENUES
An analysis of changes in the Communications Group's revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1994 1993 CHANGES REFUNDS DEMAND OTHER $
--------- --------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service............................... $ 4,067 $ 3,829 $ (12) $ 30 $ 216 $ 4 $ 238
Interstate access........................... 2,269 2,147 (15) (6) 148 (5) 122
Intrastate access........................... 729 682 (10) (4) 51 10 47
Long-distance network....................... 1,329 1,442 (8) 1 (43) (63) (113)
Other services.............................. 782 770 -- -- -- 12 12
--------- --------- --- --- ----- --- ---------
Total Communications Group.................. $ 9,176 $ 8,870 $ (45) $ 21 $ 372 $ (42) $ 306
--------- --------- --- --- ----- --- ---------
--------- --------- --- --- ----- --- ---------
<CAPTION>
%
---
<S> <C>
Local service............................... 6.2
Interstate access........................... 5.7
Intrastate access........................... 6.9
Long-distance network....................... (7.8)
Other services.............................. 1.6
---
Total Communications Group.................. 3.4
---
---
</TABLE>
In 1994, local service revenues increased principally as a result of higher
demand for services. Reported access lines increased by 3.6 percent. Excluding
the sale of approximately 60,000 rural telephone access lines during 1994,
access line growth was 4.0 percent.
B-16
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Higher revenues from interstate access services were primarily attributable
to an increase of 7.8 percent in interstate billed access minutes of use, which
more than offset the effects of price decreases. Intrastate access charges
increased primarily as a result of higher demand, including demand for private
line services.
Long-distance revenues decreased principally due to the effects of the MTCPs
implemented in Oregon and Washington. The 1994 impact was a loss of $68 in
long-distance revenues, partially offset by a decrease of $48 in other operating
expenses and an increase of $10 in intrastate access revenue. These regulatory
arrangements decreased net income by approximately $6 in 1994.
During 1994, revenues from other services increased due to higher revenue
from billing and collection services and increased market penetration of new
service offerings. 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
premises equipment installations.
MEDIA GROUP SALES AND OTHER REVENUES
An analysis of the Media Group's sales and other revenues follows:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1994 1993 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information 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
--------- --------- --------- ---------
Total Media Group................................................... $ 1,908 $ 1,549 $ 359 23.2
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
(1)
The Company's paging business was sold in June 1994. Results reflect
operations for the six months ending June 30, 1994.
During 1994, Media Group sales and other revenues increased 25 percent to
$1,862, excluding the effect of the 1994 Atlanta Systems acquisition and paging
sale. The increase was primarily due to strong growth in cellular service
revenue.
DIRECTORY AND INFORMATION SERVICES Revenues related to Yellow Pages
directory advertising increased approximately $59, or 6.5 percent, 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 $11, including $7 related to new products. Partially
offsetting these increases was the absence of revenues related to certain
publishing, software development and marketing operations that were sold, which
reduced revenues by $22.
The increase in international directory publishing revenue is attributable
to U S WEST's May 1994 purchase of Thomson Directories.
B-17
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
WIRELESS COMMUNICATIONS Cellular service revenues increased 43 percent, to
$633 in 1994, due to a 61 percent increase in subscribers (with 24 percent of
the additions occurring in December), partially offset by an 8 percent drop in
average revenue per subscriber to $70.00 per month.
Cellular equipment revenues increased 90 percent, to $120 in 1994, 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.
CABLE AND TELECOMMUNICATIONS Domestic cable and telecommunications revenues
reflect the December 1994 acquisition of the Atlanta Systems.
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>
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 the Restructuring Plan 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 Plan, lower health-care benefit
costs, including a reduction in the accrual for postretirement benefits, and
lower incentive compensation payments to employees.
Selling and other operating costs related to growth in the cellular
subscriber base increased other operating expenses by approximately $166 in
1994. Partially offsetting this increase was a $48 decrease in access expense
related to the effects of the multiple toll carrier plan arrangements.
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.
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 against interest expense
rather than to other income (expense). U S WEST's average borrowing cost
decreased to 6.6 percent in 1994, from 6.7 percent in 1993.
Equity losses in unconsolidated ventures increased over 1993, 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 One 2 One.
B-18
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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>
1994 1993 INCREASE
--------- --------- -----------
<S> <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.
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1995
OPERATING ACTIVITIES
Cash provided by operations increased $173 in 1995. Business growth in the
Communications Group and the cellular business, and the acquisition of the
Atlanta Systems contributed to the increase in cash provided by operations. This
increase was partially offset by increases in Restructuring Plan expenditures
and higher income tax and interest payments, including approximately $60 related
to the partial sale of the Company's joint venture interest in TeleWest.
Cash from operations in 1994 remained relatively flat compared with 1993.
Business growth and a decrease in the cash funding for postretirement benefits
was offset by increased Restructuring Plan payments.
INVESTING ACTIVITIES
Total capital expenditures were $3,140 in 1995, $2,820 in 1994 and $2,441 in
1993. The 1995 capital expenditures exceeded the 1994 and 1993 levels due to the
Communications Group's efforts to improve customer service (including reductions
in held orders) and to accommodate additional line capability in several states,
and the enhancement and expansion of the cellular network. In 1996, capital
expenditures are expected to approximate $3.1 billion. Included in the 1996
capital expenditures estimate are costs to enter new markets as allowed under
the Telecommunications Act of 1996, upgrade the Atlanta Systems and expand the
cellular network.
The Company received cash proceeds of $214 and $93 in 1995 and 1994,
respectively, for the sales of certain rural telephone exchanges. Since
implementing its rural telephone exchange sales program, the Company has sold
approximately 155,000 access lines. Planned sales of rural exchanges for 1996
and beyond aggregate approximately 180,000 lines.
Investing activities of the Company also include equity investments in
international ventures. In 1995, the Company invested $681 in international
ventures, primarily investments in Malaysia, the Netherlands, the Czech Republic
and the United Kingdom. The Company invested approximately $444 in developing
international businesses in 1994, including the acquisition of Thomson
Directories. The Company anticipates that investments in international ventures
will approximate $400 in 1996. This includes investments for recently awarded
licenses to provide cellular service using digital technology in India and
Poland. At December 31, 1995, U S WEST guaranteed debt in the principal amount
of approximately $140 related to international ventures.
In March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets. The
Company's share of the cost of the licenses was approximately $268, all of which
was funded in 1995. Under the PCS PrimeCo partnership
B-19
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
agreement, U S WEST is required to fund approximately 24 percent of PCS
PrimeCo's operating and capital costs, including licensing costs. U S WEST
anticipates that its total funding obligations to PCS PrimeCo during the next
three years will be approximately $400.
In 1994, the Company 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 Company did not receive cash from
the 1994 partial sale of its joint venture interest in TeleWest or from the 1995
merger. All proceeds from the 1994 sale have been used by TeleWest for general
business purposes, including financing both construction and operations, and
repaying debt.
On February 27, 1996, U S West announced a definitive agreement to merge
with Continental. Continental, the nation's third-largest cable operator, serves
4.2 million domestic customers, passes more than seven million domestic homes
and holds significant other domestic and international properties. U S WEST will
purchase all of Continental's stock for approximately $5.3 billion and will
assume Continental's debt and other obligations, which amount to approximately
$5.5 billion. Consideration for the $5.3 billion in equity will consist of
approximately $1 billion in U S WEST preferred stock, convertible to Media
Stock; and, at U S WEST's option, between $1 billion and $1.5 billion in cash,
and $2.8 billion to $3.3 billion in shares of Media Stock. The transaction,
which is expected to close in the fourth quarter of 1996, is subject to a number
of conditions and approvals, including approvals from Continental shareholders
and local franchising and government authorities.
FINANCING ACTIVITIES
During 1995, debt increased $917 primarily due to the increase in capital
expenditures, new investments in international ventures, cash funding of the PCS
licenses and a reclassification of debt from net investment in assets held for
sale.
During fourth-quarter 1995, U S WEST issued $130 of exchangeable notes, or
Debt Exchangeable for Common Stock ("DECS"), due December 15, 1998. Upon
maturity, each DECS will be mandatorily exchanged by U S WEST for shares of
Enhance Financial Services Group, Inc. ("Enhance") or, at U S WEST's option,
redeemed at the cash equivalent. The capital assets segment currently holds
approximately 31.5 percent of the outstanding Enhance common stock.
These increases in debt were partially offset by reductions of debt related
to the investment in TWE and a refinancing of commercial paper by issuing
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely Company-guaranteed debentures ("Preferred Securities"). U S
WEST issued $600 of Preferred Securities in 1995. The payment of interest and
redemption amounts to holders of the securities are fully and unconditionally
guaranteed by U S WEST.
During 1995, U S WEST refinanced $2.6 billion of commercial paper to take
advantage of favorable long-term interest rates. In addition to the commercial
paper, U S WEST Communications refinanced $145 of long-term debt. In 1993, U S
WEST Communications refinanced $2.7 billion of long-term debt. Expenses
associated with the refinancing of long-term debt resulted in extraordinary
after-tax charges to income of $8 and $77, net of tax benefits of $5 and $48 in
1995 and 1993, respectively.
Debt increased $739 in 1994, primarily due to the December 1994 acquisition
of the Atlanta Systems, partially offset by reductions in debt related to the
investment in TWE. The cash investment related to the acquisition of the Atlanta
Systems was $745, obtained through short-term borrowing.
Excluding debt associated with the capital assets segment, the Company's
percentage of debt to total capital at December 31, 1995, was 50.7 percent
compared with 51.6 percent at December 31, 1994 and 55.1 percent at December 31,
1993. Including debt associated with the capital assets segment, Preferred
Securities and other preferred stock, the Company's percentage of debt to total
capital was 56.4 percent at
B-20
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
December 31, 1995, 55.7 percent at December 31, 1994 and 59.7 percent at
December 31, 1993. The decrease in the 1994 percentage of debt to total capital
is primarily attributable to higher net income and the effects of an increase in
common shares outstanding.
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements as well as to maintain a presence in the short-term debt
market. In addition, U S WEST maintains lines of credit aggregating
approximately $1.9 billion, all of which was available at December 31, 1995.
Under registration statements filed with the SEC, as of December 31, 1995, U S
WEST is permitted to issue up to approximately $1.5 billion of new debt
securities.
Debt related to discontinued operations decreased $487 in 1995 and $213 in
1994. Cash to the 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
Financial Security Assurance Holdings, Ltd. ("FSA"), an investment of the
capital assets segment. For financial reporting purposes debt of the capital
assets segment is netted against the related assets. See Consolidated Financial
Statements -- Note 20: Net Investment in Assets Held for Sale.
In connection with U S WEST's February 27, 1996 announcement of a planned
merger with Continental, U S WEST, Inc.'s credit rating is being reviewed by
credit rating agencies, which may result in a downgrading. The credit rating of
U S WEST Communications was not placed under review by Moody's, has been
reaffirmed by Duff and Phelps, and is under review by Fitch and Standard &
Poors.
Subsequent to the acquisition of the Atlanta Systems (See Note 4 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 first-quarter 1995, the Company purchased 1,704,700 shares of U S WEST common
stock at an average price per share of $37.02. In December 1994, the Company
purchased 550,400 shares of U S WEST common stock at an average price per share
of $36.30.
RISK MANAGEMENT
The Company is exposed to market risks arising from changes in interest
rates and foreign exchange rates. Derivative financial instruments are used to
manage these risks. U S WEST does not use derivative financial instruments for
trading purposes.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt. Interest rate swaps are used to adjust the ratio of
fixed- to variable-rate debt. The market value of the debt portfolio, including
the interest rate swaps, is monitored and compared with predetermined benchmarks
to evaluate the effectiveness of the risk management program.
Notional amounts of interest rate swaps outstanding were $1.6 billion at
December 31, 1995 and 1994, with various maturities extending to 2004. The
estimated effect of interest rate derivative transactions was to adjust the
level of fixed-rate debt from 88 percent to 94 percent of the total debt
portfolio at December 31, 1995, and from 73 percent to 82 percent of the total
debt portfolio at December 31, 1994 (including debt associated with the capital
assets segment).
In conjunction with the 1993 debt refinancing, the Company executed forward
contracts to sell U.S. Treasury bonds to lock in the U. S. Treasury rate
component of $1.5 billion of the future debt issue. At December 31, 1995,
deferred credits of $8 and deferred charges of $51 on closed 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.
B-21
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FOREIGN EXCHANGE RISK MANAGEMENT
U S WEST has entered into forward and option contracts to manage the market
risks associated with fluctuations in foreign exchange rates after consideration
of offsetting foreign exposures among international operations. The use of
forward and option contracts allow U S WEST 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 with predetermined levels
of acceptable risk.
Notional amounts of foreign exchange forward and option contracts
outstanding were $456 and $170 as of December 31, 1995 and 1994, respectively,
with maturities of one year or less. These contracts were primarily for the
purchase of Dutch guilders and British pounds in 1995 and British pounds in
1994.
The Company had foreign exchange risks associated with a Dutch
guilder-denominated payable in the translated principal amount of $216 at
December 31, 1995, and British pound-denominated receivables in the translated
principal amounts of $139 and $48 at December 31, 1995 and 1994, respectively,
of which $63 and $48 of these respective balances are with a wholly owned
subsidiary. These positions were 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 the Consolidated 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.
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 common stock and received $154 in net proceeds from the
public offering. In December 1995, FSA merged with Capital Guaranty Corporation
for shares of FSA and cash of $51. The transaction was valued at approximately
$203 and reduced U S WEST's ownership interest in FSA to 50.3 percent and its
voting interest to 41.7 percent. U S WEST expects to monetize and ultimately
reduce its ownership in FSA through the issuance of Debt Exchangeable for Common
Stock ("DECS") in 1996. At maturity, each DECS will be mandatorily exchanged by
U S WEST for FSA common stock held by U S WEST or, at U S WEST's option,
redeemed at the cash equivalent.
On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of cumulative redeemable preferred stock for a total
of $50. The shares are mandatorily redeemable in year ten and, at the option of
FFC, the preferred stock also can be redeemed for common shares of FSA.
U S WEST Real Estate, Inc. has sold various properties totaling $120, $327
and $66 in 1995, 1994 and 1993, respectively. The sales proceeds were in line
with estimates. Proceeds from building sales were primarily used to repay
related debt. U S WEST has completed construction of existing buildings in the
commercial real estate portfolio and expects to substantially complete
liquidation of this portfolio by 1998. The remaining balance of assets subject
to sale is approximately $490, net of reserves, as of December 31, 1995.
COMPETITIVE AND REGULATORY ENVIRONMENT
THE TELECOMMUNICATIONS ACT OF 1996
On February 1, 1996, the House and Senate approved the Telecommunications
Act of 1996 (the "1996 Act") which is intended to promote competition between
local telephone companies, long-distance carriers and cable television
operators. The 1996 Act was signed into law on February 8, 1996, and replaces
the antitrust consent decree that broke up the "Bell System" in 1984. A major
provision of the legislation includes the preemption of state regulations that
govern competition by allowing local telephone companies,
B-22
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
long-distance carriers and cable television companies to enter each other's
lines of business. Consequently, the Regional Bell Operating Companies ("RBOCs")
are immediately permitted to offer wireline interLATA toll services out of their
regions. However, to participate in the interLATA long-distance market within
their regions, the RBOCs must first open their local networks to
facilities-based competition by satisfying a detailed checklist of requirements,
including requirements related to interconnection and number portability.
Other key provisions of the 1996 Act: (1) eliminate most of the regulation
of cable television rates within three years and eliminate the ban on
cross-ownership between cable television and telephone companies in small
communities; (2) permit the RBOCs to develop new, competitive cable systems
within their regions and to acquire or build wireless cable systems; (3) provide
partial relief from the ban against manufacturing telecommunications equipment
by the RBOCs; and (4) permit wireless operators to provide interLATA toll
service in and out of region without a separate subsidiary and to jointly market
or resell cellular service.
The FCC and state regulators have been given latitude in interpreting and
overseeing the implementation of this legislation, including developing
universal service funding policy. The extent and timing of future competition,
including the Communications Group's ability to offer in-region interLATA
long-distance services, will depend in part on the implementation guidelines
determined by the FCC and state regulators, and how quickly the Communications
Group can satisfy requirements of the checklist. The Communications Group
estimates that fulfillment of the checklist requirements could occur in the
majority of its states within 12 to 18 months.
THE COMMUNICATIONS GROUP
Markets served by the Communications Group, including markets for local,
access and long-distance services, are being impacted by the rapid technological
and regulatory changes occurring within the telecommunications industry. Current
and potential competitors include local telephone companies, interexchange
carriers, competitive access providers ("CAPs"), cable television companies and
providers of personal communications services ("PCS").
The Communications Group believes that competitors will initially target
high-volume business customers in densely populated urban areas. The resulting
loss of local service customers will affect multiple revenue streams and could
have a material, adverse effect on the Communications Group's operations. The
resulting revenue losses, however, could be at least partially offset by the
Communications Group's ability to bundle local, long-distance and wireless
services, and provide interconnection services.
The Communications Group's strategy is to offer integrated communications,
entertainment, information and transaction services over both wired and wireless
networks to its customers primarily within its Region. The key initiatives to
support this strategy include five key elements:
- Providing superior customer service
- Building customer loyalty
- Enhancing network capability and capacity
- Expanding the product and service portfolio
- Ensuring a fair competitive environment
Strategic initiatives to attract and retain customers include: (1) enhancing
existing services with products such as caller identification, call waiting and
voice messaging; (2) aggressive expansion of data services; (3) pursuing
opportunities to offer paging, wireless and cable television services; and (4)
rapid entry into the interLATA long-distance market.
B-23
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
A market trial for a broadband network capable of providing voice, data and
video services to customers commenced in the Omaha area in August 1995. The
Communications Group does not intend to expand this service offering beyond the
Omaha area because of service cost and pricing issues. The Communications Group
does plan to continue to provide the system that delivers basic, premium and
pay-per-view video services in the Omaha area. The Communications Group is
evaluating the relative costs of alternative video technologies, as well as the
near-term feasibility of interactive services. To satisfy anticipated demand for
combined video and telephony services on a cost-effective basis, the
Communications Group's strategy may include selective investments in wireless
cable technologies.
The Communications Group is subject to varying degrees of federal and state
regulation. The Communications Group's regulatory strategy includes working to:
- Achieve accelerated capital recovery;
- Reprice local services to cover costs and ensure these services are
subsidy free, while lowering toll and access rates to meet competition;
and
- Ensure that the new rules associated with the Telecommunications Act of
1996 concerning the unbundling of interconnection, resale of services and
universal service do not advantage one competitor over another.
The Communications Group is currently working with state regulators to gain
approval of these initiatives.
THE MEDIA GROUP
The Media Group's strategy is based on the belief that communication and
commerce are migrating from other mediums to electronic networks. Over time,
this global phenomenon will result in networks replacing traditional
distribution channels. To meet the needs of this growing market, the Media Group
provides local connections and then integrates market-based service offerings to
meet the needs of end users. The Media Group executes this strategy through
three lines of business -- cable and telecommunications, wireless and directory
and information services -- in selected high-growth markets worldwide.
CABLE AND TELECOMMUNICATIONS The 1996 Act will enable the Media Group to
provide "one-stop shopping" for voice, video and data services, a key objective
of the Media Group. The Media Group is currently in the process of negotiating
reasonable and nondiscriminatory local interconnection rates, terms and
conditions with BellSouth and is planning on entering the local exchange market,
through the Atlanta Systems, on a competitive basis by the end of 1996.
The Atlanta 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, satellite master antenna service
and direct broadcast satellite services. Cable television systems are also in
competition for both viewers and advertising in varying degrees with other
communications and entertainment media. Such competition may increase with the
development and growth of new technologies.
The 1996 Act has amended certain aspects of the Cable Television Consumer
Protection and Competition Act of 1992 ("the 1992 Cable Act"). Under the 1996
Act, cable rates are deregulated effective March 31, 1999, or earlier if
competition exists. In addition, the provisions of the 1996 Act simplify the
process of filing rate complaints, relax uniform rate requirements and
subscriber notice provisions, expand the definition of effective competition and
eliminate certain restrictions on the sale of cable systems. Current program
access restrictions applying to cable operators are extended to common carriers
by the 1996 Act. The 1996 Act also eliminates certain cross-ownership
restrictions between cable operators, broadcasters and multichannel, multipoint
distribution system operators.
B-24
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
In 1995, the Georgia legislature removed the legal prohibition on local
telephone competition by authorizing competition in local telephone exchange
service. The Media Group has received certification from the Georgia Public
Service Commission to provide local switched and nonswitched telephone service
in Georgia and, with the passage of the 1996 Act, certain long-distance
services.
WIRELESS COMMUNICATIONS There are two competitive cellular licenses in each
market. Competition is based on the price of cellular service, the quality of
the service and the size of the geographic area served. The development of PCS
services will increase the number of competitors and the level of competition.
The Media Group is unable to estimate the impact of the availability of PCS
services on its cellular operations, though it could be significant.
The wireless operations are subject to regulation by federal and some state
and local authorities. The construction and transfer of cellular systems in the
United States are regulated by the FCC pursuant to the Communications Act of
1934. The FCC regulates 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.
The passage of the 1996 Act eliminates long-distance restrictions imposed by
the Modified Final Judgment ("MFJ"). As a result, the Media Group, including its
wireless partners, are now able to offer integrated local and long-distance
services to its wireless customers. The 1996 Act also permits the Media Group to
enter into activities related to the manufacture of telecommunications
equipment.
DIRECTORY AND INFORMATION SERVICES The Media Group may face emerging
competition in the provision of interactive services from cable and
entertainment companies, on-line services and other information providers.
Directory listings are beginning to be offered via electronic databases through
telephone company and third party networks. As such offerings expand and are
enhanced through interactivity and other features, the Media Group may
experience heightened competition in its directory publishing businesses. With
the passage of the 1996 Act, the Media Group will be able to provide certain
information services across LATA boundaries. The Media Group will continue to
expand its core products and develop and package new information products to
meet its customers' needs.
OTHER ISSUES
The Communications Group'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. In
March 1995, the FCC issued an interim order on price cap regulation. The price
cap index for most services is annually adjusted for inflation, productivity
level and exogenous costs, and has resulted in reduced access prices paid by
interexchange carriers to local telephone companies. The interim order also
provides for three productivity options, including a no-sharing option, and for
increased flexibility for adjusting prices downward in response to competition.
In 1995, the Communications Group selected the lowest productivity option, while
prior to this interim order, the Communications Group used an optional higher
productivity factor in determining its prices. Consequently, the Communications
Group expects the order to have no significant near-term impact.
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
B-25
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 is $0 to $150.
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against U
S WEST on October 11, 1995, alleging misrepresentation, breach of contract and
other misconduct on the part of U S WEST. Time Warner's countersuit seeks a
reformation of the Time Warner Entertainment partnership agreement, an order
that enjoins U S WEST from breaching the partnership agreement, and unspecified
compensatory damages. U S WEST has denied each of the claims in Time Warner's
countersuit. The trial for this action concluded on March 22, 1996. A ruling by
the Delaware Chancery Court is expected in June 1996.
On October 2, 1995, union members approved a new three-year contract with U
S WEST. The contract provides for salary increases of 10.6 percent over three
years effective January 1 of each year. The contract also provides employees
with a lump sum payment of $1,500 in lieu of wage increases becoming effective
in August of each year. This lump sum payment is being recognized over the life
of the contract. The agreement covers approximately 30,000 Communications
Workers of America ("CWA") members who work for the Communications Group.
On October 15, 1995, U S WEST Direct and the CWA reached a tentative
agreement on their contract, subject to ratification by the CWA membership. This
contract would provide for salary increases of 10.5 percent over three years and
provides employees with a lump sum payment of $850.
B-26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Consolidated Balance Sheets of U S WEST, Inc. as of
December 31, 1995 and 1994, and the related Consolidated Statements of
Operations and Cash Flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1995 and 1994, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 8 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.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996, except for Note 4, paragraph 3, as to which
the date is February 27, 1996
B-27
<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 T. Anderson
ACTING EXECUTIVE VICE PRESIDENT
AND CHIEF FINANCIAL OFFICER
February 12, 1996
B-28
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues......................................................... $ 11,746 $ 10,953 $ 10,294
Operating expenses:
Employee-related expenses...................................................... 4,071 3,779 3,584
Other operating expenses....................................................... 2,323 2,203 2,065
Taxes other than income taxes.................................................. 416 412 417
Depreciation and amortization.................................................. 2,291 2,052 1,955
Restructuring charge........................................................... -- -- 1,000
--------- --------- ---------
Total operating expenses..................................................... 9,101 8,446 9,021
--------- --------- ---------
Income from operations........................................................... 2,645 2,507 1,273
Interest expense................................................................. 527 442 439
Equity losses in unconsolidated ventures......................................... 207 121 74
Gains on asset sales:
Merger and partial sale of joint venture interest.............................. 157 164 --
Rural telephone exchanges...................................................... 136 82 --
Paging assets.................................................................. -- 68 --
Guaranteed minority interest expense............................................. 14 -- --
Other income (expense) -- net.................................................... (36) 25 (15)
--------- --------- ---------
Income from continuing operations before income taxes and extraordinary items.... 2,154 2,283 745
Provision for income taxes....................................................... 825 857 269
--------- --------- ---------
Income from continuing operations before extraordinary items..................... 1,329 1,426 476
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
--------- --------- ---------
Income before extraordinary items................................................ 1,329 1,426 394
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax...................................... -- -- (3,123)
Early extinguishment of debt, net of tax....................................... (12) -- (77)
--------- --------- ---------
NET INCOME (LOSS)................................................................ $ 1,317 $ 1,426 $ (2,806)
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock..................................................... 3 -- --
--------- --------- ---------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK....................................... $ 1,314 $ 1,426 $ (2,806)
--------- --------- ---------
--------- --------- ---------
</TABLE>
B-29
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
IN THOUSANDS (EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
PRO FORMA COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE:
Income before extraordinary item........................................... $ 2.52
Extraordinary item -- early extinguishment of debt......................... (0.02)
----------
PRO FORMA COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE..................... $ 2.50
----------
----------
PRO FORMA COMMUNICATIONS GROUP AVERAGE COMMON SHARES OUTSTANDING............. 470,716
----------
----------
PRO FORMA MEDIA GROUP EARNINGS PER COMMON SHARE:
Income before extraordinary item........................................... $ 0.30
Extraordinary item -- early extinguishment of debt......................... (0.01)
----------
PRO FORMA MEDIA GROUP EARNINGS PER COMMON SHARE.............................. $ 0.29
----------
----------
PRO FORMA MEDIA GROUP AVERAGE COMMON SHARES OUTSTANDING...................... 470,549
----------
----------
U S WEST, INC. EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations available for common stock........................... -- $ 3.14 $ 1.13
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
Extraordinary items:
Discontinuance of SFAS No. 71............................................ -- -- (7.45)
Early extinguishment of debt............................................. -- -- (0.18)
---------- ---------- ----------
U S WEST, INC. EARNINGS (LOSS) PER COMMON SHARE.............................. -- $ 3.14 $ (6.69)
---------- ---------- ----------
---------- ---------- ----------
U S WEST, INC. AVERAGE COMMON SHARES OUTSTANDING............................. -- 453,316 419,365
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
B-30
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................. $ 192 $ 209
Accounts and notes receivable, less allowance for
credit losses of $88 and $62, respectively................................................ 1,886 1,693
Inventories and supplies................................................................... 227 189
Deferred tax asset......................................................................... 282 352
Prepaid and other.......................................................................... 322 323
--------- ---------
Total current assets......................................................................... 2,909 2,766
--------- ---------
Property, plant and equipment -- net......................................................... 14,677 13,997
Investment in Time Warner Entertainment...................................................... 2,483 2,522
Intangible assets -- net..................................................................... 1,798 1,858
Investments in international ventures........................................................ 1,511 881
Net investment in assets held for sale....................................................... 429 302
Other assets................................................................................. 1,264 878
--------- ---------
Total assets................................................................................. $ 25,071 $ 23,204
--------- ---------
--------- ---------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt............................................................................ $ 1,901 $ 2,837
Accounts payable........................................................................... 975 944
Employee compensation...................................................................... 385 367
Dividends payable.......................................................................... 254 251
Current portion of restructuring charge.................................................... 282 337
Other...................................................................................... 1,255 1,278
--------- ---------
Total current liabilities.................................................................... 5,052 6,014
--------- ---------
Long-term debt............................................................................... 6,954 5,101
Postretirement and other postemployment benefit obligations.................................. 2,433 2,502
Deferred income taxes........................................................................ 1,071 890
Unamortized investment tax credits........................................................... 199 231
Deferred credits and other................................................................... 763 1,033
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures........................................................ 600 --
Preferred stock subject to mandatory redemption.............................................. 51 51
Common shareowners' equity:
Common shares -- At 12/31/95-Communications Stock- $0.01 per share par value, 2,000,000,000
authorized, 482,877,097 issued and 473,635,025 outstanding. Media Stock -- $0.01 per share
par value, 2,000,000,000 authorized, 481,556,451 issued and 472,314,379 outstanding. At
12/31/94-U S WEST, Inc. no par, 2,000,000,000 authorized, 476,880,420 issued and
469,343,048 outstanding................................................................... 8,228 8,056
Cumulative deficit......................................................................... (115) (458)
LESOP guarantee............................................................................ (127) (187)
Foreign currency translation adjustments................................................... (38) (29)
--------- ---------
Total common shareowners' equity............................................................. 7,948 7,382
--------- ---------
Total liabilities and shareowners' equity.................................................... $ 25,071 $ 23,204
--------- ---------
--------- ---------
Contigencies (See Note 19 to the Consolidated Financial Statements)
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
B-31
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................................................. $ 1,317 $ 1,426 $ (2,806)
Adjustments to net income (loss):
Discontinuance of SFAS No. 71.................................................... -- -- 3,123
Restructuring charge............................................................. -- -- 1,000
Depreciation and amortization.................................................... 2,291 2,052 1,955
Gains on asset sales:
Merger and partial sale of joint venture interest.............................. (157) (164) --
Rural telephone exchanges...................................................... (136) (82) --
Paging assets.................................................................. -- (68) --
Equity losses in unconsolidated ventures......................................... 207 121 74
Discontinued operations.......................................................... -- -- 82
Deferred income taxes and amortization of investment tax credits................. 274 373 (225)
Changes in operating assets and liabilities:
Restructuring payments........................................................... (334) (289) (120)
Postretirement medical and life costs, net of cash fundings...................... (24) (5) (122)
Accounts and notes receivable.................................................... (169) (104) (90)
Inventories, supplies and other.................................................. (79) (81) (56)
Accounts payable and accrued liabilities......................................... 45 (4) 216
Other -- net....................................................................... 185 72 169
--------- --------- ---------
Cash provided by operating activities.............................................. 3,420 3,247 3,200
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment..................................... (2,825) (2,603) (2,427)
Investment in Time Warner Entertainment............................................ -- -- (1,557)
Investment in Atlanta Systems...................................................... -- (745) --
Investments in international ventures.............................................. (681) (350) (230)
Proceeds from disposals of property, plant and equipment........................... 201 96 45
Proceeds from sale of paging assets................................................ -- 143 --
Other -- net....................................................................... (201) (119) (10)
--------- --------- ---------
Cash (used for) investing activities............................................... (3,506) (3,578) (4,179)
--------- --------- ---------
FINANCING ACTIVITIES
Net (repayments of) proceeds from issuance of short-term debt...................... (1,281) 1,280 687
Proceeds from issuance of long-term debt........................................... 2,732 251 2,282
Repayments of long-term debt....................................................... (1,058) (526) (2,969)
Proceeds from issuance of trust originated preferred securities -- net............. 581 -- --
Dividends paid on common stock..................................................... (929) (886) (812)
Proceeds from issuance of common stock............................................. 87 364 1,150
Proceeds from issuance of preferred stock.......................................... -- 50 --
Purchases of treasury stock........................................................ (63) (20) --
--------- --------- ---------
Cash provided by financing activities.............................................. 69 513 338
--------- --------- ---------
Cash (used for) provided by continuing operations.................................. (17) 182 (641)
Cash (to) from discontinued operations............................................. -- (101) 610
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)................................................................ (17) 81 (31)
Beginning balance.................................................................. 209 128 159
--------- --------- ---------
Ending balance..................................................................... $ 192 $ 209 $ 128
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
B-32
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors of U S WEST, Inc.
(the "Board") to reincorporate in Delaware and create two classes of common
stock that are intended to reflect separately the performance of the
communications and multimedia businesses. Under the Recapitalization Plan,
shareholders approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware corporation ("U S WEST" or "Company"), pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger, the Certificate of Incorporation of U S WEST has been amended and
restated to designate two classes of common stock of U S WEST, one class of
which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado was converted into one share each of
Communications Stock and Media Stock.
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (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"), 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 Communications Group primarily provides regulated
communications services to more than 25 million residential and business
customers within a 14 state region.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc.,
which publishes White and Yellow Pages telephone directories, and provides
directory and information services, U S WEST NewVector Group, Inc., which
provides communications and information products and services over wireless
networks, 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.
Dividends to be paid on Communications Stock are initially $0.535 per share
per quarter. Dividends on the Communications Stock will be paid at the
discretion of the Board, based primarily on the financial condition, results of
operations and business requirements of the Communications Group and the Company
as a whole. 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.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The Consolidated Financial Statements include the
accounts of U S WEST and its majority-owned subsidiaries, except for the capital
assets segment, which is held for sale. All significant intercompany amounts and
transactions have been eliminated. Investments in less than majority-owned
ventures are accounted for using the equity method.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
B-33
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In third-quarter 1993, U S WEST discontinued accounting for its regulated
telephone operations, U S WEST Communications, under Statement of Financial
Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain
Types of Regulation." (See Note 8 to the Consolidated Financial Statements.)
INDUSTRY SEGMENTS 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 (directory and information services, wireless
communications, cable and telecommunications, and the capital assets segment,
which is held for sale) as defined in SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise."
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 Consolidated Financial Statements.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Nonreusable material is carried
at its estimated salvage value. Inventories of all other U S WEST subsidiaries
are carried at the lower of cost or market on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT The investment in property, plant and
equipment is carried at cost, less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are expensed as
incurred.
U S WEST Communications' 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. Prior to discontinuing SFAS No.
71, depreciation was based on lives specified by regulators. 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 other subsidiaries 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 included in income.
Depreciation expense was $2,215, $2,029 and $1,941 in 1995, 1994 and 1993,
respectively.
Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and 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 $72, $44 and $20 in 1995, 1994 and 1993,
respectively.
INTANGIBLE ASSETS Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets. The costs of
identified intangible assets and goodwill are amortized by the
B-34
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $76, $23 and $14 in 1995, 1994 and
1993, respectively.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of international
investments are translated at year-end exchange rates, and income statement
items are translated at average exchange rates for the year. Resulting
translation adjustments are recorded as a separate component of equity. Gains
and losses resulting from foreign currency transactions are included in income.
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 of selling,
composition, printing and distribution are generally deferred and recognized
over the period during which directories are used, normally 12 months. For
international operations, directory advertising revenues and related directory
costs are deferred and recognized upon publication. The balance of deferred
directory costs included in prepaid and other is $247 and $234 at December 31,
1995 and 1994, respectively.
FINANCIAL INSTRUMENTS Net interest received or paid on interest rate swaps
is recognized over the life of the swaps as an adjustment to interest expense.
Foreign exchange contracts designated as hedges of firm equity investment
commitments are carried at market value, with gains and losses recorded in
equity until sale of the investment. Forward contracts designated as hedges of
foreign denominated loans are recorded at market value, with gains and losses
recorded in income.
INVESTMENTS IN DEBT SECURITIES Debt securities are classified as available
for sale and are carried at fair market value with unrealized gains and losses
included in equity.
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 $190 and $146 at December 31, 1995
and 1994, respectively, is recorded in property, plant and equipment. The
Company amortized capitalized computer software costs of $70, $62 and $37 in
1995, 1994 and 1993, 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.
EARNINGS (LOSS) PER COMMON SHARE For 1995, earnings per common share for
Communications Stock and Media Stock are presented on a pro forma basis to
reflect the two classes of stock as if they had been outstanding since January
1, 1995. For periods prior to the recapitalization, the average common shares
outstanding are assumed to be equal to the average common shares outstanding for
U S WEST. For 1994 and 1993, earnings (loss) per common share are computed on
the basis of the weighted average number of shares of U S WEST common stock
outstanding during each year.
B-35
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS In 1996, U S WEST will adopt SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets and associated
intangibles be written down to fair value whenever an impairment review
indicates that the carrying value cannot be recovered on an undiscounted cash
flow basis. SFAS No. 121 also requires that a company no longer record
depreciation expense on assets held for sale. U S WEST expects that the adoption
of SFAS No. 121 will not have a material effect on its financial position or
results of operations.
In 1996, U S WEST will adopt SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. U S
WEST will adopt this standard through compliance with the disclosure
requirements set forth in SFAS No. 123. Adoption of the standard will have no
impact on the financial position or results of operations of U S WEST.
NOTE 3: INDUSTRY SEGMENTS
Industry segment data is presented for the consolidated operations of U S
WEST. The Company's equity method investments and the capital assets segment,
which is held for sale, are included in "Corporate and other."
The businesses comprising the Communications Group operate in a single
industry segment -- communications and related services. The Communications
Group primarily provides regulated communications services to more than 25
million residential and business customers in the Communications Group region
(the "Region"). The Region includes the states of Arizona, Colorado, Idaho,
Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South
Dakota, Utah, Washington and Wyoming. Services offered by the Communications
Group include local telephone services, exchange access services (which connect
customers to the facilities of carriers, including long-distance providers and
wireless operators), and long-distance services within Local Access and
Transport Areas ("LATAs") in the Region. The Communications Group provides other
products and services, including custom calling, voice messaging, caller
identification, high-speed data applications, customer premises equipment and
certain communications services to business customers and governmental agencies
both inside and outside the Region.
Approximately 97 percent of the revenues of the Communications Group are
attributable to the operations of U S WEST Communications, of which
approximately 59 percent are derived from the states of Arizona, Colorado,
Minnesota and Washington.
The Media Group operates in four industry segments, including the capital
assets segment, which is held for sale. The directory and information 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 services over wireless networks in 13 western and
midwestern states. The cable and telecommunications segment was created with the
December 6, 1994 acquisition of cable television systems in the Atlanta
Metropolitan area. (See Note 4 to the Consolidated Financial Statements.)
B-36
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INDUSTRY SEGMENTS (CONTINUED)
Industry segment financial information follows:
<TABLE>
<CAPTION>
COMMUNI- DIRECTORY
CATIONS AND AND WIRELESS CABLE AND CORPORATE
RELATED INFORMATION COMMUNI- TELECOMMUNI- AND INTERSEGMENT
SERVICES SERVICES(1) CATIONS CATIONS(2) OTHER(3) ELIMINATIONS
----------- ------------- ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1995
Sales and other revenues.............. $ 9,484 $ 1,180 $ 941 $ 215 $ 38 $ (112)
Operating income (loss)............... 2,178 398 147 23 (101) --
Identifiable assets................... 16,585 583 1,439 1,466 5,127 (129)
Depreciation and amortization......... 2,042 36 121 77 15 --
Capital expenditures.................. 2,739 37 277 64 23 --
1994
Sales and other revenues.............. 9,176 1,075 781 18 34 (131)
Operating income (loss) from
continuing operations................ 2,118 396 88 -- (95) --
Identifiable assets................... 15,944 613 1,286 1,459 4,036 (134)
Depreciation and amortization......... 1,908 30 102 6 6 --
Capital expenditures.................. 2,477 42 274 2 25 --
1993
Sales and other revenues.............. 8,870 956 561 -- 32 (125)
Operating income (loss) from
continuing operations (4)............ 1,035 356 (29) -- (89) --
Identifiable assets................... 15,423 450 1,175 -- 3,821 (189)
Depreciation and amortization......... 1,828 16 104 -- 7 --
Capital expenditures.................. 2,226 32 175 -- 8 --
<CAPTION>
CONSOLIDATED
-------------
<S> <C>
1995
Sales and other revenues.............. $ 11,746
Operating income (loss)............... 2,645
Identifiable assets................... 25,071
Depreciation and amortization......... 2,291
Capital expenditures.................. 3,140
1994
Sales and other revenues.............. 10,953
Operating income (loss) from
continuing operations................ 2,507
Identifiable assets................... 23,204
Depreciation and amortization......... 2,052
Capital expenditures.................. 2,820
1993
Sales and other revenues.............. 10,294
Operating income (loss) from
continuing operations (4)............ 1,273
Identifiable assets................... 20,680
Depreciation and amortization......... 1,955
Capital expenditures.................. 2,441
</TABLE>
- ----------------------------------
(1)
Includes revenue from directory publishing activities in Europe of $122, $78
and $7, and identifiable assets of $133, $124 and $4 for 1995, 1994 and 1993,
respectively.
(2)
Results of operations have been included since the date of acquisition of the
Atlanta Systems.
(3)
Includes U S WEST's equity method investments and the capital assets segment,
which has been discontinued and is held for sale.
(4)
Includes pretax restructuring charges of $880, $50 and $70 for the
communications and related services, directory and information services and
wireless communications segments, respectively.
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, debt securities, investments in international ventures, the
investment in Time Warner Entertainment, the net investment in assets held for
sale and other assets. Corporate and other operating losses include general
corporate expenses and administrative costs primarily associated with the Media
Group equity investments.
SIGNIFICANT CONCENTRATIONS The largest volume of the Communications Group's
services are provided to AT&T. During 1995, 1994 and 1993, revenues related to
those services provided to AT&T were $1,085, $1,130 and $1,159, respectively.
Related accounts receivable at December 31, 1995 and 1994, totaled $91 and $98,
respectively. As of December 31, 1995, the Communications Group is not aware of
any other significant concentration of business transacted with a particular
customer, supplier or lender that could, if suddenly eliminated, severely impact
operations.
To ensure consistency and quality of service, the wireless segment uses
Motorola as its primary vendor for infrastructure equipment and cellular mobile
telephone equipment and accessories. In addition, Motorola provides ongoing
technological support for the infrastructure equipment. The infrastructure of
approximately 75 percent of the Media Group's major cellular markets is
comprised of Motorola equipment.
WIRELESS COMMUNICATIONS SEGMENT During 1994, U S WEST 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 U S WEST.
B-37
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INDUSTRY SEGMENTS (CONTINUED)
The combination will take place in two phases. During Phase I, which U S WEST
entered effective November 1, 1995, the two companies are operating their
cellular properties separately. A Wireless Management Company (the "WMC") has
been formed and is providing centralized services to both companies on a
contract basis. In Phase II, AirTouch and U S WEST will contribute their
domestic cellular assets to the WMC. In this phase, the Company will reflect its
share of the combined operating results of the WMC using the equity method of
accounting. The recent passage of the Telecommunications Act of 1996 has removed
significant regulatory barriers to completion of Phase II of the business
combination. U S WEST expects that Phase II closing could take place by the end
of 1996 or early 1997.
NOTE 4: ACQUISITION OF CABLE SYSTEMS
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 of the Company since the date
of acquisition. Had the acquisition occurred as of January 1, 1994, the
Company's revenue, net income and earnings per common share for 1994 would have
been $11,143, $1,415 and $3.04, respectively.
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.
CONTINENTAL CABLEVISION, INC. (SUBSEQUENT EVENT) On February 27, 1996, the
Company announced a definitive agreement to merge with Continental Cablevision,
Inc. ("Continental"). Continental, the nation's third-largest cable operator,
serves 4.2 million domestic customers, passes more than seven million domestic
homes and holds significant other domestic and international properties. U S
WEST will purchase all of Continental's stock for approximately $5.3 billion and
will assume Continental's debt and other obligations, which amount to
approximately $5.5 billion. Consideration for the $5.3 billion in equity will
consist of approximately $1 billion in U S WEST preferred stock, convertible to
Media Stock; and, at U S WEST's option, between $1 billion and $1.5 billion in
cash, and $2.8 billion to $3.3 billion in shares of Media Stock. The
transaction, which is expected to close in the fourth quarter of 1996, is
subject to a number of conditions and approvals, including approvals from
Continental shareholders and local franchising and government authorities.
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" or "Time Warner Entertainment") for an
aggregate purchase price of $2.553 billion. TWE owns and operates substantially
all of the entertainment assets previously owned by Time Warner Inc. ("Time
Warner"), consisting primarily of its filmed entertainment, programming-HBO and
cable businesses.
Upon U S WEST's admission to the partnership, certain wholly owned
subsidiaries of Time Warner ("General Partners") and subsidiaries of Toshiba
Corporation and ITOCHU Corporation held pro-rata priority capital and residual
equity interests of 63.27, 5.61 and 5.61 percent, respectively. In 1995, Time
Warner acquired the limited partnership interests previously held by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation.
U S WEST has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is
B-38
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
exercisable, in whole or part, between January 1, 1999, and May 31, 2005, for an
aggregate cash exercise price ranging from $1.25 billion to $1.8 billion,
depending upon the year of exercise. Either TWE or U S WEST may elect that the
exercise price for the option be paid with partnership interests rather than
cash.
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the General Partners); pro-rata priority capital (A preferred -- held pro
rata by the general and limited partners); junior priority capital (B preferred
- -- held by the General Partners); and common (residual equity interests held pro
rata by the general and limited partners). Of the $2.553 billion contributed by
U S WEST, $1.658 billion represents A preferred capital and $895 represents
common capital. The TWE Partnership Agreement provides for special allocations
of income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' 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 are allocated in reverse order, first to eliminate prior
allocations of partnership income, except senior preferred and special tax
income, next to reduce initial capital amounts, other than senior preferred,
then to reduce the senior preferred account and finally, to eliminate special
tax allocations.
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
TIME WARNER LIMITED PARTNERS
PRIORITY OF CONTRIBUTED GENERAL ----------------------
CONTRIBUTED CAPITAL CAPITAL(A) PARTNERS TIME WARNER U S WEST
- --------------------------------------------------- ----------- ----------- ----------- ---------
PRIORITY CAPITAL
RATES OF
RETURN(B)
-----------------
(% PER ANNUM
COMPOUNDED
QUARTERLY) (OWNERSHIP %)
<S> <C> <C> <C> <C> <C>
Senior preferred................................... $ 1,400(c) 8.00% 100.00% -- --
Pro-rata priority capital.......................... 5,600 13.00%(d) 63.27% 11.22% 25.51%
Junior priority capital............................ 2,900(e) 13.25%(f) 100.00% -- --
Residual equity capital............................ 3,300 -- 63.27% 11.22% 25.51%
</TABLE>
- ----------------------------------
(a)
Estimated fair value of net assets contributed excluding partnership income or
loss allocated thereto.
(b)
Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c)
The senior preferred is scheduled to be distributed in three annual
installments beginning July 1, 1997.
(d)
11.00 percent to the extent concurrently distributed.
(e)
Includes $300 for the September 1995 reacquisition of assets previously
excluded from the partnership (the Time Warner service partnership assets) for
regulatory reasons.
(f)
11.25 percent to the extent concurrently distributed.
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions were previously subject to
restrictions until July 1995, and are now paid to the partners on a current
basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the General Partners receive
their full share of distributions. No cash distributions have been made to U S
WEST.
B-39
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
U S WEST accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by U S WEST's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
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, the Company's
recorded pretax share of TWE operating results before extraordinary item was
$(31), $(18) and $(20) in 1995, 1994 and 1993, respectively. In addition, TWE
recorded an extraordinary loss for the early extinguishment of debt in 1995. The
Company's share of this extraordinary loss was $4, net of an income tax benefit
of $2.
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, $26
and $8 were recorded to other income in 1995, 1994 and 1993, respectively.
Included in the U S WEST Consolidated Balance Sheet is a note payable to TWE of
$169 and $771 and management fee receivables of $50 and $34 at December 31, 1995
and 1994, respectively.
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1993
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................................. $ 9,517 $ 8,460 $ 7,946
Operating expenses (1)............................................................... 8,557 7,612 7,063
Interest and other expense, net (2).................................................. 777 647 611
--------- --------- ---------
Income before income taxes and extraordinary item.................................... $ 183 $ 201 $ 272
Income before extraordinary item..................................................... 97 161 208
--------- --------- ---------
Net income........................................................................... $ 73 $ 161 $ 198
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ----------------------------------
(1)
Includes depreciation and amortization of $1,039, $943 and $902 in 1995, 1994
and 1993, respectively.
(2)
Includes corporate services of $64, $60 and $60 in 1995, 1994 and 1993,
respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
SUMMARIZED FINANCIAL POSITION 1995 1994
- -------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets (3).......................................................................... $ 2,909 $ 3,573
Noncurrent assets (4)....................................................................... 15,996 15,089
Current liabilities......................................................................... 3,214 2,857
Noncurrent liabilities, including minority interest......................................... 7,787 7,909
Senior preferred capital.................................................................... 1,426 1,663
Partners' capital (5,6)..................................................................... 6,478 6,233
</TABLE>
- ----------------------------------
(3)
Includes cash of $209 and $1,071 at December 31, 1995 and 1994, respectively.
(4)
Includes a loan receivable from Time Warner of $400 at December 31, 1995 and
1994.
(5)
Net of a note receivable from U S WEST of $169 and $771 at December 31, 1995
and 1994, respectively.
(6)
Contributed capital is based on the estimated fair value of the net assets
that each partner contributed to the partnership. The aggregate of such
amounts is significantly higher than TWE's partner's capital as reflected in
the Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
B-40
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
In early 1995, Time Warner announced its intention to simplify its corporate
structure by establishing an enterprise that will be responsible for the overall
management and financing of the cable and telecommunications properties. Any
change in the structure of TWE would require U S WEST's approval in addition to
certain creditors' and regulatory approvals. (See Note 19 to the Consolidated
Financial Statements for disclosure related to litigation with Time Warner.)
NOTE 6: RESTRUCTURING CHARGE
The Company's 1993 results reflect a $1 billion restructuring charge
(pretax). 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, 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 has consolidated its 560 customer
service centers into 26 centers in 10 cities and reducing its total work force
by approximately 10,000 employees. This increased the number of employee
separations to 10,000 from 9,000, and increased the estimated total cost for
employee separations to $316, compared with $286 in the original estimate.
Approximately 1,000 employees that were originally expected to relocate have
chosen separation or other job assignments and have been replaced. The $30 cost
associated with these additional employee separations was reclassified from
relocation to the reserve for employee separations during 1995.
Following is a schedule of the costs included in the 1993 restructuring
charge:
<TABLE>
<CAPTION>
1993
RESTRUCTURING CHANGE IN DECEMBER 31,
CHARGE ESTIMATE 1995 ESTIMATE
------------- ------------- -------------
<S> <C> <C> <C>
Employee separation(1)................................................... $ 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>
- ----------------------------------
(1)Employee-separation costs, including the balance of a 1991 restructuring
reserve at December 31, 1993, aggregate $316.
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. 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.
B-41
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: RESTRUCTURING CHARGE (CONTINUED)
The following table shows amounts charged to the restructuring reserve:
<TABLE>
<CAPTION>
1993
RESTRUCTURING 1994 1995 CHANGE IN DECEMBER 31,
RESERVE ACTIVITY ACTIVITY ESTIMATE 1995 BALANCE
--------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Employee separation (1)................................ $ 286 $ 75 $ 76 $ 30 $ 165
Systems development.................................... 400 127 145 -- 128
Real estate............................................ 130 50 66 -- 14
Relocation............................................. 110 21 24 (30) 35
Retraining and other................................... 65 16 23 -- 26
----- ----- ----- --- -----
Total................................................ $ 991 $ 289 $ 334 $ -- $ 368
----- ----- ----- --- -----
----- ----- ----- --- -----
</TABLE>
- ----------------------------------
(1)
Includes $56 associated with work-force reductions under a 1991 restructuring
plan.
Employee separations under the Restructuring Plan in 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
CUMULATIVE
SEPARATIONS AT
1994 1995 DECEMBER 31,
SEPARATIONS SEPARATIONS 1995
------------- ------------- ---------------
<S> <C> <C> <C>
Employee separations:
Managerial............................................................ 497 682 1,179
Occupational.......................................................... 1,683 1,643 3,326
----- ----- -----
Total............................................................... 2,180 2,325 4,505
----- ----- -----
----- ----- -----
</TABLE>
The Restructuring Plan is expected to be substantially completed by the end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the business and related service issues, new business opportunities, revisions
to system delivery schedules and productivity issues caused by the major
rearrangement of resources due to restructuring. These issues will continue to
affect the timing of employee separations.
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES
The significant investments in international ventures follows:
<TABLE>
<CAPTION>
NET INVESTMENT AT
DECEMBER 31,
LINE OF OWNERSHIP --------------------
VENTURE LOCATION BUSINESS PERCENTAGE 1995 1994
- ---------------------------------------------------- ------------------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
TeleWest............................................ United Kingdom C&T 26.8 $ 540 $ 456
Binariang Sdn Bhd................................... Malaysia C&T 20 224 50
A2000 (KTA)......................................... Netherlands C&T 50 218 --
One 2 One........................................... United Kingdom W 50 73 123
All other........................................... 456 252
--------- ---------
Total............................................. $ 1,511 $ 881
--------- ---------
--------- ---------
</TABLE>
- ----------------------------------
(C&T)
Cable and Telecommunications
(W)Wireless
B-42
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
The following table shows summarized combined financial information for the
Company's significant equity method investments in international ventures:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMBINED OPERATIONS 1995 1994 1993
- --------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue................................................................................ $ 1,163 $ 580 $ 296
Operating expenses..................................................................... 1,264 684 354
Depreciation and amortization.......................................................... 272 140 60
--------- --------- ---------
Operating loss....................................................................... (373) (244) (118)
Interest and other, net................................................................ (141) (75) (40)
--------- --------- ---------
Loss before extraordinary item....................................................... (514) (319) (158)
Extraordinary gain -- interest rate swaps.............................................. -- 11 --
--------- --------- ---------
Net loss............................................................................. $ (514) $ (308) $ (158)
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
COMBINED FINANCIAL POSITION 1995 1994
- ------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets....................................................................... $ 1,469 $ 714
Property, plant and equipment -- net................................................. 3,545 1,462
Other assets......................................................................... 1,644 343
--------- ---------
Total assets......................................................................... $ 6,658 $ 2,519
--------- ---------
--------- ---------
Current liabilities.................................................................. $ 1,260 $ 344
Long-term debt....................................................................... 2,065 463
Other liabilities.................................................................... 58 71
Owners' equity....................................................................... 3,275 1,641
--------- ---------
Total liabilities and equity......................................................... $ 6,658 $ 2,519
--------- ---------
--------- ---------
</TABLE>
In November 1994, TeleWest plc ("TeleWest") made an initial public offering
of its ordinary shares. Following the offering, in which U S WEST sold part of
its 50 percent joint venture interest, U S WEST owned approximately 37.8 percent
of TeleWest. Net proceeds of approximately $650 were used by TeleWest to finance
construction and operating costs, invest in affiliated companies and repay debt.
It is U S WEST's policy to recognize as income any gains or losses related to
the sale of stock to the public. The Company recognized a gain of $105 in 1994,
net of $59 in deferred taxes, for the partial sale of its joint venture interest
in TeleWest.
On October 2, 1995, TeleWest and SBC CableComms (UK) completed a merger of
their UK cable television and telecommunications interests, creating the largest
provider of combined cable and telecommunications services in the United
Kingdom. Following completion of the merger, U S WEST and Tele-Communications,
Inc., the major shareholders, each own 26.8 percent of the combined company. The
Company recognized a gain of $95 in 1995, net of $62 in deferred income taxes,
in conjunction with the merger.
TeleWest, which is the only equity method investment for which a quoted
market price is available, had a market value of $914 at December 31, 1995, and
$1,004 at December 31, 1994.
FOREIGN CURRENCY TRANSACTIONS U S WEST enters into forward and zero-cost
combination option contracts to manage foreign currency risk. Under a forward
contract, U S WEST agrees with another party to exchange a foreign currency and
U.S. dollars at a specified price at a future date. Under combination
B-43
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
options, U S WEST combines purchased options to cap the foreign exchange rate to
be paid at a future date with written options to finance the premium of the
purchased options. The commitments, forward contracts and combination options
are for periods up to one year.
Forward exchange contracts are carried at market value. Gains or losses on
the portion of the contracts designated as hedges of firm equity investment
commitments are deferred as a component of equity and are recognized in income
upon sale of the investment. Gains or losses on the portion of the contracts
designated to offset translation of investee net income are recorded in income.
Forward contracts are also used to hedge foreign denominated loans. These
contracts are carried at market value with gains or losses recorded in income.
Foreign exchange contracts outstanding follow:
<TABLE>
<CAPTION>
$U.S. EQUIVALENT
DECEMBER 31,
--------------------
TYPE 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Forwards:
Dutch Guilders................................................................. Buy $ 225 $ --
British pounds................................................................. Buy 130 135
British pounds................................................................. Sell 37 --
Japanese yen................................................................... Buy 25 --
French francs.................................................................. Buy 19 --
Combination options:
British pounds................................................................. -- $ -- $ 35
French francs.................................................................. -- 20 --
</TABLE>
Cumulative deferred gains on foreign exchange contracts of $9 and deferred
losses of $25, including deferred taxes (benefits) of $4 and ($10),
respectively, are included in equity at December 31, 1995. Cumulative deferred
gains on foreign exchange contracts of $7 and deferred losses of $25, including
deferred taxes (benefits) of $3 and ($10), respectively, are included in equity
at December 31, 1994.
The counterparties to these contracts are major financial institutions. U S
WEST is exposed to credit loss in the event of nonperformance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Land and buildings................................................................ $ 2,627 $ 2,604
Telephone network equipment....................................................... 12,019 11,622
Telephone outside plant........................................................... 12,353 11,897
Cellular systems.................................................................. 733 585
Cable distribution systems........................................................ 167 148
General purpose computers and other............................................... 4,051 3,425
Construction in progress.......................................................... 934 733
--------- ---------
32,884 31,014
Less accumulated depreciation..................................................... 18,207 17,017
--------- ---------
Property, plant and equipment -- net.............................................. $ 14,677 $ 13,997
--------- ---------
--------- ---------
</TABLE>
B-44
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
In 1995, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $258. U S WEST Communications received consideration for the
sales of $388, including $214 in cash. In 1994, U S WEST Communications sold
certain rural telephone exchanges with a cost basis of $122 and received
consideration of $204, including $93 in cash.
The Media Group businesses depreciate buildings between 15 to 35 years,
cellular and cable distribution systems between 5 to 15 years, and general
purpose computers and other between 3 to 20 years. See "Discontinuance of SFAS
No. 71" for depreciation rates used by the Communications Group.
DISCONTINUANCE OF SFAS NO. 71
U S WEST Communications incurred a noncash, 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 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' 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 flows 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>
B-45
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value.................................... $ 1,183 $ 1,166
Goodwill............................................................................. 743 762
--------- ---------
Total................................................................................ 1,926 1,928
Less accumulated amortization........................................................ 128 70
--------- ---------
Total intangible assets -- net....................................................... $ 1,798 $ 1,858
--------- ---------
--------- ---------
</TABLE>
NOTE 10: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper................................................................... $ 807 $ 2,305
Bank loan.......................................................................... 216 --
Current portion of long-term debt.................................................... 1,029 732
Allocated to the capital assets segment -- net....................................... (151) (200)
--------- ---------
Total................................................................................ $ 1,901 $ 2,837
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.79 percent and
5.97 percent at December 31, 1995 and 1994, respectively.
The bank loan, in the translated principal amount of $216, is denominated in
Dutch guilders. The loan was entered into in connection with U S WEST's
investment in a cable television venture in the Netherlands and was repaid in
February 1996.
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. U S WEST is permitted to borrow up to approximately $1.9 billion under
lines of credit, all of which was available at December 31, 1995.
B-46
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1997 1998 1999 2000 THEREAFTER 1995 1994
- --------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%............................... $ -- $ 35 $ -- $ 90 $ 150 $ 275 $ 546
Above 5% to 6%......................... -- 430 -- -- 261 691 574
Above 6% to 7%......................... -- -- 126 363 2,773 3,262 1,361
Above 7% to 8%......................... 16 -- -- -- 3,214 3,230 3,193
Above 8% to 9%......................... -- -- 107 -- 290 397 444
Above 9% to 10%........................ 29 -- 15 200 10 254 399
Above 10%.............................. 1 1 -- -- -- 2 --
Variable rate debt (indexed to two- and
ten-year constant maturity Treasury
rates)................................ 25 -- 155 -- -- 180 180
--------- --------- --------- --------- ----------- --------- ---------
$ 71 $ 466 $ 403 $ 653 $ 6,698 8,291 6,697
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other.... 197 153
Unamortized discount -- net............ (1,178) (1,239)
Allocated to the capital assets
segment -- net........................ (356) (510)
--------- ---------
Total.................................. $ 6,954 $ 5,101
--------- ---------
--------- ---------
</TABLE>
Long-term debt consists principally of debentures, 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 equal
shares of Communications Stock and Media Stock. 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 $521 and $498 at December 31, 1995 and 1994,
respectively.
In 1995, U S WEST issued $130 of Debt Exchangeable for Common Stock
("DECS"), due December 15, 1998, in the principal amount of $24.00 per note. The
notes bear interest at 7.625 percent, of which 1.775 percent has been included
in the assets held for sale reserve. Upon maturity, each DECS will be
mandatorily redeemed by U S WEST for shares of Enhance Financial Services Group,
Inc. ("Enhance") held by U S WEST or the cash equivalent, at U S WEST's option.
The number of shares to be delivered at maturity varies based on the per share
market price of Enhance. If the market price is $24.00 per share or less, one
share of Enhance will be delivered for each note; if the market price is between
$24.00 and $28.32 per share, a fractional share equal to $24.00 is delivered; if
the market value is greater than $28.32 per share, .8475 shares are delivered.
The capital assets segment currently owns approximately 31.5 percent of the
outstanding Enhance common stock.
During 1995, U S WEST refinanced $2.6 billion of commercial paper to take
advantage of favorable long-term interest rates. In addition to the commercial
paper, U S WEST refinanced $145 of long-term debt. Expenses associated with the
refinancing of long-term debt resulted in extraordinary charges to income of $8,
net of an income tax benefit of $5.
During 1993, U S WEST refinanced long-term 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.
At December 31, 1995, U S WEST guaranteed debt in the principal amount of
approximately $140, primarily related to international ventures.
B-47
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: DEBT (CONTINUED)
Interest payments, net of amounts capitalized, were $518, $523 and $670 in
1995, 1994 and 1993, respectively, of which $87, $134 and $272, respectively,
relate to the capital assets segment.
INTEREST RATE RISK MANAGEMENT
Interest rate swap agreements are primarily used to effectively convert
existing commercial paper to fixed-rate debt. This allows U S WEST to achieve
interest savings over issuing fixed-rate debt directly.
Under an interest rate swap, U S WEST agrees with another party to exchange
interest payments at specified intervals over a defined term. Interest payments
are calculated by reference to the notional amount based on the fixed- and
variable-rate terms of the swap agreements. The net interest received or paid as
part of the interest rate swap is accounted for as an adjustment to interest
expense.
During 1995 and 1994, U S WEST Communications entered into currency swaps 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. 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. Variable rates are indexed to
two- and ten-year constant maturity Treasury and 30-day commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------------------
1995 1994
------------------------------------------------ ------------------------------------------------
WEIGHTED AVERAGE RATE WEIGHTED AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed............... $ 635 1996-2004 5.72 6.80 $ 785 1995-2004 6.14 6.47
Fixed to variable............... -- -- -- -- 5 1995 6.61 5.87
Currency........................ 204 1999-2001 -- 6.55 71 1999 -- 6.53
</TABLE>
In 1993, U S WEST Communications executed forward contracts to sell U.S.
Treasury bonds to lock in the U.S. Treasury rate component of the future debt
issue. At December 31, 1995, deferred credits of $8 and deferred charges of $51
on closed 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, 1995, there were no open
forward contracts.
The counterparties to these interest rate contracts are major financial
institutions. U S WEST is exposed to credit loss in the event of nonperformance
by these counterparties. U S WEST manages this exposure by monitoring the credit
standing of the counterparty and establishing dollar and term limitations which
correspond to the respective credit rating of each counterparty. U S WEST does
not have significant exposure to an individual counterparty and does not
anticipate nonperformance by any counterparty.
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
The fair values of mandatorily redeemable preferred stock and long-term
receivables, based on discounting future cash flows, approximate the carrying
values. The fair value of foreign exchange contracts, based on estimated amounts
U S WEST would receive or pay to terminate such agreements, approximate the
carrying values. It is not practicable to estimate the fair value of financial
guarantees associated with international operations because there are no quoted
market prices for similar transactions.
B-48
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of interest rate swaps, including swaps associated with the
capital assets segment, are based on estimated amounts U S WEST would receive or
pay to terminate such agreements taking into account current interest rates and
creditworthiness of the counterparties.
The fair values of long-term debt, including debt associated with the
capital assets segment, are based on quoted market prices where available or, if
not available, are based on discounting future cash flows using current interest
rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)...................................... $ 9,651 $ 10,050 $ 9,221 $ 8,700
Interest rate swap agreements -- assets................................. -- (32) -- (15)
Interest rate swap agreements -- liabilities............................ -- 51 -- 20
----------- --------- ----------- ---------
Debt -- net............................................................. $ 9,651 $ 10,069 $ 9,221 $ 8,705
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Preferred Securities.................................................... $ 600 $ 636 $ -- $ --
Preferred stock......................................................... 51 55 51 51
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Investments in debt securities are classified as available for sale and are
carried at market value. These securities have various maturity dates through
the year 2001. The market value of these securities is based on quoted market
prices where available or, if not available, is based on discounting future cash
flows using current interest rates.
The amortized cost and estimated market value of debt securities follow:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1994
-------------------------------------------------- -------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED UNREALIZED UNREALIZED
DEBT SECURITIES COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES
- ------------------------------- --- ----------- ----------- ----- --- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Corporate debt................. $ 20 $ -- $ -- $ 20 $ 19 $ -- $ --
Securitized loan............... 55 -- (5) 50 -- -- --
--- ----- ----- --- --- ----- -----
Total.......................... $ 75 $ -- $ (5) $ 70 $ 19 $ -- $ --
--- ----- ----- --- --- ----- -----
--- ----- ----- --- --- ----- -----
<CAPTION>
DEBT SECURITIES FAIR VALUE
- ------------------------------- -----
<S> <C>
Corporate debt................. $ 19
Securitized loan............... --
---
Total.......................... $ 19
---
---
</TABLE>
The 1995 net unrealized losses of $3 (net of a deferred tax benefit of $2)
are included in equity.
NOTE 12: LEASING ARRANGEMENTS
U S WEST has entered into operating leases for office facilities, equipment
and real estate. Rent expense under operating leases was $263, $288 and $275 in
1995, 1994 and 1993, respectively. Minimum future lease payments as of December
31, 1994, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- -------------------------------------------------------------------------------------
<S> <C>
1996................................................................................. $ 159
1997................................................................................. 152
1998................................................................................. 145
1999................................................................................. 127
2000................................................................................. 117
Thereafter........................................................................... 777
---------
Total................................................................................ $ 1,477
---------
---------
</TABLE>
B-49
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: PREFERRED STOCK
U S WEST has 200,000,000 authorized shares of preferred stock, 10,000,000
shares of which are designated as Series A Junior Participating Cumulative
Preferred Stock, par value $1.00 per share, 10,000,000 shares of which are
designated as Series B Junior Participating Cumulative Preferred Stock, par
value $1.00 per share, and 50,000 shares of which are designated as Series C
Preferred Stock, par value $1.00 per share.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On September 2, 1994, the Company issued to Fund American Enterprises
Holdings Inc. ("FFC") 50,000 shares of 7 percent Series C Cumulative Redeemable
Preferred Stock for a total of $50. (See Note 20 to the Consolidated Financial
Statements.) Upon issuance, 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 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, an investment held by the capital assets segment. The market value of
the option was $20 and $22 (based on the Black-Scholes Model) at December 31,
1995 and 1994, with no carrying value.
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
On September 11, 1995, U S WEST Financing I, a wholly owned subsidiary of U
S WEST ("Financing I"), issued $600 million of 7.96 percent Trust Originated
Preferred Securities (the "Preferred Securities") and $19 of common securities.
U S WEST holds all of the outstanding common securities of Financing I.
Financing I used the proceeds from such issuance to purchase from U S WEST
Capital Funding, Inc., a wholly owned subsidiary of U S WEST ("Capital
Funding"), $619 principal amount of Capital Funding's 7.96 percent Subordinated
Deferrable Interest Notes due 2025 (the "Subordinated Debt Securities"), the
obligations under which are fully and unconditionally guaranteed by U S WEST
(the "Debt Guarantee"). The sole assets of Financing I are and will be the
Subordinated Debt Securities and the Debt Guarantee.
In addition, U S WEST has guaranteed the payment of interest and redemption
amounts to holders of Preferred Securities when Financing I has funds available
for such payments (the "Payment Guarantee") as well as Capital Funding's
undertaking to pay all of Financing I's costs, expenses and other obligations
(the "Expense Undertaking"). The Payment Guarantee and the Expense Undertaking,
including U S WEST's guarantee with respect thereto, considered together with
Capital Funding's obligations under the indenture and Subordinated Debt
Securities and U S WEST's obligations under the indenture, declaration and Debt
Guarantee, constitute a full and unconditional guarantee by U S WEST of
Financing I's obligations under the Preferred Securities. The interest and other
payment dates on the Subordinated Debt Securities correspond to the distribution
and other payment dates on the Preferred Securities. Under certain
circumstances, the Subordinated Debt Securities may be distributed to the
holders of Preferred Securities and common securities in liquidation of
Financing I. The Subordinated Debt Securities are redeemable in whole or in part
by Capital Funding at any time on or after September 11, 2000, at a redemption
price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest.
If Capital Funding redeems the Subordinated Debt Securities, Financing I is
required to redeem the Preferred Securities concurrently at $25.00 per share
plus accrued and unpaid distributions. As of December 31, 1995, 24,000,000
Preferred Securities were outstanding.
B-50
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
COMMUNICATIONS MEDIA
STOCK STOCK U S WEST STOCK FOREIGN
----------------- --------- ---------------------- CUMULATIVE CURRENCY
SHARES SHARES SHARES AMOUNT DEFICIT TRANSLATION
----------------- --------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992................. 414,462 $ 5,770 $ 2,826 $ (34)
Issuance of common stock................ 26,516 1,224
Issuance of treasury stock.............. 162 6
Net income.............................. (2,806)
Common dividends declared ($2.12 per
share)................................. (905)
Market value adjustment for debt
securities............................. 35
Foreign currency translation............ (1)
Other................................... (4) (7)
------- --------- --------- ----------- ----------- -----
Balance December 31, 1993................. 441,140 6,996 (857) (35)
Issuance of common stock................ 18,647 694
Settlement of litigation................ 5,506 210
Benefit trust contribution (OPEB)....... 4,600 185
Purchase of treasury stock.............. (550) (20)
Net income.............................. 1,426
Common dividends declared ($2.14 per
share)................................. (980)
Market value adjustment for debt
securities............................. (64)
Foreign currency translation............ 6
Other................................... (9) 17
------- --------- --------- ----------- ----------- -----
Balance December 31, 1994................. 469,343 8,056 (458) (29)
Issuance of common stock................ 2,791 117
Benefit trust contribution (OPEB)....... 1,500 61
Purchase of treasury stock.............. (1,705) (63)
Other................................... 3
November 1, 1995 Recapitalization Plan.... 471,929 471,922 (471,929)
Recapitalization Plan dissenters (1).... (6)
Issuance of common stock................ 1,712 392 59
Net income.............................. 1,317
Common dividends declared ($2.14 per
share)................................. (1,010)
Preferred dividends..................... (3)
Market value adjustment for debt
securities............................. 36
Foreign currency translation............ (9)
Other................................... (5) 3
------- --------- --------- ----------- ----------- -----
Balance December 31, 1995................. 473,635 472,314 -- $ 8,228 $ (115) $ (38)
------- --------- --------- ----------- ----------- -----
------- --------- --------- ----------- ----------- -----
<CAPTION>
LESOP
GUARANTEE
-------------
<S> <C>
Balance December 31, 1992................. $ (294)
Issuance of common stock................
Issuance of treasury stock..............
Net income..............................
Common dividends declared ($2.12 per
share).................................
Market value adjustment for debt
securities.............................
Foreign currency translation............
Other................................... 51
-----
Balance December 31, 1993................. (243)
Issuance of common stock................
Settlement of litigation................
Benefit trust contribution (OPEB).......
Purchase of treasury stock..............
Net income..............................
Common dividends declared ($2.14 per
share).................................
Market value adjustment for debt
securities.............................
Foreign currency translation............
Other................................... 56
-----
Balance December 31, 1994................. (187)
Issuance of common stock................
Benefit trust contribution (OPEB).......
Purchase of treasury stock..............
Other...................................
November 1, 1995 Recapitalization Plan....
Recapitalization Plan dissenters (1)....
Issuance of common stock................
Net income..............................
Common dividends declared ($2.14 per
share).................................
Preferred dividends.....................
Market value adjustment for debt
securities.............................
Foreign currency translation............
Other................................... 60
-----
Balance December 31, 1995................. $ (127)
-----
-----
</TABLE>
- ------------------------------
(1)
Under the Recapitalization Plan, Media Stock was not issued to shareowners who
elected to receive cash rather than Communications Stock and Media Stock.
Dissenting shareowners were paid $47.9375 per U S WEST share on December 15,
1995.
COMMON STOCK 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 4 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,
nontransferable rights to purchase shares of common stock directly from U S
WEST, on a commission-free basis, at a 3 percent discount from the 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.
B-51
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
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 PLAN ("LESOP") U S WEST maintains a
defined contribution savings plan for substantially all management and
occupational employees of the Company. The Company matches a certain percentage
of eligible employee contributions with shares of Communications Stock and/ or
Media Stock in accordance with participant elections. Participants may also
elect to reallocate past Company contributions between Communications Stock and
Media Stock. In 1989, U S WEST established two LESOPs to provide Company stock
for matching contributions to the savings plan. At December 31, 1995, 10,145,485
shares each of Communications Stock and Media Stock has been allocated from the
LESOP, while 2,839,435 shares each of Communications Stock and Media Stock
remained unallocated.
The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are included in the accompanying Consolidated Balance
Sheets and corresponding amounts have been recorded as reductions to common
shareowners' equity. Contributions from the Company as well as dividends on
unallocated shares held by the LESOP ($8, $11 and $14 in 1995, 1994 and 1993,
respectively) are used for debt service. Beginning with the dividend paid in
fourth-quarter 1995, dividends on allocated shares are being paid annually to
participants. Previously, dividends on allocated shares were used for debt
service with participants receiving additional shares from the LESOP.
U S WEST recognizes expense based on the cash payments method. Total Company
contributions to the plan (excluding dividends) were $86, $80 and $75 in 1995,
1994 and 1993, respectively, of which $15, $19 and $24, respectively, have been
classified as interest expense.
SHAREHOLDER RIGHTS PLAN The Board has adopted a shareholder rights plan
which, in the event of a takeover attempt, would entitle existing shareowners to
certain preferential rights. The rights expire on April 6, 1999, and are
redeemable by the Company at any time prior to the date they would become
effective.
SHARE REPURCHASE Subsequent to the acquisition of the Atlanta Systems (See
Note 4 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 first-quarter 1995, the Company purchased 1,704,700 shares of U S
WEST common stock at an average price per share of $37.02. 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 16: STOCK INCENTIVE PLANS
U S WEST maintains stock incentive plans for executives and key employees,
and nonemployees. The Amended 1994 Stock Plan (the "Plan") was approved by
shareowners on October 31, 1995 in connection with the Recapitalization Plan.
The Plan is a successor plan to the U S WEST, 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
nonemployees.
During calendar year 1995, up to 2,200,000 shares of Communications Stock
and 1,485,000 shares of Media Stock were available for grant. The maximum
aggregate number of shares of Communications Stock and Media Stock that may be
granted in any other calendar year for all purposes under the Plan is nine-
tenths of one percent (0.90 percent) and three-quarters of one percent (0.75
percent), respectively, of the shares of such class outstanding (excluding
shares held in 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 either class
available for
B-52
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
issuance in any calendar year are issued in any such year, the shares not issued
shall be added to the shares of such class available for issuance in any
subsequent year or years. Options may be exercised no later than 10 years after
the date on which the option was granted.
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP
MEDIA GROUP U S WEST, INC.
------------------------ ------------------------ ------------------------
AVERAGE AVERAGE AVERAGE
NUMBER OPTION NUMBER OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES PRICE OF SHARES* PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1, 1993........................ 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
----------- -----------
Granted.......................................... 3,062,920 43.63
Exercised........................................ (430,631) 34.03
Canceled or expired.............................. (175,147) 39.76
----------- -----------
Outstanding October 31, 1995....................... 9,843,179 $ 40.39
----------- -----------
Recapitalization Plan.............................. 9,843,179 $ 24.11 9,843,179 $ 16.28 (9,843,179) $ (40.39)
----------- ----------- ----------- -----------
Granted.......................................... 138,309 32.16 71,580 18.51
Exercised........................................ (543,037) 21.23 (191,243) 14.71
Canceled or expired.............................. (15,350) 24.91 (15,350) 16.82
----------- ----------- ----------- ----------- ----------- -----------
Outstanding December 31, 1995...................... 9,423,101 $ 24.39 9,708,166 $ 16.33 -- --
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
* Includes options granted in tandem with SARs.
Options to purchase 2,672,666 shares of Communications Stock and 3,021,166
shares of Media Stock were exercisable at December 31, 1995. Options to purchase
2,374,394 shares of U S WEST stock were exercisable at December 31, 1994. A
total of 2,050,466 shares of Communications Stock and 1,419,795 shares of Media
Stock were available for grant under the plans in effect at December 31, 1995. A
total of 914,816 shares of U S WEST common stock were available for grant under
the plans in effect at December 31, 1994. A total of 11,484,792 shares of
Communications Stock and 11,121,186 shares of Media Stock were reserved for
issuance under the Plan at December 31, 1995.
NOTE 17: EMPLOYEE BENEFITS
PENSION PLAN
U S WEST sponsers a defined benefit pension plan covering substantially all
management and occupational employees of the Company. 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 Security Act of 1974 ("ERISA") and no
funding was required in 1995, 1994 or 1993.
B-53
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
The composition of the net pension cost and the actuarial assumptions of the
plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period....................... $ 173 $ 197 $ 148
Interest cost on projected benefit obligation........................... 558 561 514
Actual return on plan assets............................................ (1,918) 188 (1,320)
Net amortization and deferral........................................... 1,185 (946) 578
--------- --------- ---------
Net pension cost.......................................................... $ (2) $ 0 $ (80)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1995, 8.50 percent for 1994 and 9.00 percent
for 1993.
The funded status of the plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5,839 and $5,044,
respectively...................................................................... $ 6,617 $ 5,616
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds.............................. $ 9,874 $ 8,388
Less: Projected benefit obligation................................................. 8,450 7,149
--------- ---------
Plan assets in excess of projected benefit obligation.............................. 1,424 1,239
Unrecognized net (gain) loss....................................................... (101) 161
Prior service cost not yet recognized in net periodic pension cost................. (62) (67)
Balance of unrecognized net asset at January 1, 1987............................... (705) (785)
--------- ---------
Prepaid pension cost............................................................... $ 556 $ 548
--------- ---------
--------- ---------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Discount rate...................................................................... 7.00% 8.00%
Weighted average rate of compensation increase..................................... 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. In conjunction with the Company's 1992
adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," U S WEST elected to immediately recognize the accumulated
postretirement benefit obligation for current and future retirees. 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 with most
jurisdictions requiring funding as a stipulation for rate recovery.
B-54
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net postretirement benefit costs and actuarial assumptions
underlying plan benefits follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- --------------------------------- ----------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL MEDICAL LIFE
----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned
during the period.................. $ 59 $ 6 $ 65 $ 62 $ 13 $ 75 $ 60 $ 11
Interest on accumulated benefit
obligation......................... 235 32 267 221 39 260 235 36
Actual return on plan assets........ (319) (96) (415) 3 1 4 (73) (52)
Net amortization and deferral....... 228 58 286 (68) (31) (99) 27 22
----- --- --------- ----- --- --------- ----- ---
Net postretirement benefit costs.... $ 203 $ 0 $ 203 $ 218 $ 22 $ 240 $ 249 $ 17
----- --- --------- ----- --- --------- ----- ---
----- --- --------- ----- --- --------- ----- ---
<CAPTION>
TOTAL
---------
<S> <C>
Service cost -- benefits earned
during the period.................. $ 71
Interest on accumulated benefit
obligation......................... 271
Actual return on plan assets........ (125)
Net amortization and deferral....... 49
---------
Net postretirement benefit costs.... $ 266
---------
---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1995, 8.50 percent in 1994 and
9.00 percent in 1993.
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1995 1994
------------------------------- ---------------------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retirees............................................ $ 1,866 $ 271 $ 2,137 $ 1,733 $ 248 $ 1,981
Fully eligible plan participants.................... 293 34 327 264 38 302
Other active plan participants...................... 1,059 165 1,224 940 135 1,075
--------- --------- --------- ----------- --------- ---------
Total accumulated postretirement benefit obligation... 3,218 470 3,688 2,937 421 3,358
Unrecognized net gain................................. 378 161 539 243 90 333
Unamortized prior service cost........................ -- (34) (34) -- -- --
Fair value of plan assets, primarily stocks, bonds and
life insurance (1)................................... (1,385) (460) (1,845) (894) (374) (1,268)
--------- --------- --------- ----------- --------- ---------
Accrued postretirement benefit obligation............. $ 2,211 $ 137 $ 2,348 $ 2,286 $ 137 $ 2,423
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
</TABLE>
- ------------------------------
(1)
Medical plan assets include Communications Stock of $210 and Media Stock of
$112 in 1995, and U S WEST common stock of $164 in 1994.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Discount rate...................................................................... 7.00% 8.00%
Medical trend*..................................................................... 9.00% 9.70%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5 percent in
2011.
B-55
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1995 net postretirement benefit cost by approximately $40 and
increased the 1995 accumulated postretirement benefit obligation by
approximately $350.
For U S WEST, the annual funding amount is based on its cash requirements,
with the funding at U S WEST Communications based on regulatory accounting
requirements.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
NOTE 18: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current....................................................................... $ 481 $ 418 $ 422
Deferred...................................................................... 225 337 (147)
Investment tax credits -- net................................................. (38) (47) (56)
--------- --------- ---------
668 708 219
State and local:
Current....................................................................... 64 52 71
Deferred...................................................................... 54 83 (23)
--------- --------- ---------
118 135 48
Foreign:
Current....................................................................... 6 -- --
Deferred...................................................................... 33 14 2
--------- --------- ---------
39 14 2
--------- --------- ---------
Provision for income taxes...................................................... $ 825 $ 857 $ 269
--------- --------- ---------
--------- --------- ---------
</TABLE>
The unamortized balance of investment tax credits at December 31, 1995 and
1994, was $199 and $231, respectively.
Amounts paid for income taxes were $566, $313 and $391 in 1995, 1994 and
1993, respectively, inclusive of the capital assets segment.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
IN PERCENT
<S> <C> <C> <C>
Federal statutory tax rate........................................................ 35.0 35.0 35.0
Investment tax credit amortization................................................ (1.2) (1.3) (3.0)
State income taxes -- net of federal effect....................................... 3.5 3.9 4.0
Foreign taxes -- net of federal effect............................................ 1.2 0.4 --
Rate differential on reversing temporary differences.............................. -- -- (2.2)
Depreciation on capitalized overheads -- net...................................... -- -- 1.4
Tax law change -- catch-up adjustment............................................. -- -- 3.1
Restructuring charge.............................................................. -- -- (1.5)
Other............................................................................. (0.2) (0.5) (0.7)
--- --- ---
Effective tax rate................................................................ 38.3 37.5 36.1
--- --- ---
--- --- ---
</TABLE>
B-56
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Property, plant and equipment........................................................ $ 1,540 $ 1,504
Leases............................................................................... 668 690
State deferred taxes -- net of federal effect........................................ 358 395
Intangible assets.................................................................... 112 164
Investments in partnerships.......................................................... 213 142
Other................................................................................ 74 84
--------- ---------
Deferred tax liabilities............................................................. 2,965 2,979
--------- ---------
Postemployment benefits, including pension........................................... 697 718
Restructuring, assets held for sale and other........................................ 329 417
Unamortized investment tax credit.................................................... 70 79
State deferred taxes -- net of federal effect........................................ 166 232
Other................................................................................ 229 317
--------- ---------
Deferred tax assets.................................................................. 1,491 1,763
--------- ---------
Net deferred tax liability........................................................... $ 1,474 $ 1,216
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $282 and $352 at December
31, 1995 and 1994, 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 $74, including $20 for the capital assets segment.
The net deferred tax liability includes $686 in 1995 and $678 in 1994
related to the capital assets segment.
NOTE 19: 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
$150.
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against U
S WEST on October 11, 1995, alleging misrepresentation, breach of contract and
other misconduct on the part of U S WEST. Time Warner's countersuit seeks a
reformation of the Time Warner Entertainment partnership agreement, an order
that enjoins U S WEST from breaching the partnership agreement, and unspecified
compensatory damages. U S WEST has denied each of the claims in Time Warner's
countersuit. The trial for this action concluded on March 22, 1996. A ruling by
the Delaware Chancery Court is expected in June 1996.
B-57
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE
The Consolidated Financial Statements 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 Company
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 is reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, charged to continuing operations.
No such adjustment was required in 1995. 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. U S WEST received
$154 in net proceeds from the offering. The Media Group retained certain risks
in asset-backed obligations related to the commercial real estate portfolio. 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 13 to the Consolidated Financial
Statements.) In December 1995, FSA merged with Capital Guaranty Corporation for
shares of FSA and cash of $51. The transaction was valued at approximately $203
and reduced U S WEST's ownership interest in FSA to 50.3 percent and its voting
interest to 41.7 percent. U S WEST expects to monetize and ultimately reduce its
ownership in FSA through the issuance of Debt Exchangeable for Common Stock
("DECS") in 1996. At maturity, each DECS will be mandatorily exchanged by U S
WEST for shares of FSA common stock held by U S WEST or, at U S WEST's option,
redeemed at the cash equivalent.
U S WEST entered into a transaction to reduce its investment in Enhance
Financial Services Group, Inc. ("Enhance") during fourth-quarter 1995. U S WEST
issued DECS due December 15, 1998. Upon maturity, each DECS will be mandatorily
exchanged by U S WEST for shares of Enhance common stock or, at U S WEST's
option, redeemed at the cash equivalent. The capital assets segment currently
owns approximately 31.5 percent of the outstanding Enhance common stock. (See
Note 10 to the Consolidated Financial Statements.)
U S WEST Real Estate, Inc. has sold various properties totaling $120, $327
and $66 in each of the three years ended December 31, 1995, respectively. The
sales proceeds were in line with estimates. Proceeds from building sales were
primarily used to repay related debt. U S WEST has completed 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 $490, net of reserves, as of
December 31, 1995.
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. 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
B-58
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
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 capital assets segment were
$237, $553 and $710 in 1995, 1994 and 1993, respectively. Income from
discontinued operations for 1993 (to June 1) totaled $38. Income (loss) from the
capital assets segment subsequent to June 1, 1993 is being deferred and is
included within the reserve for assets held for sale.
The assets and liabilities of the capital assets segment have been
separately classified on the Consolidated Balance Sheets as net investment in
assets held for sale.
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................ $ 38 $ 7
Finance receivables -- net........................................................... 953 1,073
Investment in real estate -- net of valuation allowance.............................. 368 465
Bonds, at market value............................................................... 149 155
Investment in FSA.................................................................... 384 329
Other assets......................................................................... 177 347
--------- ---------
Total assets......................................................................... $ 2,069 $ 2,376
--------- ---------
--------- ---------
LIABILITIES
Debt................................................................................. $ 796 $ 1,283
Deferred income taxes................................................................ 686 678
Accounts payable, accrued liabilities and other...................................... 148 103
Minority interests................................................................... 10 10
--------- ---------
Total liabilities.................................................................... 1,640 2,074
--------- ---------
Net investment in assets held for sale............................................... $ 429 $ 302
--------- ---------
--------- ---------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases that U S WEST intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
nonrecourse debt which is netted against the related lease receivable.
The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Receivables.......................................................................... $ 921 $ 1,095
Unguaranteed estimated residual values............................................... 447 467
--------- ---------
1,368 1,562
Less: Unearned income................................................................ 390 459
Credit loss and other allowances................................................ 25 30
--------- ---------
Finance receivables -- net........................................................... $ 953 $ 1,073
--------- ---------
--------- ---------
</TABLE>
Investments in debt securities are classified as available for sale and are
carried at market value. Any resulting unrealized holding gains or losses, net
of applicable deferred income taxes, are reflected as a component of equity.
B-59
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The amortized cost and estimated market value of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1995 1994
-------------------------------------------------- ------------------------
GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED
DEBT SECURITIES COST GAINS LOSSES VALUE COST GAINS
- ----------------------------------------------- --------- ------------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Municipal...................................... $ 91 $ 1 $ 1 $ 91 $ 113 $ --
Other.......................................... 58 -- -- 58 65 --
--------- ----- ----- --------- --------- -----
Total.......................................... $ 149 $ 1 $ 1 $ 149 $ 178 $ --
--------- ----- ----- --------- --------- -----
--------- ----- ----- --------- --------- -----
<CAPTION>
GROSS
UNREALIZED FAIR
DEBT SECURITIES LOSSES VALUE
- ----------------------------------------------- ------------- ---------
<S> <C> <C>
Municipal...................................... $ 13 $ 100
Other.......................................... 10 55
--- ---------
Total.......................................... $ 23 $ 155
--- ---------
--- ---------
</TABLE>
Note: Also included in equity are unrealized gains and losses on debt securities
associated with U S WEST's equity investment in FSA. 1995 includes
unrealized gains of $24, net of deferred taxes of $13, and 1994 includes
unrealized losses of $49, net of deferred tax benefits of $26.
The 1995 net unrealized gains of $39 (net of deferred taxes of $21) and the
1994 net unrealized losses of $64 (net of deferred tax benefits of $34), are
included in equity.
DEBT
Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------ TOTAL TOTAL
INTEREST RATES 1997 1998 1999 2000 1995 1994
- ----------------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Up to 5%......................................................... $ -- $ -- $ -- $ -- $ -- $ 55
Above 5% to 6%................................................... 10 -- -- -- 10 15
Above 6% to 7%................................................... 54 -- -- -- 54 154
Above 7% to 8%................................................... 5 -- -- -- 5 17
Above 8% to 9%................................................... -- -- 134 4 138 189
Above 9% to 10%.................................................. 48 5 -- -- 53 114
Above 10% to 11%................................................. -- 29 -- -- 29 29
--------- --------- --------- --------- --------- ---------
$ 117 $ 34 $ 134 $ 4 289 573
--------- --------- --------- ---------
--------- --------- --------- ---------
Allocated to the capital assets segment -- net................... 507 710
--------- ---------
Total............................................................ $ 796 $ 1,283
--------- ---------
--------- ---------
</TABLE>
Debt of $71 and $119 at December 31, 1995 and 1994, respectively, was
collateralized by first deeds of trust on associated real estate and assignment
of rents from leases.
The following table summarizes terms of swaps associated with the capital
assets segment. Variable rates are indexed to three- and six-month LIBOR.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 AND 1994
--------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE PAY
RECEIVE RATE RATE
NOTIONAL -------------------- --------------------
AMOUNT MATURITIES 1995 1994 1995 1994
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Variable to fixed (1).................................... $ 380 1996-1997 5.96 5.69 9.03 9.03
Fixed to variable (1).................................... 380 1996-1997 7.29 7.29 5.87 5.80
Variable rate basis adjustment (2)....................... 10 1997 5.92 5.89 5.85 7.04
</TABLE>
- ------------------------------
(1)
The fixed to variable swaps have the same terms as the variable to fixed swaps
and were entered into to terminate the variable to fixed swaps. The net loss
on the swaps is deferred and amortized over the remaining life of the swaps
and is included in the reserve for assets held for sale.
(2)
Variable rate debt based on Treasuries is swapped to a LIBOR-based interest
rate.
B-60
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
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 obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TERMS TO MATURITY 1995 1994
- ------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
0 to 5 Years......................................................................... $ 639 $ 540
5 to 10 Years........................................................................ 450 537
10 to 15 Years....................................................................... 10 391
--------- ---------
Total................................................................................ $ 1,099 $ 1,468
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1995 1994
- ------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate............................................................. $ 442 $ 530
Corporate secured.................................................................. 657 888
Other asset-backed................................................................... -- 50
--------- ---------
Total................................................................................ $ 1,099 $ 1,468
--------- ---------
--------- ---------
</TABLE>
ADDITIONAL FINANCIAL INFORMATION
Information for U S WEST Financial Services, Inc., a member of the capital
assets segment, follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED FINANCIAL INFORMATION 1995 1994 1993
- --------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.................................................................... $ 44 $ 54 $ 410
Net finance receivables.................................................... 931 981 1,020
Total assets............................................................... 1,085 1,331 1,797
Total debt................................................................. 274 533 957
Total liabilities.......................................................... 1,024 1,282 1,748
Equity..................................................................... 61 49 49
</TABLE>
B-61
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995
Sales and other revenues................................................. $ 2,828 $ 2,894 $ 2,964 $ 3,060
Income before income taxes and extraordinary items....................... 538 514 538 564
Income before extraordinary items........................................ 330 318 325 356
Net income............................................................... 330 318 316 353
Pro forma earnings per common share:
Communications Group earnings per common share before extraordinary
item.................................................................. 0.67 0.62 0.62 0.60
Communications Group earnings per common share......................... 0.67 0.62 0.61 0.59
Media Group earnings per common share before extraordinary item........ 0.03 0.05 0.07 0.15
Media Group earnings per common share.................................. 0.03 0.05 0.06 0.15
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
</TABLE>
- ------------------------------
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock. Earnings
per common share for 1995 have been presented on a pro forma basis to reflect
the two classes of stock as if they had been outstanding since January 1, 1995.
For periods prior to the recapitalization, the average common shares outstanding
for the two classes of stock are assumed to be equal to the average common
shares outstanding for U S WEST, Inc.
1995 first-quarter net income includes $39 ($0.08 per Communications share)
from a gain on the sales of certain rural telephone exchanges. 1995
second-quarter net income includes $10 ($0.02 per Communications share) from a
gain on the sales of certain rural telephone exchanges. 1995 third-quarter net
income includes $21 ($0.04 per Communications share) from a gain on the sales of
certain rural telephone exchanges and $10 ($0.01 per Communications share and
$0.01 per Media share) for expenses associated with the Recapitalization Plan.
1995 third-quarter net income also includes charges of $9 ($0.01 per
Communications share and $0.01 per Media share) for the early extinguishment of
debt. 1995 fourth-quarter net income includes $15 ($0.03 per Communications
share) from a gain on the sales of certain rural telephone exchanges and $95
($0.20 per Media share) from the merger of U S WEST's joint venture interest in
TeleWest. 1995 fourth-quarter net income also includes other charges of $10
($0.01 per Communications share and $0.01 per Media share), including $7 for
expenses associated with the Recapitalization Plan and an extraordinary charge
of $3 for the early extinguishment of debt.
1994 first-quarter net income includes $15 ($.03 per share) from a gain on
the sales of certain rural telephone exchanges. 1994 second-quarter net income
includes gains of $16 ($.04 per share) and $41 ($.09 per share) on 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 in TeleWest and $20 ($.04 per share) on
the sales of certain rural telephone exchanges.
B-62
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
MARKET PRICE
--------------------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- --------------------------------------------------------------------- --------- --------- --------- -----------
(WHOLE DOLLARS)
<S> <C> <C> <C> <C>
1995
U S WEST Stock
First.............................................................. $ 41.375 $ 35.125 $ 40.125 $ 0.535
Second............................................................. 42.875 39.125 41.625 0.535
Third.............................................................. 48.375 40.875 47.125 0.535
Fourth (through October 31, 1995).................................. 48.375 45.625 47.875 --
Communications Stock
Fourth (November 1, 1995 through December 31, 1995)................ $ 36.375 $ 28.375 $ 35.625 $ 0.535
Media Stock..........................................................
Fourth (November 1, 1995 through December 31, 1995)................ $ 20.000 $ 17.375 $ 19.000 $ --
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
</TABLE>
B-63
<PAGE>
U S WEST COMMUNICATIONS GROUP
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Operating revenues......................................... $ 9,484 $ 9,176 $ 8,870 $ 8,530 $ 8,345
Net income (loss) 1........................................ 1,176 1,150 (2,809) (815) 771
Pro forma earnings per common share 2...................... 2.50 2.53 -- -- --
Pro forma dividends per common share 2..................... 2.14 2.14 -- -- --
EBITDA 3................................................... 4,220 4,026 3,743 3,553 3,547
EBITDA margin 3............................................ 44.5% 43.9% 42.2% 41.7% 42.5%
Total assets............................................... $ 16,585 $ 15,944 $ 15,423 $ 20,655 $ 20,244
Total debt................................................. 6,754 6,124 5,673 5,181 5,287
Communications Group equity 4.............................. 3,476 3,179 2,722 6,003 7,530
Return on Communications Group equity 4, 5................. 35.6% 39.0% 22.5% 13.7% 12.8%
Percentage of debt to total capital 4...................... 66.0% 65.8% 67.6% 46.3% 41.3%
Capital expenditures....................................... $ 2,739 $ 2,477 $ 2,226 $ 2,385 $ 2,194
Telephone network access lines in service (thousands)...... 14,847 14,336 13,843 13,345 12,935
Billed access minutes of use -- interstate (millions)...... 47,801 43,768 40,594 37,413 35,144
Billed access minutes of use -- intrastate (millions)...... 9,504 8,507 7,529 6,956 6,557
Communications Group employees............................. 50,825 51,402 52,598 55,352 57,725
Telephone company employees................................ 47,934 47,493 49,668 52,423 54,923
Telephone company employees per ten thousand access
lines..................................................... 32.3 33.1 35.9 39.3 42.5
Pro forma average common shares outstanding
(thousands) 2............................................. 470,716 453,316
Pro forma common shares outstanding (thousands) 2.......... 473,635* 469,343
</TABLE>
- ------------------------------
* Actual
(1)
1995 net income includes a gain of $85 ($0.18 per share) on the sales of
certain rural telephone exchanges and other charges of $16 ($0.03 per share),
including an extraordinary charge of $8 for the early extinguishment of debt
and $8 for costs associated with the November 1, 1995 recapitalization. 1994
net income includes a gain of $51 ($0.11 per share) 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 Statement
of Financial Accounting Standards ("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 a $173 restructuring charge.
(2)
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share have been
presented on a pro forma basis to reflect the two classes of stock as if they
had been outstanding since January 1, 1994. For periods prior to the
recapitalization, the average common shares outstanding are assumed to be
equal to the average common shares outstanding for U S WEST, Inc.
(3)
Earnings before interest, taxes, depreciation, amortization and other
("EBITDA"). EBITDA also excludes the gain on sales of rural telephone
exchanges and restructuring charges. 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 generally accepted accounting principles.
(4)
The increases in the percentage of debt to total capital and return on
Communications Group equity, and the decrease in Communications Group equity
since 1992, are primarily due to the effects of discontinuing SFAS No. 71 in
1993 and the cumulative effect of change in accounting principles in 1992.
(5)
1995 return on Communications Group equity is based on income before
extraordinary items. For 1994, there are no adjustments to net income for this
calculation. 1993 return on Communications Group equity is based on 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 income excluding the effects of a
restructuring charge.
C-1
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THE RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate in
Delaware and create two classes of common stock. Under the Recapitalization
Plan, shareholders approved an Agreement and Plan of Merger between U S WEST
Colorado and U S WEST, Inc., a Delaware corporation ("U S WEST" or the
"Company"), pursuant to which U S WEST continues as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST has
been amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock") and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock").
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
THE COMMUNICATIONS GROUP
The Communications Group primarily provides regulated communications
services to more than 25 million residential and business customers in the
Communications Group Region (the "Region"). The Region includes the states of
Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North
Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Services offered by
the Communications Group include local telephone services, exchange access
services (which connect customers to the facilities of carriers, including
long-distance providers and wireless operators), and long-distance services
within Local Access and Transport Areas ("LATAs") in the Region. The
Communications Group provides other products and services, including custom
calling features, voice messaging, caller identification, high-speed data
applications, customer premises equipment and certain communications services to
business customers and governmental agencies both inside and outside the Region.
The Telecommunications Act of 1996, enacted into law on February 8, 1996, will
dramatically alter the competitive landscape of the telecommunications industry
and will further change the nature of services the Communications Group will
offer. These future service offerings include interLATA long-distance service,
wireless services, cable TV and interconnection services provided to competing
providers of local services.
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 and related transactions of U S WEST identified with the
Communications Group; and (iii) an allocated portion of the corporate expenses
of U S WEST. All significant intra-group financial transactions have been
eliminated. Transactions between the Communications Group and the Media Group
have not been eliminated. For a more complete discussion of U S WEST's corporate
allocation policies, see the U S WEST Communications Group Combined Financial
Statements -- Note 2: Summary of Significant Accounting Policies.
The following discussion is based on the U S WEST Communications Group
Combined Financial Statements prepared in accordance with generally accepted
accounting principles ("GAAP"). The discussion should be read in conjunction
with the U S WEST, Inc. Consolidated Financial Statements.
C-2
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
Comparative details of income before extraordinary items for 1995 and 1994
follow:
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
19951 19942 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
U S WEST Communications, Inc................................................. $ 1,219 $ 1,175 $ 44 3.7
Other operations............................................................. (35) (25) (10) (40.0)
--------- --------- --------- ---------
Income before extraordinary items............................................ $ 1,184 $ 1,150 $ 34 3.0
--------- --------- --------- ---------
--------- --------- --------- ---------
Pro forma earnings per common share before extraordinary items 3............. $ 2.52 $ 2.53 $ (0.01) (0.4)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
1 1995 income before extraordinary items includes a gain of $85 ($0.18 per
share) on the sales of certain rural telephone exchanges and $8 ($0.01 per
share) for costs associated with the Recapitalization Plan.
2 1994 income before extraordinary items includes a gain of $51 ($0.11 per
share) on the sales of certain rural telephone exchanges.
3 Earnings per common share have been presented on a pro forma basis as if the
Communications Stock had been outstanding since January 1, 1994. For periods
prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
The Communications Group's 1995 income before extraordinary items, excluding
the effects of one-time items described in Note 1 to the table above, was
$1,107, an increase of $8, or 0.7 percent, compared with $1,099 in 1994, also
excluding the effects of one-time items. Total revenue growth of 3.4 percent was
largely offset by significantly higher costs incurred to improve customer
service and meet greater than expected business growth. Net income growth will
also be limited in 1996 while the Communications Group continues to commit
significant resources to meet customer service objectives and broaden its range
of product and service offerings.
Excluding the effects of one-time items described in Note 1 to the table
above, pro forma earnings per common share before extraordinary items ("earnings
per share") were $2.35 in 1995, a decrease of $0.07, or 2.9 percent, compared
with $2.42 in 1994, similarly adjusted. Earnings per share in 1995 reflect
approximately 17 million additional average common shares outstanding, of which
12.8 million were issued in December 1994.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancings resulted in extraordinary charges of
$8, net of tax benefits of $5.
Increased demand for services resulted in growth in earnings before
interest, taxes, depreciation, amortization and other ("EBITDA") of 4.8 percent
in 1995. The Communications Group believes EBITDA is an important indicator of
the operational strength of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of
performance or as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with generally
accepted accounting principles ("GAAP").
C-3
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING REVENUES
An analysis of changes in operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1995 1994 CHANGES REFUNDS DEMAND OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service............................... $ 4,344 $ 4,067 $ 35 $ (10) $ 273 $ (21) $ 277
Interstate access........................... 2,378 2,269 (66) (2) 191 (14) 109
Intrastate access........................... 747 729 (31) 8 36 5 18
Long-distance network....................... 1,189 1,329 (23) (1) (54) (62) (140)
Other services.............................. 826 782 -- -- -- 44 44
--------- --------- ----- ----- ----- ----- ---------
Total....................................... $ 9,484 $ 9,176 $ (85) $ (5) $ 446 $ (48) $ 308
--------- --------- ----- ----- ----- ----- ---------
--------- --------- ----- ----- ----- ----- ---------
<CAPTION>
%
---------
<S> <C>
Local service............................... 6.8
Interstate access........................... 4.8
Intrastate access........................... 2.5
Long-distance network....................... (10.5)
Other services.............................. 5.6
---------
Total....................................... 3.4
---------
---------
</TABLE>
Approximately 97 percent of the revenues of the Communications Group are
attributable to the operations of U S WEST Communications, Inc. ("U S WEST
Communications"), of which approximately 59 percent are derived from the states
of Arizona, Colorado, Minnesota and Washington. Approximately 29 percent of the
access lines in service are devoted to providing services to business customers.
The access line growth rate for business customers, who tend to be heavier users
of the network, has consistently exceeded the growth rate of residential
customers. During 1995, business access lines grew 5.4 percent while residential
access lines increased 2.8 percent.
The primary factors that influence changes in revenues are customer demand
for products and services, price changes (including those related to regulatory
proceedings) and refunds. During 1995, revenues from new product and service
offerings were $534, an increase of 58 percent compared with 1994. These
revenues primarily consist of caller identification, voice messaging, call
waiting and high-speed data network transmission services.
Local service revenues include local telephone exchange, local private line
and public telephone services. In 1995, local service revenues increased
principally as a result of higher demand for new and existing services, and
demand for second lines. Local service revenues from new services increased $92,
or 78 percent, compared with 1994. Reported total access lines increased
511,000, or 3.6 percent, of which 161,000 were second lines. Second line
installations increased 25.5 percent compared with 1994. Access line growth was
4.2 percent adjusted for the sale of approximately 95,000 rural telephone access
lines during the last 12 months.
Access charges are collected primarily from 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 33 percent of
access revenues and 11 percent of total revenues are derived from providing
access services to AT&T.
Higher revenues from interstate access services were driven by an increase
of 9.2 percent in interstate billed access minutes of use. The increased
business volume more than offset the effects of price reductions and refunds.
The Communications Group reduced prices for interstate access services in both
1995 and 1994 as a result of Federal Communications Commission ("FCC") orders
and competitive pressures. Intrastate access revenues increased primarily due to
the impact of increased business volume and multiple toll carrier plans,
partially offset by the impact of rate changes.
Long-distance revenues are derived from calls made within the LATA
boundaries of the Region. During 1995 and 1994, long-distance revenues were
impacted by the implementation of multiple toll carrier plans ("MTCPs") in
Oregon and Washington in May and July 1994, respectively. The MTCPs essentially
allow independent telephone companies to act as toll carriers. The 1995 impact
of the MTCPs was long-distance revenue losses of $62, partially offset by
increases in intrastate access revenues of $12 and decreases in other
C-4
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
operating expenses (i.e. access expense) of $42 compared with 1994. These
regulatory arrangements have decreased annual net income by approximately $10.
Similar changes in other states could occur, though the impact on 1996 net
income would not be material.
Excluding the effects of the MTCPs, long-distance revenues decreased by 5.9
percent in 1995, primarily due to the effects of competition and rate
reductions. Long-distance 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. A portion of revenues
lost to competition, however, is recovered through access charges paid by the
interexchange carriers. Erosion in long-distance revenue will continue due to
the loss of 1+ dialing in Minnesota, effective in February 1996, and in Arizona,
effective in April 1996. Annual long-distance revenue losses could approximate
$30 as a result of these changes. The Communications Group is partially
mitigating competitive losses through competitive pricing of intraLATA
long-distance services.
Revenues from other services primarily consist of billing and collection
services provided to interexchange carriers, voice messaging services,
high-speed data transmission services, sales of service agreements related to
inside wiring and the provision of customer premises equipment. Revenues from
other services also include directory listings, customer lists, billing and
collection and other services provided to the Media Group. These services are
sold at market price. However, the Communications Group's accounting and
reporting for regulatory purposes is in accordance with regulatory requirements.
Revenues for services provided to Media Group were $20 in 1995 and $29 in 1994.
During 1995, revenues from other services increased $44, primarily as a
result of continued market penetration in voice messaging services and sales of
high-speed data transmission services. Revenue growth from other services is
also attributable to maintenance contracts for inside wire services and a large
contract related to a wire installation project. These increases were partially
offset by a decrease of $20 in revenues from billing and collection services.
The decline in billing and collection revenues is primarily related to lower
contract prices and a decrease in the volume of services provided to AT&T.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses............................................ $ 3,341 $ 3,215 $ 126 3.9
Other operating expenses............................................. 1,543 1,547 (4) (0.3)
Taxes other than income taxes........................................ 380 388 (8) (2.1)
Depreciation and amortization........................................ 2,042 1,908 134 7.0
Interest expense..................................................... 427 376 51 13.6
Other expense -- net................................................. 41 21 20 95.2
</TABLE>
Employee-related expenses include basic salaries and wages, overtime,
benefits (including pension and health care), payroll taxes and contract labor.
During 1995, improving customer service was the Communications Group's first
priority. Overtime payments and contract labor expense associated with customer
service initiatives increased employee-related costs by approximately $168
compared with 1994. Expenses related to the addition of approximately 1,700
employees in 1995 and 1,000 employees in 1994 also increased employee-related
costs. These expenses were incurred to handle the higher than anticipated volume
of business and to meet new business opportunities. Partially offsetting these
increases was a $34 reduction in the accrual for postretirement benefits, a $22
decrease in travel expense and reduced expenses related to employee separations
under reengineering and streamlining initiatives. The Communications Group will
continue to add employees to address customer service issues and growth in the
core business. Costs related to these work-force additions will partially offset
the benefits of employee separations achieved through restructuring. (See
"Restructuring Charge.")
C-5
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other operating expenses include access charges (incurred for the routing of
long-distance traffic through the facilities of independent companies), network
software expenses and other general and administrative costs, including
allocated costs from U S WEST. During 1995, other operating expenses decreased
primarily due to the effects of the multiple toll carrier plans and a reduction
in expenses related to project funding at Bell Communications Research, Inc.
("Bellcore"), of which U S WEST Communications has a one-seventh ownership
interest. These decreases in other operating expenses were partially offset by
increases in costs associated with increased sales, including bad debt expense.
Allocated costs from U S WEST were $116 and $110 in 1995 and 1994, respectively.
Taxes other than income taxes, which consist primarily of property taxes,
decreased 2.1 percent in 1995, primarily due to favorable property tax
valuations and mill levies as compared with 1994. As a result of these
valuations and mill levies, 1995 fourth-quarter accruals decreased by $20
compared with fourth-quarter 1994.
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base, partially offset by the effects of
the sales of certain rural telephone exchanges.
Interest expense increased primarily as a result of an increased use of debt
financing. The average borrowing cost was 6.9 percent in 1995, compared with 6.8
percent in 1994. (See "Liquidity and Capital Resources.") The increase in other
expense is largely attributable to $8 of costs associated with the
Recapitalization Plan in 1995.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
----------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes......................................... $ 662 $ 653 $ 9 1.4
Effective tax rate................................................. 35.9% 36.2% -- --
</TABLE>
The decrease in the effective tax rate resulted primarily from the effects
of a research and experimentation credit and adjustments for prior periods.
RESTRUCTURING CHARGE
The Communications Group's 1993 results reflected an $880 restructuring
charge (pretax). 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, the
Communications Group 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
products and services for customers, and centralize its service centers. The
Communications Group has consolidated its 560 customer service centers into 26
centers in 10 cities and plans on reducing its work force by approximately
10,000 employees. All service centers are operational and supported by new
systems and enhanced system functionality.
The Restructuring Plan is expected to be substantially complete by the end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the business and related service issues, new business opportunities, revisions
to system delivery schedules and productivity issues caused by the major
rearrangement of resources due to restructuring. These issues will continue to
affect the timing of employee separations.
The Communications Group estimates that full implementation of the 1993
Restructuring Plan will reduce employee-related expenses by approximately $400
per year. The savings related to work-force reductions will be offset by the
effects of inflation and a variety of other factors. These factors include costs
related to the achievement of customer service objectives and increased demand
for existing services. (See "Costs and Expenses.")
C-6
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Following is a schedule of the costs included in the Restructuring Plan:
<TABLE>
<CAPTION>
1994 1995 1996 1997
ACTUAL ACTUAL ESTIMATE ESTIMATE TOTAL
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation 1............................................... $ 19 $ 76 $ 33 $ 127 $ 255
Systems development................................................. 118 129 113 -- 360
Real estate......................................................... 50 66 14 -- 130
Relocation.......................................................... 21 21 20 13 75
Retraining and other................................................ 8 23 22 7 60
----- ----- ----- ----- ---------
Total 1993 Restructuring Plan....................................... 216 315 202 147 880
Remaining 1991 plan employee costs 1................................ 56 -- -- -- 56
----- ----- ----- ----- ---------
Total............................................................... $ 272 $ 315 $ 202 $ 147 $ 936
----- ----- ----- ----- ---------
----- ----- ----- ----- ---------
</TABLE>
- ------------------------------
1 Employee separation costs, including the balance of a 1991 restructuring
reserve at December 31, 1993, aggregate $311.
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Systems 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. 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.
EMPLOYEE SEPARATION. Under the Restructuring Plan, the Communications Group
anticipates the separation of 10,000 employees. Approximately 1,000 employees
that were originally expected to relocate have chosen separation or other job
assignments and have been replaced. This increased the number of employee
separations to 10,000 from 9,000, and increased the estimated total cost for
employee separations to $311 from $281, as compared with the original estimate.
The $30 cost associated with these additional employee separations was
reclassified from relocation to the reserve for employee separations during
1995.
Annual employee separations and employee-separation amounts under the
Restructuring Plan follow:
<TABLE>
<CAPTION>
19941 1995 1996 1997
---------------------- ---------------------- ----------- -----------
ESTIMATE ACTUAL ESTIMATE ACTUAL ESTIMATE2 ESTIMATE2 TOTAL
----------- --------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Employee separation:
Managerial............................... 1,061 497 612 682 202 1,357 2,738
Occupational............................. 1,887 1,683 1,638 1,643 798 3,138 7,262
----- --------- ----- --------- ----- ----- ---------
Total.................................... 2,948 2,180 2,250 2,325 1,000 4,495 10,000
----- --------- ----- --------- ----- ----- ---------
----- --------- ----- --------- ----- ----- ---------
<CAPTION>
19941 1995 1996 1997
---------------------- ---------------------- ----------- -----------
ESTIMATE ACTUAL ESTIMATE ACTUAL ESTIMATE2 ESTIMATE2 TOTAL
----------- --------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Employee-separation amounts:
Managerial............................... $ 22 $ 5 $ 21 $ 30 $ 9 $ 54 $ 98
Occupational............................. 15 14 54 46 24 73 157
----- --------- ----- --------- ----- ----- ---------
Total.................................... 37 19 75 76 33 127 255
Remaining 1991 reserve................... 56 56 -- -- -- -- 56
----- --------- ----- --------- ----- ----- ---------
Total.................................... $ 93 $ 75 $ 75 $ 76 $ 33 $ 127 $ 311
----- --------- ----- --------- ----- ----- ---------
----- --------- ----- --------- ----- ----- ---------
</TABLE>
- ------------------------------
(1)
Includes the remaining employees and the separation amounts associated with
the balance of a 1991 restructuring reserve at December 31, 1993.
(2)
A significant number of the employee reductions originally scheduled for 1996
will be delayed while the Communications Group focuses on overtime and
contract-labor expenses. The Restructuring Plan is expected to be
substantially complete by the end of 1997.
C-7
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Compared with the original estimates, employee reductions and separation
amounts shown above have been reduced by 1,600 employees and $53, respectively,
in 1996, and increased by 4,495 employees and $127, respectively, in 1997.
SYSTEMS DEVELOPMENT. The existing information management systems were
largely developed to support a monopoly environment. These systems were
inadequate due to the effects of increased competition, new forms of regulation
and changing technology that have driven consumer demand for products and
services that can be delivered quickly, reliably and economically. The
Communications Group 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 initial strategy
which placed more emphasis on the development of new systems.
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
customer calls to be directed to those service representatives who can meet
their requirements. This process will provide enhanced information to the
service representatives regarding the customer requests and the ability of
the Communications Group to fulfill them.
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.
Certain of the new systems and enhanced system functionality have been
implemented in the service centers and have simplified the labor-intensive
interfaces between systems processes in existence prior to the Restructuring
Plan. Enhanced system functionality introduced under the Restructuring Plan
since its inception includes the following:
- The ability to determine facilities' availability while the customer is
placing an order;
- Automated engineering of central office facilities and automated updating
of central office facilities' records;
- The ability to track the status of complex network design jobs from the
customer's perspective; and
- Systems that accurately diagnose network problems and prepare repair
packages to correct the problems identified.
The direct, incremental and nonrecurring costs of providing new systems and
enhanced system functionality follow:
<TABLE>
<CAPTION>
1994 1995 1996
------------------------ ------------------------ -----------
ESTIMATE ACTUAL ESTIMATE ACTUAL ESTIMATE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Service delivery......................................... $ 35 $ 21 $ 21 $ 19 $ 44
Service assurance........................................ 45 12 24 22 26
Capacity provisioning.................................... 17 57 92 85 42
All other................................................ 8 28 8 3 1
----- ----- ----- ----- -----
Total.................................................... $ 105 $ 118 $ 145 $ 129 $ 113
----- ----- ----- ----- -----
----- ----- ----- ----- -----
<CAPTION>
TOTAL
---------
<S> <C>
Service delivery......................................... $ 84
Service assurance........................................ 60
Capacity provisioning.................................... 184
All other................................................ 32
---------
Total.................................................... $ 360
---------
---------
</TABLE>
Systems expenses charged to current operations consist of costs associated
with the information management function, including planning, developing,
testing and maintaining databases for general purpose
C-8
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
computers, in addition to systems costs related to maintenance of telephone
network applications. Other systems expenses are for administrative (i.e.
general purpose) systems which 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 1995, 1994 and 1993. The Communications Group expects systems costs
charged to current operations as a percent of total operating expenses to
approximate the current level throughout 1996. 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>
RESERVE RESERVE RESERVE
BALANCE 1994 BALANCE 1995 CHANGE IN BALANCE
12/31/93 ACTIVITY 12/31/94 ACTIVITY ESTIMATE 12/31/95
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Employee separation:
Managerial.......................................... $ 75 $ 5 $ 70 $ 30 $ 23 $ 63
Occupational........................................ 150 14 136 46 7 97
----- ----- ----- ----- --- -----
Total employee separation............................. 225 19 206 76 30 160
Systems development:
Service delivery.................................... 73 21 52 19 11 44
Service assurance................................... 64 12 52 22 (4) 26
Capacity provisioning............................... 179 57 122 85 5 42
All other........................................... 44 28 16 3 (12) 1
----- ----- ----- ----- --- -----
Total systems development............................. 360 118 242 129 -- 113
Real estate........................................... 130 50 80 66 -- 14
Relocation............................................ 105 21 84 21 (30) 33
Retraining and other.................................. 60 8 52 23 -- 29
----- ----- ----- ----- --- -----
Total 1993 Restructuring Plan......................... 880 216 664 315 -- 349
Remaining 1991 plan expenditures...................... 56 56 -- -- -- --
----- ----- ----- ----- --- -----
Total................................................. $ 936 $ 272 $ 664 $ 315 $ -- $ 349
----- ----- ----- ----- --- -----
----- ----- ----- ----- --- -----
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
1994 1995 SEPARATIONS AT
SEPARATIONS SEPARATIONS DECEMBER 31, 1995
------------- ------------- ---------------------
<S> <C> <C> <C>
Employee separations:
Managerial...................................................... 497 682 1,179
Occupational.................................................... 1,683 1,643 3,326
----- ----- -----
Total............................................................. 2,180 2,325 4,505
----- ----- -----
----- ----- -----
</TABLE>
RESULTS OF OPERATIONS -- 1994 COMPARED WITH 1993
Comparative details of income before extraordinary items for 1994 and 1993
follow:
<TABLE>
<CAPTION>
19941 19932 INCREASE
--------- --------- -----------
<S> <C> <C> <C>
U S WEST Communications, Inc........................................................ $ 1,175 $ 435 $ 740
Other operations.................................................................... (25) (44) 19
--------- --------- -----
Income before extraordinary items................................................... $ 1,150 $ 391 $ 759
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------
(1)
1994 income before extraordinary items includes a gain of $51 on the sales 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.
C-9
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Communications Group's 1994 income before extraordinary items was
$1,099, an increase of $120, or 12.3 percent, over 1993, excluding the one-time
effects described in Notes 1 and 2 to the table above. The increase was
primarily attributable to increased demand for telecommunications services.
In 1993, U S WEST Communications incurred extraordinary charges for the
discontinuance of Statement of Financial Accounting Standards ("SFAS") No. 71,
"Accounting for the Effects of Certain Types of Regulation," and the early
extinguishment of debt. An extraordinary, noncash 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).
Revenue growth, partially offset by higher operating expenses, provided a
7.6 percent increase in EBITDA.
OPERATING REVENUES
An analysis of changes in operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1994 1993 CHANGES REFUNDS DEMAND OTHER $
--------- --------- ----------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service............................... $ 4,067 $ 3,829 $ (12) $ 30 $ 216 $ 4 $ 238
Interstate access........................... 2,269 2,147 (15) (6) 148 (5) 122
Intrastate access........................... 729 682 (10) (4) 51 10 47
Long-distance network....................... 1,329 1,442 (8) 1 (43) (63) (113)
Other services.............................. 782 770 -- -- -- 12 12
--------- --------- --- --- ----- --- ---------
Total....................................... $ 9,176 $ 8,870 $ (45) $ 21 $ 372 $ (42) $ 306
--------- --------- --- --- ----- --- ---------
--------- --------- --- --- ----- --- ---------
<CAPTION>
%
---------
<S> <C>
Local service............................... 6.2
Interstate access........................... 5.7
Intrastate access........................... 6.9
Long-distance network....................... (7.8)
Other services.............................. 1.6
---------
Total....................................... 3.4
---------
---------
</TABLE>
In 1994, local service revenues increased principally as a result of higher
demand for services. Reported access lines increased by 3.6 percent. Excluding
the sale of approximately 60,000 rural telephone access lines during 1994,
access line growth was 4.0 percent.
Higher revenues from interstate access services were primarily attributable
to an increase of 7.8 percent in interstate billed access minutes of use, which
more than offset the effects of price decreases. Intrastate access charges
increased primarily as a result of higher demand, including demand for private
line services.
Long-distance revenues decreased principally due to the effects of the MTCPs
implemented in Oregon and Washington. The 1994 impact was a loss of $68 in
long-distance revenues, partially offset by a decrease of $48 in other operating
expenses and an increase of $10 in intrastate access revenue. These regulatory
arrangements decreased net income by approximately $6 in 1994.
During 1994, revenues from other services increased due to higher revenue
from billing and collection services and increased market penetration of new
service offerings. 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
premises equipment installations. Revenues for services provided to the Media
Group were $29 in 1994 and $26 in 1993.
C-10
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
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>
In 1994, overtime payments, contract labor and basic salaries and wages, all
related to the implementation of major customer service and streamlining
initiatives, 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. Partially offsetting these
increases were the effects of employees leaving under the Restructuring Plan,
lower health-care benefit costs, including a reduction in the accrual for
postretirement benefits, and lower incentive compensation payments to employees.
Other operating expenses decreased primarily due to the effect of the MTCPs.
Lower customer premises equipment installations and lower expenses at Bellcore
also contributed to the decrease. Allocated costs assigned from U S WEST to the
Communications Group totaled $110 and $117 in 1994 and 1993, respectively. The
increase in depreciation and amortization expense was primarily the result of a
higher depreciable asset base and increased rates of depreciation.
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's
average borrowing cost was 6.8 percent in 1994 compared with 6.9 percent in
1993.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1994 1993 INCREASE
----------- ----------- -----------
<S> <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.
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1995
OPERATING ACTIVITIES
Cash from operations increased $210 in 1995 primarily due to the increase in
EBITDA and a decrease in the cash funding for postretirement benefits, partially
offset by higher payments for restructuring charges. Cash provided by operating
activities decreased by $168 in 1994 compared with 1993, largely due to cash
payments for restructuring activities of $279 in 1994, compared with $120 in
1993. Further details of cash provided by operating activities are provided in
the Combined Statements of Cash Flows.
C-11
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The future cash needs of the Communications Group may increase as a result
of new business opportunities, including wireless services, and requirements
related to the recently enacted Telecommunications Act of 1996.
INVESTING ACTIVITIES
Total capital expenditures were $2,739 in 1995, $2,477 in 1994 and $2,226 in
1993. The 1995 capital expenditures exceeded the 1994 and 1993 levels due to the
Communications Group's efforts to improve customer service (including reductions
in held orders) and to accommodate additional line capability in several states.
Capital expenditures related to the Restructuring Plan were approximately $190
in 1995 as compared to $265 in 1994. In 1996, capital expenditures are expected
to approximate $2.5 billion. Included in the 1996 capital expenditures estimate
are costs to enter new markets as allowed under the Telecommunications Act of
1996.
The Communications Group received cash proceeds of $214 and $93 in 1995 and
1994, respectively, for the sales of certain rural telephone exchanges. Since
implementing its rural telephone exchange sales program, the Communications
Group has sold approximately 155,000 access lines. Planned sales of rural
exchanges for 1996 and beyond aggregate approximately 180,000 lines.
FINANCING ACTIVITIES
Debt increased by $630 in 1995, primarily due to the increase in capital
expenditures. The percentage of debt to total capital at year-end 1995 was 66.0.
During 1994, debt increased $451, though the percentage of debt to total capital
declined to 65.8 at year-end 1994 from 67.6 at year-end 1993. The decrease in
the percentage of debt to total capital in 1994 was primarily attributable to
higher net income and issuances of equity.
During 1995, U S WEST Communications refinanced $1.5 billion of commercial
paper to take advantage of favorable long-term interest rates. In addition to
the commercial paper, U S WEST Communications refinanced $145 of long-term debt.
In 1993, U S WEST Communications refinanced $2.7 billion of long-term debt.
Expenses associated with the refinancing of long-term debt resulted in
extraordinary after-tax charges to income of $8 and $77, net of tax benefits of
$5 and $48, in 1995 and 1993, respectively.
U S WEST and U S WEST Communications maintain commercial paper programs to
finance short-term cash flow requirements, as well as to maintain a presence in
the short-term debt market. In addition, U S WEST Communications is permitted to
borrow up to $600 under short-term lines of credit, all of which was available
at December 31, 1995. Additional lines of credit aggregating approximately $1.3
billion are available to both the Media Group and the nonregulated subsidiaries
in the Communications Group in accordance with their borrowing needs. Under
registration statements filed with the Securities and Exchange Commission
("SEC"), as of December 31, 1995, U S WEST Communications is permitted to issue
up to $320 of new debt securities. An additional $1.2 billion in securities is
permitted to be issued under registration statements filed with the SEC to
support the requirements of the Media Group and the nonregulated subsidiaries in
the Communications Group.
In connection with U S WEST's February 27, 1996 announcement of a planned
merger with Continental Cablevision, U S WEST, Inc.'s credit rating is being
reviewed by credit rating agencies, which may result in a downgrading. The
credit rating of U S WEST Communications was not placed under review by Moody's,
has been reaffirmed by Duff and Phelps and is under review by Fitch and Standard
& Poors.
Financing activities for the nonregulated Communications Group businesses
and the Media Group, including the issuance, repayment and repurchase of
short-term and long-term debt, and the issuance and repurchase of preferred
securities, are managed by U S WEST on a centralized basis. Notwithstanding such
centralized management, financing activities for U S WEST Communications are
separately identified and accounted for in U S WEST's records and U S WEST
Communications continues to conduct its own
C-12
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
borrowing activities. Debt incurred and investments made by U S WEST and its
subsidiaries on behalf of the nonregulated Communications Group businesses and
all debt incurred and investments made by U S WEST Communications are
specifically allocated and reflected on the financial statements of the
Communications Group. All other debt incurred and investments made by U S WEST
and its subsidiaries on behalf of the Media Group are specifically allocated to
and reflected on the financial statements of the Media Group. Debt incurred by U
S WEST or a subsidiary on behalf of a Group is charged to such Group at the
borrowing rate of U S WEST or such subsidiary.
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 Communications Group 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. Interest rate swaps are used to adjust the ratio of
fixed-to variable-rate debt. The market value of the debt portfolio including
the interest rate swaps is monitored and compared with predetermined benchmarks
to evaluate the effectiveness of the risk management program.
Notional amounts of interest rate swaps outstanding were $784 and $781 at
December 31, 1995 and 1994, respectively, with various maturities extending to
2001. The estimated effect of U S WEST Communications' interest rate derivative
transactions was to adjust the level of fixed-rate debt from 88 percent to 97
percent of the total debt portfolio at December 31, 1995, and from 76 percent to
86 percent of the total debt portfolio at December 31, 1994.
In conjunction with the 1993 debt refinancing, the Communications Group
executed forward contracts to sell U.S. Treasury bonds to lock in the U.S.
Treasury rate component of $1.5 billion of the future debt issue. At December
31, 1995, deferred credits of $8 and deferred charges of $51 on closed 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.
COMPETITIVE AND REGULATORY ENVIRONMENT
Markets served by the Communications Group, including markets for local,
access and long-distance services, are being impacted by the rapid technological
and regulatory changes occurring within the telecommunications industry. Current
and potential competitors include local telephone companies, interexchange
carriers, competitive access providers ("CAPs"), cable television companies and
providers of personal communications services ("PCS").
On February 1, 1996, the House and Senate approved the Telecommunications
Act of 1996 (the "1996 Act") which is intended to promote competition between
local telephone companies, long-distance carriers and cable television
operators. The 1996 Act was signed into law on February 8, 1996, and replaces
the antitrust consent decree that broke up the "Bell System" in 1984. A major
provision of the legislation includes the preemption of state regulations that
govern competition by allowing local telephone companies, long-distance carriers
and cable television companies to enter each other's lines of business.
Consequently, the Regional Bell Operating Companies ("RBOCs") are immediately
permitted to offer wireline interLATA toll services out of their regions.
However, to participate in the interLATA long-distance market within their
regions, the RBOCs must first open their local networks to facilities-based
competition by satisfying a detailed checklist of requirements, including
requirements related to interconnection and number portability.
Other key provisions of the 1996 Act: (1) eliminate most of the regulation
of cable television rates within three years and eliminate the ban on
cross-ownership between cable television and telephone
C-13
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
companies in small communities; (2) permit the RBOCs to develop new, competitive
cable systems within their regions and to acquire or build wireless cable
systems; (3) provide partial relief from the ban against manufacturing
telecommunications equipment by the RBOCs; and (4) permit wireless operators to
provide interLATA toll service in and out of region without a separate
subsidiary and to jointly market or resell cellular service.
The FCC and state regulators have been given latitude in interpreting and
overseeing the implementation of this legislation, including developing
universal service funding policy. The extent and timing of future competition,
including the Communications Group's ability to offer in-region interLATA
long-distance services, will depend in part on the implementation guidelines
determined by the FCC and state regulators, and how quickly the Communications
Group can satisfy requirements of the checklist. The Communications Group
estimates that fulfillment of the checklist requirements could occur in the
majority of its states within 12 to 18 months.
The Communications Group believes that competitors will initially target
high-volume business customers in densely populated urban areas. The resulting
loss of local service customers will affect multiple revenue streams and could
have a material, adverse effect on the Communications Group's operations. The
resulting revenue losses, however, could be at least partially offset by the
Communications Group's ability to bundle local, long-distance and wireless
services, and provide interconnection services.
The Communications Group's strategy is to offer integrated communications,
entertainment, information and transaction services over both wired and wireless
networks to its customers primarily within its Region. The key initiatives to
support this strategy include five key elements:
- Providing superior customer service
- Building customer loyalty
- Enhancing network capability and capacity
- Expanding the product and service portfolio
- Ensuring a fair competitive environment
Strategic initiatives to attract and retain customers include: (1) enhancing
existing services with products such as caller identification, call waiting and
voice messaging; (2) aggressive expansion of data services; (3) pursuing
opportunities to offer paging, wireless and cable television services; and (4)
rapid entry into the interLATA long-distance market.
A market trial for a broadband network capable of providing voice, data and
video services to customers commenced in the Omaha area in August 1995. The
Communications Group does not intend to expand this service offering beyond the
Omaha area because of service cost and pricing issues. The Communications Group
does plan to continue to provide the system that delivers basic, premium and
pay-per-view video services in the Omaha area. The Communications Group is
evaluating the relative costs of alternative video technologies, as well as the
near-term feasibility of interactive services. To satisfy anticipated demand for
combined video and telephony services on a cost-effective basis, the
Communications Group's strategy may include selective investments in wireless
cable technologies.
The Communications Group is subject to varying degrees of federal and state
regulation. The Communications Group's regulatory strategy includes working to:
- Achieve accelerated capital recovery;
- Reprice local services to cover costs and ensure these services are
subsidy free, while lowering toll and access rates to meet competition;
and
C-14
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- Ensure that the new rules associated with the Telecommunications Act of
1996 concerning the unbundling of interconnection, resale of services and
universal service do not advantage one competitor over another.
The Communications Group is currently working with state regulators to gain
approval of these initiatives.
OTHER REGULATORY ISSUES
The Communications Group'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. In
March 1995, the FCC issued an interim order on price cap regulation. The price
cap index for most services is annually adjusted for inflation, productivity
level and exogenous costs, and has resulted in reduced access prices paid by
interexchange carriers to local telephone companies. The interim order also
provides for three productivity options, including a no-sharing option, and for
increased flexibility for adjusting prices downward in response to competition.
In 1995, the Communications Group selected the lowest productivity option while,
prior to this interim order, the Communications Group used an optional higher
productivity factor in determining its prices. Consequently, the Communications
Group expects the order to have no significant near-term impact.
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 is $0 to $150.
UNION CONTRACT
On October 2, 1995, union members approved a new three-year contract with U
S WEST. The contract provides for salary increases of 10.6 percent over three
years effective January 1 of each year. The contract also provides employees
with a lump sum payment of $1,500 in lieu of wage increases becoming effective
in August of each year. This lump sum payment is being recognized over the life
of the contract. The agreement covers approximately 30,000 Communications
Workers of America members who work for the Communications Group.
C-15
<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 2 to the Combined Financial Statements) as of December 31,
1995 and 1994, and the related Combined Statements of Operations and Cash Flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1995 and 1994, and the combined results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As more fully discussed in Note 2, 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 5 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.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
C-16
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Operating revenues:
Local service................................................................ $ 4,344 $ 4,067 $ 3,829
Interstate access service.................................................... 2,378 2,269 2,147
Intrastate access service.................................................... 747 729 682
Long-distance network services............................................... 1,189 1,329 1,442
Other services............................................................... 826 782 770
---------- ---------- ---------
Total operating revenues................................................... 9,484 9,176 8,870
Operating expenses:
Employee-related expenses.................................................... 3,341 3,215 3,068
Other operating expenses..................................................... 1,543 1,547 1,671
Taxes other than income taxes................................................ 380 388 388
Depreciation and amortization................................................ 2,042 1,908 1,828
Restructuring charge......................................................... -- -- 880
---------- ---------- ---------
Total operating expenses................................................... 7,306 7,058 7,835
---------- ---------- ---------
Income from operations......................................................... 2,178 2,118 1,035
Interest expense............................................................... 427 376 412
Gains on sales of rural telephone exchanges.................................... 136 82 --
Other expense -- net........................................................... 41 21 24
---------- ---------- ---------
Income before income taxes and extraordinary items............................. 1,846 1,803 599
Provision for income taxes..................................................... 662 653 208
---------- ---------- ---------
Income before extraordinary items.............................................. 1,184 1,150 391
Extraordinary items:
Discontinuance of SFAS No. 71, net of tax.................................... -- -- (3,123)
Early extinguishment of debt, net of tax..................................... (8) -- (77)
---------- ---------- ---------
NET INCOME (LOSS).............................................................. $ 1,176 $ 1,150 $ (2,809)
---------- ---------- ---------
---------- ---------- ---------
Pro forma earnings per common share:
Income before extraordinary items............................................ $ 2.52 $ 2.53
Extraordinary items -- early extinguishment of debt.......................... (0.02) --
---------- ----------
PRO FORMA EARNINGS PER COMMON SHARE............................................ $ 2.50 $ 2.53
---------- ----------
---------- ----------
PRO FORMA AVERAGE COMMON SHARES OUTSTANDING (thousands)........................ 470,716 453,316
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-17
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 172 $ 116
Accounts and notes receivable, less allowance for credit losses of $30 and $29,
respectively............................................................................. 1,617 1,500
Inventories and supplies.................................................................. 193 166
Deferred tax asset........................................................................ 259 300
Prepaid and other......................................................................... 51 56
--------- ---------
Total current assets........................................................................ 2,292 2,138
--------- ---------
Property, plant and equipment -- net........................................................ 13,529 13,041
Other assets................................................................................ 764 765
--------- ---------
Total assets................................................................................ $ 16,585 $ 15,944
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:........................................................................
Short-term debt........................................................................... $ 1,065 $ 1,608
Accounts payable.......................................................................... 851 888
Employee compensation..................................................................... 316 313
Dividends payable......................................................................... 254 250
Current portion of restructuring charge................................................... 270 318
Advanced billing and customer deposits.................................................... 223 211
Other..................................................................................... 628 620
--------- ---------
Total current liabilities................................................................... 3,607 4,208
--------- ---------
Long-term debt.............................................................................. 5,689 4,516
Postretirement and other postemployment benefit obligations................................. 2,351 2,427
Deferred income taxes....................................................................... 689 547
Unamortized investment tax credits.......................................................... 199 231
Deferred credits and other.................................................................. 574 836
Communications Group equity................................................................. 3,476 3,179
--------- ---------
Total liabilities and equity................................................................ $ 16,585 $ 15,944
--------- ---------
--------- ---------
Contingencies (see Note 13 to the Combined Financial Statements)
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-18
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................................................... $ 1,176 $ 1,150 $ (2,809)
Adjustments to net income (loss):
Discontinuance of SFAS No. 71. ............................................... -- -- 3,123
Restructuring charge.......................................................... -- -- 880
Depreciation and amortization................................................. 2,042 1,908 1,828
Gains on sales of rural telephone exchanges................................... (136) (82) --
Deferred income taxes and amortization of investment tax credits................ 172 226 (191)
Changes in operating assets and liabilities:
Restructuring payments........................................................ (315) (279) (120)
Postretirement medical and life costs, net of cash fundings................... (90) (197) (135)
Accounts receivable........................................................... (117) (64) (78)
Inventories, supplies and other............................................... (51) (29) (23)
Accounts payable and accrued liabilities...................................... 7 (147) 153
Other -- net.................................................................... 31 23 49
--------- --------- ---------
Cash provided by operating activities............................................. 2,719 2,509 2,677
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (2,462) (2,254) (2,234)
Proceeds from (payments on) disposals of property, plant and equipment.......... (18) 3 42
Proceeds from sales of rural telephone exchanges................................ 214 93 --
Other -- net.................................................................... (2) 2 --
--------- --------- ---------
Cash (used for) investing activities............................................ (2,268) (2,156) (2,192)
--------- --------- ---------
FINANCING ACTIVITIES
Net (repayments of) proceeds from issuance of short-term debt................... (832) 344 687
Proceeds from issuance of long-term debt........................................ 1,647 326 2,408
Repayments of long-term debt.................................................... (334) (285) (2,952)
Dividends paid on common stock.................................................. (926) (886) (812)
Proceeds from issuance of equity................................................ 50 208 356
Advance from/(repayment to) Media Group......................................... -- -- (153)
--------- --------- ---------
Cash (used for) financing activities............................................ (395) (293) (466)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase........................................................................ 56 60 19
Beginning balance............................................................... 116 56 37
--------- --------- ---------
Ending balance.................................................................. $ 172 $ 116 $ 56
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-19
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors of U S WEST, Inc.
(the "Board") to reincorporate in Delaware and create two classes of common
stock that are intended to reflect separately the performance of the
communications and multimedia businesses. Under the Recapitalization Plan,
shareholders approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware corporation ("U S WEST" or "Company"), pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger, the Certificate of Incorporation of U S WEST has been amended and
restated to designate two classes of common stock of U S WEST, one class of
which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado was converted into one share each of
Communications Stock and Media Stock.
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (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"), 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 Communications Group primarily provides regulated
communications services to more than 25 million residential and business
customers within a 14 state region.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc.,
which publishes White and Yellow Pages telephone directories, and provides
directory and information services, U S WEST NewVector Group, Inc., which
provides communications and information products and services over wireless
networks, 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.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The Combined Financial Statements of the Groups
comprise all of the accounts included in the corresponding Consolidated
Financial Statements of U S WEST. Investments in less than majority-owned
ventures are generally accounted for using the equity method. The separate 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 intra-group
amounts and transactions eliminated; (ii) in the case of the Communications
Group Combined Financial Statements, certain corporate assets and liabilities of
U S WEST and related transactions identified with the Communications Group;
(iii) in the case of the Media Group 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 Group, holders of Communications Stock and Media Stock are
subject to risks associated with an investment in a single company and all of U
S WEST's businesses, assets and liabilities. Such allocation of assets and
liabilities and change in the equity structure of U S WEST does
C-20
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not result in a distribution or spin-off to shareholders of any assets or
liabilities of U S WEST or any of its subsidiaries or otherwise affect
responsibility for the liabilities of U S WEST or such subsidiaries. As a
result, the rights of the holders of U S WEST or any of its subsidiaries' debt
are not affected. Financial effects arising from either Group that affect U S
WEST's results of operations or financial condition could, if significant,
affect the results of operations or financial position of the other Group or the
market price of the class of common stock relating to the other Group. Any net
losses of the Communications Group or the Media Group, and dividends or
distributions on, or repurchases of Communications Stock, Media Stock or
preferred stock, will reduce the funds of U S WEST legally available for payment
of dividends on both the Communications Stock and Media Stock. Accordingly, the
Communications Group Combined Financial Statements should be read in conjunction
with U S WEST's Consolidated Financial Statements 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 without approval of the
stockholders, although there is no present intention to do so. The Board may
also adopt additional policies depending on the circumstances. Any determination
of the Board to modify or rescind such policies, or to add additional policies,
including any 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 U S
WEST 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.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
ALLOCATION OF SHARED SERVICES Certain costs relating to U S WEST's general
and administrative services (including certain executive management, legal, tax,
accounting and auditing, treasury, strategic planning and public policy
services) are directly assigned by U S WEST 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. U S WEST
charges each Group for such services at fully distributed cost. These direct and
indirect allocations were $116, $110 and $117 in 1995, 1994 and 1993,
respectively. In 1995, the direct allocations comprised approximately 37 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 was a separate legal entity. However, U S
WEST believes that under the Recapitalization Plan, each Group benefits from
synergies with the other, including having lower operating costs than might be
incurred if each Group was a separate legal entity.
ALLOCATION OF INCOME TAXES Federal, state and local income taxes, which are
determined on a consolidated or combined basis, are allocated to each Group in
accordance with tax sharing agreements between U S WEST and the entities within
the Groups. The allocations will generally reflect each Group's contribution
(positive or negative) to consolidated taxable income and consolidated tax
credits. A Group will be compensated only at such time as, and to the extent
that, its tax attributes are utilized by U S WEST in a combined or consolidated
income tax filing. Federal and state tax refunds and carryforwards or carrybacks
of tax attributes will generally be allocated to the group to which such tax
attributes relate.
GROUP FINANCING Financing activities for the nonregulated Communications
Group businesses and the Media Group, including the issuance, repayment and
repurchase of short-term and long-term debt, and the issuance and repurchase of
preferred securities are managed by U S WEST on a centralized basis. Financing
C-21
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
activities for U S WEST Communications are separately identified and accounted
for in U S WEST's records and U S WEST Communications conducts its own borrowing
activities. Debt incurred and investments made by U S WEST and its subsidiaries
on behalf of the nonregulated Communications Group 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. All debt incurred and investments made by U S WEST and its subsidiaries
on behalf of the Media Group are specifically allocated to and reflected on the
financial statements of the Media Group. Debt incurred by U S WEST or a
subsidiary on behalf of a Group is charged to such Group at the borrowing rate
of U S WEST or such subsidiary.
As of November 1, 1995, the effective date of the Recapitalization Plan, U S
WEST does not intend to transfer funds between the Groups, except for certain
short-term, ordinary course advances of funds at market rates associated with U
S WEST's centralized cash management program for the nonregulated businesses.
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.
DIVIDENDS 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 U S WEST as
a whole. Dividends will be payable out of the lesser of: 1) the funds of U S
WEST legally available for the payment of dividends; and 2) the Communications
Group Available Dividend Amount.
The 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 that applied in determining the
Communications Group net earnings (loss) over; 2) 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.
EARNINGS PER COMMON SHARE Earnings per common share for 1995 and 1994 have
been presented on a pro forma basis to reflect the Communications Stock as if it
had been outstanding since January 1, 1994. For periods prior to the
recapitalization, the average common shares outstanding are assumed to be equal
to the average common shares outstanding for U S WEST.
INDUSTRY SEGMENT The businesses comprising the Communications Group operate
in a single industry segment as defined in Statement of Financial Accounting
Standards ("SFAS") No. 14, "Financial Reporting for Segments of a Business
Enterprise." The Communications Group primarily provides regulated
communications services to more than 25 million residential and business
customers in the Communications Group region (the "Region"). The Region includes
the states of Arizona, Colorado, Idaho, Iowa, Minnesota,
C-22
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah,
Washington and Wyoming. Services offered by the Communications Group include
local telephone services, exchange access services (which connect customers to
the facilities of carriers, including long-distance providers and wireless
operators), and long-distance services within Local Access and Transport Areas
("LATAs") in the Region. The Communications Group provides other products and
services, including custom calling, voice messaging, caller identification,
high-speed data applications, customer premises equipment and certain
communications services to business customers and governmental agencies both
inside and outside the Region.
Approximately 97 percent of the revenues of the Communications Group are
attributable to the operations of U S WEST Communications, of which
approximately 59 percent are derived from the states of Arizona, Colorado,
Minnesota and Washington.
SIGNIFICANT CONCENTRATIONS The largest volume of the Communications Group's
services are provided to AT&T. During 1995, 1994 and 1993, revenues related to
those services provided to AT&T were $1,085, $1,130 and $1,159, respectively.
Related accounts receivable at December 31, 1995 and 1994, totaled $91 and $98,
respectively. As of December 31, 1995, the Communications Group is not aware of
any other significant concentration of business transacted with a particular
customer, supplier or lender that could, if suddenly eliminated, severely impact
operations.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Nonreusable material is carried
at its estimated salvage value. Inventories of the Communications Group's
nontelephone 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 expensed 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 third quarter 1993, U S WEST
Communications discontinued accounting for its regulated telephone operations
under SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation."
(See Note 5 to the Combined Financial Statements.) Prior to discontinuing SFAS
No. 71, depreciation was based on lives specified by regulators.
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 nontelephone 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 included in income.
C-23
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interest related to qualifying construction projects is capitalized and
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 $39, $36 and
$15 in 1995, 1994 and 1993, 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 exchange access and long-distance
services are billed and recorded monthly as services are provided.
FINANCIAL INSTRUMENTS Net interest received or paid on interest rate swaps
is recognized over the life of the swaps as an adjustment to interest expense.
Gains and losses on forward contracts are deferred and recognized as an
adjustment to interest expense over the life of the underlying debt. Currency
swaps entered into to convert foreign debt to dollar-denominated debt are
combined with the foreign currency debt and accounted for as if fixed-rate,
dollar-denominated debt were issued directly.
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 $183 and $146 at December 31, 1995
and 1994, respectively, is recorded in property, plant and equipment.
Amortization of capitalized computer software costs totaled $69, $61 and $37 in
1995, 1994 and 1993, 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 U S WEST'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.
NEW ACCOUNTING STANDARDS In 1996, U S WEST will adopt SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets and associated
intangibles be written down to fair value whenever an impairment review
indicates that the carrying value cannot be recovered on an undiscounted cash
flow basis. SFAS No. 121 also requires that a company no longer record
depreciation expense on assets held for sale. U S WEST expects that the adoption
of SFAS No. 121 will not have a material effect on its financial position or
results of operations.
In 1996, U S WEST will adopt SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. U S
WEST will adopt this standard through compliance with the disclosure
requirements set forth in SFAS No. 123. Adoption of the standard will have no
impact on the financial position or results of operations of U S WEST.
C-24
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: RELATED PARTY TRANSACTIONS
CUSTOMER LISTS, BILLING AND COLLECTION SERVICES, AND OTHER SERVICES U S
WEST Communications sells customer lists, billing and collection services, and
other services to the domestic publishing operations of the Media Group. These
data and services are sold at market price. However, the accounting and
reporting for regulatory purposes is in accordance with regulatory requirements.
U S WEST Communications charged $20, $29 and $26 for these services in 1995,
1994 and 1993, respectively.
TELECOMMUNICATIONS SERVICES U S WEST Communications sells
telecommunications network access and usage to the domestic cellular operations
of the Media Group. U S WEST Communications charged $40, $30 and $24 in 1995,
1994 and 1993, respectively, for these services.
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 one-seventh ownership interest,
were $84, $111 and $113 in 1995, 1994 and 1993, respectively.
NOTE 4: RESTRUCTURING CHARGE
The Communications Group's 1993 results reflected an $880 restructuring
charge (pretax). 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, the
Communications Group 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 products and services for customers, and centralize its service centers. The
Communications Group has consolidated its 560 customer service centers into 26
centers in 10 cities and plans on reducing its work force by approximately
10,000 employees. Approximately 1,000 employees that were originally expected to
relocate have chosen separation or other job assignments and have been replaced.
This increased the number of employee separations to 10,000 from 9,000, and
increased the estimated total cost for employee separations to $311, compared
with $281 in the original estimate. The $30 cost associated with these
additional employee separations was reclassified from relocation to the reserve
for employee separations during 1995.
Following is a schedule of the costs included in the 1993 restructuring
charge:
<TABLE>
<CAPTION>
1993
RESTRUCTURING CHANGE IN DECEMBER 31,
CHARGE ESTIMATE 1995 ESTIMATE
--------------- ----------- ---------------
<S> <C> <C> <C>
Employee separation 1........................................... $ 225 $ 30 $ 255
Systems development............................................. 360 -- 360
Real estate..................................................... 130 -- 130
Relocation...................................................... 105 (30) 75
Retraining and other............................................ 60 -- 60
----- --- -----
Total......................................................... $ 880 -- $ 880
----- --- -----
----- --- -----
</TABLE>
- ------------------------------
1 Employee-separation costs, including the balance of a 1991 restructuring
reserve at December 31, 1993, aggregate $311.
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Systems 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. 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.
C-25
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: RESTRUCTURING CHARGE (CONTINUED)
The following table shows amounts charged to the restructuring reserve:
<TABLE>
<CAPTION>
1993
RESTRUCTURING 1994 1995 CHANGE IN DECEMBER 31,
RESERVE ACTIVITY ACTIVITY ESTIMATE 1995 BALANCE
--------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Employee separation (1)...................... $ 281 $ 75 $ 76 $ 30 $ 160
Systems development.......................... 360 118 129 -- 113
Real estate.................................. 130 50 66 -- 14
Relocation................................... 105 21 21 (30) 33
Retraining and other......................... 60 8 23 -- 29
----- ----- ----- --- -----
Total...................................... $ 936 $ 272 $ 315 $ -- $ 349
----- ----- ----- --- -----
----- ----- ----- --- -----
</TABLE>
- ------------------------------
(1)
Includes $56 associated with work-force reductions under a 1991 restructuring
plan.
Employee separations under the Restructuring Plan in 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
CUMULATIVE
1994 1995 SEPARATIONS AT
SEPARATIONS SEPARATIONS DECEMBER 31, 1995
------------- ------------- -----------------
<S> <C> <C> <C>
Employee separations:
Managerial................................................. 497 682 1,179
Occupational............................................... 1,683 1,643 3,326
----- ----- -----
Total.................................................... 2,180 2,325 4,505
----- ----- -----
----- ----- -----
</TABLE>
The Restructuring Plan is expected to be substantially completed by the end
of 1997. Implementation of the Restructuring Plan has been impacted by growth in
the business and related service issues, new business opportunities, revisions
to system delivery schedules and productivity issues caused by the major
rearrangement of resources due to restructuring. These issues will continue to
affect the timing of employee separations.
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Land and buildings................................................................ $ 2,459 $ 2,453
Telephone network equipment....................................................... 12,019 11,622
Telephone outside plant........................................................... 12,353 11,897
General purpose computers and other............................................... 3,580 3,013
Construction in progress.......................................................... 767 593
--------- ---------
31,178 29,578
--------- ---------
Less accumulated depreciation
Buildings....................................................................... 686 657
Telephone network equipment..................................................... 7,221 6,733
Telephone outside plant......................................................... 7,851 7,442
General purpose computers and other............................................. 1,891 1,705
--------- ---------
17,649 16,537
--------- ---------
Property, plant and equipment -- net.............................................. $ 13,529 $ 13,041
--------- ---------
--------- ---------
</TABLE>
C-26
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
In 1995, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $258. U S WEST Communications received consideration for the
sales of $388, including $214 in cash. In 1994, U S WEST Communications sold
certain rural telephone exchanges with a cost basis of $122 and received
consideration of $204, including $93 in cash.
DISCONTINUANCE OF SFAS NO. 71
U S WEST Communications incurred a noncash, 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 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' 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 flows 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>
C-27
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper................................................................... $ 542 $ 1,321
Other.............................................................................. 62 116
Current portion of long-term debt.................................................... 461 171
--------- ---------
Total................................................................................ $ 1,065 $ 1,608
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.79 percent and
5.92 percent at December 31, 1995 and 1994, respectively.
U S WEST and U S WEST Communications maintain commercial paper programs to
finance short-term cash flow requirements, as well as to maintain a presence in
the short-term debt market. In addition, U S WEST Communications, which conducts
its own borrowing activities, is permitted to borrow up to $600 under short-term
lines of credit, all of which was available at December 31, 1995. Additional
lines of credit aggregating approximately $1.3 billion are available to both the
Media Group and the nonregulated subsidiaries of the Communications Group in
accordance with their borrowing needs.
LONG-TERM DEBT
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL
INTEREST RATES 1997 1998 1999 2000 THEREAFTER 1995
- --------------------------------------------------------- --------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Up to 5%................................................. $ -- $ 35 $ -- $ 90 $ 150 $ 275
Above 5% to 6%........................................... -- 300 -- -- 261 561
Above 6% to 7%........................................... -- -- 71 257 1,916 2,244
Above 7% to 8%........................................... 16 -- -- -- 2,477 2,493
Above 8% to 9%........................................... -- -- -- -- 250 250
Above 9% to 10%.......................................... -- -- -- 175 -- 175
Variable rate debt indexed to two- and ten-year constant
maturity Treasury rates................................. 25 -- 155 -- -- 180
--------- --------- --------- --------- ----------- ---------
$ 41 $ 335 $ 226 $ 522 $ 5,054 6,178
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other...................... 195
Unamortized discount -- net.............................. (684)
---------
Total.................................................... $ 5,689
---------
---------
<CAPTION>
TOTAL
INTEREST RATES 1994
- --------------------------------------------------------- ---------
<S> <C>
Up to 5%................................................. $ 275
Above 5% to 6%........................................... 561
Above 6% to 7%........................................... 1,361
Above 7% to 8%........................................... 2,136
Above 8% to 9%........................................... 250
Above 9% to 10%.......................................... 320
Variable rate debt indexed to two- and ten-year constant
maturity Treasury rates................................. 180
---------
5,083
Capital lease obligations and other...................... 148
Unamortized discount -- net.............................. (715)
---------
Total.................................................... $ 4,516
---------
---------
</TABLE>
Long-term debt consists principally of debentures, medium-term notes and
zero coupon subordinated notes convertible at any time into equal shares of
Communications Stock and Media Stock. 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 $276 and $264 at December 31, 1995 and 1994, respectively.
During 1995, U S WEST Communications refinanced $1.5 billion of commercial
paper to take advantage of favorable long-term interest rates. In addition to
the commercial paper, U S WEST Communications refinanced $145 of long-term debt.
Expenses associated with the refinancing of long-term debt resulted in
extraordinary charges to income of $8, net of tax benefits of $5.
During 1993, U S WEST Communications refinanced long-term 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.
C-28
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: DEBT (CONTINUED)
Interest payments by the Communications Group, net of amounts capitalized,
were $378, $356 and $398 in 1995, 1994 and 1993, respectively.
INTEREST RATE RISK MANAGEMENT
U S WEST Communications enters into interest rate swap agreements 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.
During 1995 and 1994, U S WEST Communications entered into currency swaps 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. 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, 1995 and 1994. Variable rates are indexed to
two- and ten-year constant maturity Treasury and 30-day commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
DECEMBER 31, 1995 ------------------------------------
----------------------------------------------- WEIGHTED
WEIGHTED AVERAGE RATE AVERAGE
RATE
NOTIONAL ---------------------- NOTIONAL -----------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE
----------- ---------- ----------- --- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed.................... $ 580 1996-1999 5.70 6.56 $ 710 1995-1999 6.14
Currency............................. 204 1999-2001 -- 6.55 71 1999 --
<CAPTION>
PAY
---
<S> <C>
Variable to fixed.................... 6.19
Currency............................. 6.53
</TABLE>
In 1993, U S WEST Communications executed forward contracts to sell U.S.
Treasury bonds to lock in the U.S. Treasury rate component of the future debt
issue. At December 31, 1995, deferred credits of $8 and deferred charges of $51
on closed 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, 1995, there were no open
forward contracts.
The counterparties to these interest rate contracts are major financial
institutions. U S WEST Communications is exposed to credit loss in the event of
nonperformance by these counterparties. U S WEST manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations which correspond to the respective credit rating of each
counterparty. U S WEST Communications does not have significant exposure to an
individual counterparty and does not anticipate nonperformance 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.
C-29
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 7: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of long-term debt are based on quoted market prices where
available or, if not available, are based on discounting future cash flows using
current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................................... $ 6,754 $ 7,050 $ 6,124 $ 5,600
Interest rate swap agreements -- assets.................................. -- (19) -- (15)
Interest rate swap agreements -- liabilities............................. -- 17 -- --
----------- --------- ----------- ---------
Debt -- net.............................................................. $ 6,754 $ 7,048 $ 6,124 $ 5,585
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
NOTE 8: 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 $210, $235 and $228 in 1995, 1994 and 1993,
respectively. Minimum future lease payments as of December 31, 1995, under
noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------
<S> <C>
1996....................................................................... $ 113
1997....................................................................... 112
1998....................................................................... 110
1999....................................................................... 102
2000....................................................................... 101
Thereafter................................................................. 728
---------
Total...................................................................... $ 1,266
---------
---------
</TABLE>
NOTE 9: COMMUNICATIONS GROUP EQUITY
Following are changes in the Communications Group equity for the periods
presented:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period..................................................... $ 3,179 $ 2,722 $ 6,003
Net income (loss).................................................................. 1,176 1,150 (2,809)
Dividends.......................................................................... (1,010) (980) (905)
Equity issuances prior to Recapitalization Plan.................................... 79 287 433
Communications Stock issuances..................................................... 52 -- --
--------- --------- ---------
Balance at end of period........................................................... $ 3,476 $ 3,179 $ 2,722
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST has issued 1.7 million shares of Communications Stock since the
November 1, 1995 recapitalization and has 473,635,025 shares outstanding at
December 31, 1995.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP") The Communications Group
and the Media Group participate in the defined contribution savings plan
sponsored by U S WEST. Substantially all employees of the Communications Group
are covered by the plan. U S WEST matches a percentage of eligible employee
contributions with shares of Communications Stock and/or Media Stock in
accordance with participant elections. Participants may also elect to reallocate
past Company contributions between Communications Stock and Media Stock. In
1989, U S WEST established two LESOPS to provide Company stock for matching
contributions to the savings plan. Shares in the LESOP are released as principal
and
C-30
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: COMMUNICATIONS GROUP EQUITY (CONTINUED)
interest are paid on the debt. At December 31, 1995, 10,145,485 shares each of
Communications Stock and Media Stock had been allocated from the LESOP, while
2,839,435 shares each of Communications Stock and Media Stock remained
unallocated.
The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are reflected in the Media Group Combined Financial
Statements. Contributions from the Communications Group and the Media Group, as
well as dividends on unallocated shares held by the LESOP ($8, $11 and $14 in
1995, 1994 and 1993, respectively), are used for debt service. Beginning with
the dividend paid in fourth-quarter 1995, dividends on allocated shares are
being paid annually to participants. Previously, dividends on allocated shares
were used for debt service with participants receiving additional shares from
the LESOP. Tax benefits related to dividend payments on eligible shares in the
savings plan have been allocated to the Communications Group, which paid the
dividends.
U S WEST recognizes expense based on the cash payments method. Contributions
to the plan related to the Communications Group, excluding dividends, were $70,
$68 and $68 in 1995, 1994 and 1993, respectively, of which $12, $16 and $20,
respectively, have been classified as interest expense.
NOTE 10: STOCK INCENTIVE PLANS
U S WEST maintains stock incentive plans for executives and key employees,
and nonemployees. The Amended 1994 Stock Plan (the "Plan") was approved by
shareowners on October 31, 1995 in connection with the Recapitalization Plan.
The Plan is a successor plan to the U S WEST, 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
nonemployees.
During calendar year 1995, up to 2,200,000 shares of Communications Stock
were available for grant. The maximum aggregate number of shares of
Communications Stock that may be granted in any other calendar year for all
purposes under the Plan is nine-tenths of one percent (0.90 percent) of the
shares of such class outstanding (excluding shares 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 either class available for issuance in
any calendar year are issued in any such year, the shares not issued shall be
added to the shares of such class available for issuance in any subsequent year
or years. Options may be exercised no later than 10 years after the date on
which the option was granted.
C-31
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP
U S WEST, INC.
--------------------- ----------------------
AVERAGE AVERAGE
NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES* PRICE
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding January 1, 1993........................................ 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
----------- ---------
Granted.......................................................... 3,062,920 43.63
Exercised........................................................ (430,631) 34.03
Canceled or expired.............................................. (175,147) 39.76
----------- ---------
Outstanding October 31, 1995....................................... 9,843,179 $ 40.39
----------- ---------
Recapitalization Plan.............................................. 9,843,179 $ 24.11 (9,843,179) $ (40.39)
---------- ---------
Granted.......................................................... 138,309 32.16
Exercised........................................................ (543,037) 21.23
Canceled or expired.............................................. (15,350) 24.91
---------- --------- ----------- ---------
Outstanding December 31, 1995...................................... 9,423,101 $ 24.39 -- --
---------- --------- ----------- ---------
---------- --------- ----------- ---------
</TABLE>
- ------------------------------
* Includes options granted in tandem with SARs.
Options to purchase 2,672,666 shares of Communications Stock were
exercisable at December 31, 1995. Options to purchase 2,374,394 shares of U S
WEST stock were exercisable at December 31, 1994. A total of 2,050,466 shares of
Communications Stock were available for grant under the plans in effect at
December 31, 1995. A total of 914,816 shares of U S WEST common stock were
available for grant under the plans in effect at December 31, 1994. A total of
11,484,792 shares of Communications Stock were reserved for issuance at December
31, 1995.
NOTE 11: 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 the 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 intention 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.
C-32
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
Management benefits are based on a final pay formula while occupational
benefits are based on a flat benefit formula. U S WEST uses the projected unit
credit method for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. U S WEST's policy
is to fund amounts required under the Employee Retirement Income Security Act of
1974 ("ERISA") and no funding was required in 1995, 1994 or 1993. Should funding
be required in 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.
The composition of the net pension cost and the actuarial assumptions of the
plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period.................................. $ 173 $ 197 $ 148
Interest cost on projected benefit obligation...................................... 558 561 514
Actual return on plan assets....................................................... (1,918) 188 (1,320)
Net amortization and deferral...................................................... 1,185 (946) 578
--------- --------- ---------
Net pension cost..................................................................... $ (2) $ 0 $ (80)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1995, 8.50 percent for 1994 and 9.00 percent
for 1993.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5,839 and $5,044, respectively... $ 6,617 $ 5,616
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds.......................................... $ 9,874 $ 8,388
Less: Projected benefit obligation............................................................. 8,450 7,149
--------- ---------
Plan assets in excess of projected benefit obligation.......................................... 1,424 1,239
Unrecognized net (gain) loss................................................................... (101) 161
Prior service cost not yet recognized in net periodic pension cost............................. (62) (67)
Balance of unrecognized net asset at January 1, 1987........................................... (705) (785)
--------- ---------
Prepaid pension cost........................................................................... $ 556 $ 548
--------- ---------
--------- ---------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Discount rate.................................................................................. 7.00% 8.00%
Weighted average rate of compensation increase................................................. 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: 1) offset
the Company-wide service cost, interest cost and amortization by the return on
plan assets; and 2) allocate the remaining net pension cost to the
Communications Group based on the ratio of actuarially determined service cost
of the Communications Group to total service cost of plan participants. U S WEST
believes allocating net pension cost based on service cost is reasonable since
service cost is a primary factor in determining pension cost. Net
C-33
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
pension costs allocated to the Communications Group were $(2), $0 and $(71) in
1995, 1994 and 1993, respectively. The service and interest costs for 1995 and
the projected benefit obligation at December 31, 1995 attributed to the
Communications Group were $149, $529 and $8,021, 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. In conjunction with the Company's 1992 adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," U
S WEST elected to immediately recognize the accumulated postretirement benefit
obligation for current and future retirees. 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 with most jurisdictions requiring funding as a
stipulation for rate recovery.
U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net postretirement benefit costs and actuarial assumptions
underlying plan benefits follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- ----------------------------------- -----------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL MEDICAL
----------- --- --------- ----------- --- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned during
the period............................ $ 59 $ 6 $ 65 $ 62 $ 13 $ 75 $ 60
Interest on accumulated benefit
obligation............................ 235 32 267 221 39 260 235
Actual return on plan assets........... (319) (96) (415) 3 1 4 (73)
Net amortization and deferral.......... 228 58 286 (68) (31) (99) 27
----- --- --------- ----- --- ----- -----
Net postretirement benefit costs....... $ 203 $ 0 $ 203 $ 218 $ 22 $ 240 $ 249
----- --- --------- ----- --- ----- -----
----- --- --------- ----- --- ----- -----
<CAPTION>
LIFE TOTAL
--------- ---------
<S> <C> <C>
Service cost -- benefits earned during
the period............................ $ 11 $ 71
Interest on accumulated benefit
obligation............................ 36 271
Actual return on plan assets........... (52) (125)
Net amortization and deferral.......... 22 49
--------- ---------
Net postretirement benefit costs....... $ 17 $ 266
--------- ---------
--------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1995, 8.50 percent in 1994 and
9.00 percent in 1993.
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1995 1994
--------------------------------- ---------------------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
----------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit obligation attributable
to:
Retirees................................................... $ 1,866 $ 271 $ 2,137 $ 1,733 $ 248 $ 1,981
Fully eligible plan participants........................... 293 34 327 264 38 302
Other active plan participants............................. 1,059 165 1,224 940 135 1,075
----------- --------- --------- ----------- --------- ---------
Total accumulated postretirement benefit obligation........ 3,218 470 3,688 2,937 421 3,358
Unrecognized net gain...................................... 378 161 539 243 90 333
Unamortized prior service cost............................. -- (34) (34)
Fair value of plan assets, primarily stocks, bonds and life
insurance (1)............................................. (1,385) (460) (1,845) (894) (374) (1,268)
----------- --------- --------- ----------- --------- ---------
Accrued postretirement benefit obligation.................. $ 2,211 $ 137 $ 2,348 $ 2,286 $ 137 $ 2,423
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
</TABLE>
- ------------------------------
(1)
Medical plan assets include Communications Stock of $210 and Media Stock of
$112 in 1995, and U S WEST common stock of $164 in 1994.
C-34
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Discount rate.................................................... 7.00% 8.00%
Medical trend*................................................... 9.00% 9.70%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5 percent in
2011.
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1995 net postretirement benefit cost by approximately $40 and
increased the 1995 accumulated postretirement benefit obligation by
approximately $350.
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 the 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.
POSTRETIREMENT MEDICAL COSTS The service and interest components of net
postretirement medical benefit costs are calculated for the Communications Group
based on the population characteristics of the Group. Since funding of
postretirement medical costs is voluntary, return on assets is attributed to the
Communications Group based on historical funding. The Communications Group's
annual funding amount is based on its cash requirements with the funding at U S
WEST Communications based on regulatory accounting requirements.
Net postretirement medical benefit costs recognized by the Communications
Group for 1995, 1994 and 1993 were $189, $207 and $238, respectively. The
percentage of postretirement medical assets attributed to the Communications
Group at December 31, 1995 and 1994, based on historical voluntary
contributions, was 96 and 95 percent, respectively. The accumulated
postretirement medical benefit obligation attributed to the Communications Group
was $3,057 at December 31, 1995.
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. U S WEST will generally fund the amount allowed for tax
purposes and no funding of postretirement life insurance occurred in 1995, 1994
and 1993. U S WEST believes its method of allocating postretirement life costs
is reasonable.
Net postretirement life benefit costs allocated to the Communications Group
for 1995, 1994 and 1993 were $0, $19 and $14, respectively. The service and
interest costs for 1995 and the accumulated postretirement life benefit
obligation at December 31, 1995 attributed to the Communications Group were $5,
$29, $425, respectively.
C-35
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................................................................. $ 434 $ 368 $ 350
Deferred................................................................................ 177 233 (115)
Investment tax credits -- net........................................................... (38) (47) (56)
--------- --------- ---------
573 554 179
State and local:
Current................................................................................. 56 58 48
Deferred................................................................................ 33 41 (19)
--------- --------- ---------
89 99 29
--------- --------- ---------
Provision for income taxes................................................................ $ 662 $ 653 $ 208
--------- --------- ---------
--------- --------- ---------
</TABLE>
The unamortized balance of investment tax credits at December 31, 1995 and
1994, was $199 and $231, respectively.
Amounts for income taxes paid by the Communications Group were $511, $491
and $297 in 1995, 1994 and 1993, respectively.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
IN PERCENT
<S> <C> <C> <C>
Federal statutory tax rate.................................................................. 35.0 35.0 35.0
Investment tax credit amortization.......................................................... (1.3) (1.7) (3.5)
State income taxes -- net of federal effect................................................. 3.1 3.6 3.5
Rate differential on reversing temporary differences........................................ -- -- (2.6)
Depreciation on capitalized overheads -- net................................................ -- -- 1.6
Tax law change -- catch-up adjustment....................................................... -- -- 3.7
Restructuring charge........................................................................ -- -- (2.4)
Other....................................................................................... (0.9) (0.7) (0.6)
--- --- ---
Effective tax rate.......................................................................... 35.9 36.2 34.7
--- --- ---
--- --- ---
</TABLE>
C-36
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................................. $ 1,433 $ 1,428
State deferred taxes -- net of federal effect.................................................. 180 221
Other.......................................................................................... 68 77
--------- ---------
Deferred tax liabilities....................................................................... 1,681 1,726
--------- ---------
Postemployment benefits, including pension..................................................... 675 689
Restructuring and other........................................................................ 231 287
Unamortized investment tax credit.............................................................. 70 79
State deferred taxes -- net of federal effect.................................................. 133 194
Other.......................................................................................... 142 231
--------- ---------
Deferred tax assets............................................................................ 1,251 1,480
--------- ---------
Net deferred tax liability..................................................................... $ 430 $ 246
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $259 and $300 at December
31, 1995 and 1994, 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 13: CONTINGENCIES
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for reconsideration, thereby establishing
two exceptions to the rule against retroactive ratemaking: 1) unforeseen and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request from interexchange carriers and other parties related to the Tax Reform
Act of 1986. 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
$150.
C-37
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995
Operating revenues....................................................... $ 2,318 $ 2,338 $ 2,389 $ 2,439
Income before income taxes and extraordinary item........................ 500 460 454 432
Income before extraordinary item......................................... 315 293 292 284
Net income............................................................... 315 293 287 281
Pro forma earnings per common share before extraordinary
item.................................................................... 0.67 0.62 0.62 0.60
Pro forma earnings per common share...................................... 0.67 0.62 0.61 0.59
1994
Operating revenues....................................................... $ 2,253 $ 2,281 $ 2,316 $ 2,326
Income before income taxes............................................... 467 456 422 458
Net income............................................................... 295 289 267 299
Pro forma earnings per common share...................................... 0.66 0.64 0.59 0.65
</TABLE>
- ------------------------------
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock. Earnings
per common share have been presented on a pro forma basis to reflect the two
classes of stock as if they had been outstanding since January 1, 1994. For
periods prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST, Inc.
1995 first-quarter net income includes $39 ($0.08 per share) from a gain on
the sales of certain rural telephone exchanges. 1995 second-quarter net income
includes $10 ($0.02 per share) from a gain on the sales of certain rural
telephone exchanges. 1995 third-quarter net income includes $21 ($0.04 per
share) from a gain on the sales of certain rural telephone exchanges and $5
($0.01 per share) for expenses associated with the Recapitalization Plan. 1995
third-quarter net income also includes a charge of $5 ($0.01 per share) for the
early extinguishment of debt. 1995 fourth-quarter net income includes $15 ($0.03
per share) from a gain on the sales of certain rural telephone exchanges and
other charges of $6 ($0.01 per share), including an extraordinary charge of $3
for the early extinguishment of debt and $3 for expenses associated with the
Recapitalization Plan.
1994 net income includes gains on the sales of rural telephone exchanges of
$15 ($0.03 per share), $16 ($0.04 per share) and $20 ($0.04 per share) for first
quarter, second quarter and fourth quarter, respectively.
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------------
1995 PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- --------------------------------------------------------------------- --------- --------- --------- -----------
(WHOLE DOLLARS)
<S> <C> <C> <C> <C>
November 1, 1995 through December 31, 1995........................... $ 36.375 $ 28.375 $ 35.625 $ 0.535
</TABLE>
C-38
<PAGE>
U S WEST MEDIA GROUP
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- --------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales and other revenues:
Directory and information services........................ $ 1,180 $ 1,075 $ 956 $ 949 $ 891
Wireless communications................................... 941 781 561 407 325
Cable and telecommunications.............................. 215 18 -- -- --
Other..................................................... 38 34 32 28 45
---------- ---------- --------- --------- ---------
Total sales and other revenues.............................. $ 2,374 $ 1,908 $ 1,549 $ 1,384 $ 1,261
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
EBITDA (1).................................................. $ 716 $ 533 $ 485 $ 410 $ 373
Income from continuing operations before extraordinary item
(2)........................................................ 145 276 85 146 69
Earnings available for common stock......................... 138 276 85 146 69
Total assets................................................ 8,615 7,394 5,446 3,130 3,235
Total debt (3).............................................. 2,101 1,814 1,526 249 682
Preferred securities (4).................................... 651 51 -- -- --
Media Group equity.......................................... 4,472 4,203 3,139 2,265 2,057
Capital expenditures........................................ 401 343 215 169 231
Pro forma earnings per common share (5)..................... $ 0.29 $ 0.61
Pro forma average common shares outstanding (thousands)
(5)........................................................ 470,549 453,316
</TABLE>
PROPORTIONATE DATA(6)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues............................................................. $ 5,115 $ 4,213 $ 2,157
Operating income..................................................................... 476 401 195
Income from continuing operations before extraordinary item(2)....................... 145 276 85
EBITDA(1) (excludes 1993 restructuring charge)....................................... 1,149 902 527
Subscribers/advertisers (thousands).................................................. 5,959 4,234 3,086
</TABLE>
- ------------------------------
(1)
Earnings before interest, taxes, depreciation, amortization, and other
("EBITDA"). EBITDA also excludes gains on asset sales, equity losses and
guaranteed minority interest expense.
(2)
1995 income from continuing operations before extraordinary item includes a
gain of $95 from the merger of U S WEST's joint venture interest in TeleWest
plc with SBC CableComms (UK) and costs of $9 associated with the November 1,
1995 recapitalization. 1994 income from continuing operations before
extraordinary item includes a gain of $105 on the partial sale of U S WEST's
joint venture interest in TeleWest and a gain of $41 on the sale of U S WEST's
paging operation. 1993 and 1991 income from continuing operations before
extraordinary item was reduced by restructuring charges of $76 and $57,
respectively.
(3)
Excludes debt associated with the capital assets segment, which has been
discontinued and is held for sale.
(4)
Includes Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company-guaranteed debentures of $600 in 1995
and preferred stock subject to mandatory redemption of $51 in 1995 and 1994.
(5)
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share have been
presented on a pro forma basis to reflect the Media stock as if it had been
outstanding since January 1, 1994. For periods prior to the recapitalization,
the average common shares outstanding are assumed to be equal to the average
common shares outstanding for U S WEST, Inc.
(6)
Selected proportionate data is not required by generally accepted accounting
principles or intended to replace the Combined Financial Statements prepared
in accordance with GAAP. It is presented supplementally because the Company
believes that proportionate data facilitates the understanding and assessment
of its Combined Financial Statements. Proportionate accounting reflects the
Media Group's relative ownership interests in operating revenues and expenses
for both its consolidated and equity method investments. The table does not
reflect financial data of the capital assets segment.
D-1
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
THE RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate in
Delaware and create two classes of common stock. Under the Recapitalization
Plan, shareholders approved an agreement and plan of merger between U S WEST
Colorado and U S WEST, Inc., a Delaware corporation ("U S WEST" or the
"Company"), pursuant to which U S WEST continues as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST has
been amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock") and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock").
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
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 directory and information services businesses.
On February 27, 1996, U S WEST announced a definitive agreement to merge
with Continental Cablevision, Inc. ("Continental"). Continental, the nation's
third-largest cable operator, serves 4.2 million domestic customers, passes more
than seven million domestic homes and holds significant other domestic and
international properties. U S WEST will purchase all of Continental's stock for
approximately $5.3 billion and will assume Continental's debt and other
obligations, which amount to approximately $5.5 billion. Consideration for the
$5.3 billion in equity will consist of approximately $1 billion in U S WEST
preferred stock, convertible to Media Stock; and, at U S WEST's option, between
$1 billion and $1.5 billion in cash, and $2.8 billion to $3.3 billion in shares
of Media Stock. The transaction, which is expected to close in the fourth
quarter of 1996, is subject to a number of conditions and approvals, including
approvals from Continental shareholders and local franchising and government
authorities.
Continental's 4.2 million domestic customers are highly clustered in five
large markets -- New England, California, Chicago, Michigan, Ohio and Florida.
Upon closing, U S WEST will own or share management of cable systems in 60 of
the top 100 American markets and serve nearly one of every three cable
households. In addition, Continental has interests in cable properties in
Australia, Argentina and Singapore; a 10 percent interest in PRIMESTAR (a direct
broadcast satellite service); telephone access businesses in Florida and
Virginia; and interests in programming that include Turner Broadcasting System,
E! Entertainment Television, the Golf Channel, and the Food Channel.
The Media Group's cable and telecommunications businesses include U S WEST's
investment in Time Warner Entertainment Company L.P. ("TWE" or "Time Warner
Entertainment"), the second largest provider of cable television services in the
United States, its cable systems in the Atlanta, Georgia metropolitan area ("the
Atlanta Systems"), and international cable and telecommunications investments,
including TeleWest plc ("TeleWest"). In 1995, TeleWest Communications plc merged
its cable television and telephony interests with SBC CableComms (UK) to form
TeleWest, the largest provider of combined cable and telecommunications services
in the United Kingdom. The Media Group also owns interests in cable and/or
telecommunications properties in the Netherlands, Sweden, Norway, Hungary, Czech
Republic, Malaysia and Indonesia.
D-2
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Media Group provides domestic wireless communications services,
including cellular services, in 13 western and midwestern states to a rapidly
growing customer base. During 1994, U S WEST 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. During Phase I, which U S WEST entered effective November
1, 1995, the two companies are operating their cellular properties separately. A
Wireless Management Company (the "WMC") has been formed and is providing
centralized services to both companies on a contract basis. In Phase II,
AirTouch and U S WEST will contribute their domestic cellular assets to the WMC.
In this phase, the Media Group will reflect its share of the combined operating
results of the WMC using the equity method of accounting. The recent passage of
the Telecommunications Act of 1996 has removed significant regulatory barriers
to completion of Phase II of the business combination. U S WEST expects that
Phase II closing could take place by the end of 1996 or early 1997.
U S WEST partnered with AirTouch Communications, Bell Atlantic and NYNEX to
form a strategic national wireless alliance and formed a venture to provide
personal communications services ("PCS"). This venture, PCS PrimeCo, purchased
11 licenses in the Federal Communication Commission's (the "FCC") PCS auction,
covering 57 million people in Chicago, Dallas, Honolulu, Houston, Jacksonville,
Miami, Milwaukee, New Orleans, Richmond, San Antonio and Tampa. The Media Group
also provides wireless communications services internationally through its
Mercury One 2 One ("One 2 One") joint venture, the world's first PCS service
located in the United Kingdom. The Media Group also owns interests in wireless
properties in Hungary, the Czech and Slovak Republics, Russia, Malaysia, India
and Poland.
The Media Group's directory and information services businesses develop and
package content and information services, including telephone directories,
database marketing and other interactive services in domestic and international
markets. The Media Group publishes more than 300 White and Yellow Pages
directories in 14 western and mid-western states and nearly 200 directories in
the United Kingdom and Poland. The Media Group also has a 50 percent interest in
Listel, Brazil's largest telephone directory publisher.
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 U S WEST and related transactions not identified with the
Communications Group; and (iii) an allocated portion of the corporate expense of
U S WEST. All significant intra-group financial transactions have been
eliminated. Transactions between the Media Group and the Communications Group
have not been eliminated. For a more complete discussion of U S WEST's corporate
allocation policies, see the U S WEST Media Group Combined Financial Statements
- -- Note 2: Summary of Significant Accounting Policies.
The following discussion is based on the U S WEST Media Group Combined
Financial Statements prepared in accordance with GAAP. The discussion should be
read in conjunction with the U S WEST, Inc. Consolidated Financial Statements. A
discussion of the Media Group's operations on a proportionate basis follows the
GAAP presentation in "Selected Proportionate Financial Data."
D-3
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
Comparative details of income from continuing operations before
extraordinary item by industry segment and for significant unconsolidated equity
investments follow:
<TABLE>
<CAPTION>
PERCENT
OWNERSHIP 1995(1) 1994(2) (DECREASE)
------------- --------- --------- -----------
<S> <C> <C> <C> <C>
Consolidated:
Directory and information services..................................... 100 $ 240 $ 247 $ (7)
Wireless communications................................................ 100 62 67 (5)
Cable and telecommunications........................................... 100 (7) (2) (5)
Unconsolidated equity investments:
Time Warner Entertainment (3).......................................... 25.5 (32) (30) (2)
TeleWest............................................................... 26.8 53 76 (23)
One 2 One.............................................................. 50.0 (81) (58) (23)
Other (4)................................................................ (90) (24) (66)
--------- --------- -----------
Income from continuing operations before extraordinary item.............. $ 145 $ 276 $ (131)
--------- --------- -----------
--------- --------- -----------
Pro forma earnings per common share before extraordinary
item (5)................................................................ $ 0.30 $ 0.61 ($ 0.31)
--------- --------- -----------
--------- --------- -----------
</TABLE>
- ------------------------------
(1)
1995 income from continuing operations before extraordinary item includes a
gain of $95 from the merger of TeleWest with SBC CableComms (UK) and $9 for
costs associated with the Recapitalization Plan.
(2)
1994 income from continuing operations before extraordinary item includes a
gain of $105 from the partial sale of U S WEST's joint venture interest in
TeleWest and a gain of $41 from the sale of U S WEST's paging operations.
(3)
Percent ownership represents pro-rata priority capital and residual equity
interests.
(4)
Primarily includes interest expense and divisional expenses associated with
equity investments.
(5)
Earnings per common share have been presented on a pro forma basis as if the
Media Stock had been outstanding since January 1, 1994. For periods prior to
the recapitalization, the average common shares outstanding are assumed to be
equal to the average common shares outstanding for U S WEST, Inc.
During 1995, income from continuing operations before extraordinary item
declined 55 percent, to $59, excluding the effects of the one-time items
described in Notes 1 and 2 to the table above. The decline is due primarily to
higher equity losses related to international growth initiatives and increased
amortization and interest expense. Interest expense increases relate to debt
issued in connection with the Atlanta Systems acquisition and expansion of
international investments. The declines were partially offset by improvement in
the domestic cellular and Yellow Pages operations.
During 1995, the Media Group incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by TWE.
DIRECTORY AND INFORMATION SERVICES Income related to Yellow Pages directory
advertising increased 10 percent in 1995, to $307, due to pricing, product
enhancements and the effect of improved marketing programs on business volume.
Yellow Pages income was partially offset by net operating losses of $60 related
to new products and other growth initiatives, including development of
interactive services. The Media Group views new service offerings as an
important part of its strategy and expects investments in new products and
services in 1996 will continue to partially offset expected income related to
the Yellow Pages business.
Income related to directory and information services in 1995 includes $7 in
losses related to expansion of international directory publishing operations.
The international publishing operations were not significant to the 1994 results
of operations.
D-4
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
WIRELESS COMMUNICATIONS Income related to wireless communications more than
doubled, to $62 in 1995, excluding the 1994 gain on sale of paging assets of
$41. The increase in wireless communications income is attributable to continued
strong growth in cellular subscribers. The cellular subscriber base reached
1,463,000 at December 31, 1995, a 51 percent increase compared with 1994.
CABLE AND TELECOMMUNICATIONS The 1995 loss of $7 in cable and
telecommunications operations is primarily the result of amortization of
intangible assets related to the December 1994 acquisition of the Atlanta
Systems. The subscriber base of the Atlanta Systems increased 6.7 percent during
the last twelve months, to 527,000 at December 31, 1995.
OPERATING RESULTS OF UNCONSOLIDATED EQUITY INVESTMENTS The net loss related
to the Media Group's interests in TWE increased in 1995, due primarily to higher
TWE financing costs and depreciation charges, partially offset by increased
income related to cable and programming operations. Cable subscribers served by
TWE increased almost 6 percent compared with last year, excluding the impact of
recent cable transactions.
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against U
S WEST on October 11, 1995, alleging misrepresentation, breach of contract and
other misconduct on the part of U S WEST. Time Warner's countersuit seeks a
reformation of the Time Warner Entertainment partnership agreement, an order
that enjoins U S WEST from breaching the partnership agreement, and unspecified
compensatory damages. U S WEST has denied each of the claims in Time Warner's
countersuit. The trial for this action concluded on March 22, 1996. A ruling by
the Delaware Chancery Court is expected in June 1996.
International businesses are experiencing rapid growth associated with their
early development phases. New investments in 1995 include the acquisition of a
50 percent interest in cable television systems in the Netherlands, the
acquisition of a 29 percent interest in cable television systems in the Czech
Republic and additional capital provided to a 20 percent owned joint venture in
Malaysia to provide local wireline and wireless communications. The Czech
Republic venture incurred significant start-up losses in 1995, of which the
Media Group's share was $13. The structure of this venture is being
renegotiated.
U S WEST ventures have recently been awarded licenses to provide cellular
services using digital technology in India and Poland. The Media Group expects
losses related to international ventures will be significant in 1996.
In October 1995, TeleWest completed its merger with SBC CableComms (UK). The
Media Group recognized an after-tax gain related to the merger of $95, and has a
26.8 percent interest in the combined company.
Cable television subscribers of TeleWest and its affiliates, based on
TeleWest's equity interest in affiliated operations, increased to 457,000 at
December 31, 1995, an increase of 44 percent compared with 1994, and telephone
access lines increased 93 percent during the last twelve months, to 527,000.
Both growth rates exclude the one-time impact of the merger.
Subscribers to U S WEST's international wireless joint venture operations in
the United Kingdom, Hungary, the Czech and Slovak Republics, Russia and Malaysia
grew to 682,000 at December 31, 1995, which is almost twice the customer base at
December 31, 1994. One 2 One served 375,000 customers at December 31, 1995, an
83 percent increase compared with 1994.
Effective January 1, 1995, the capital assets segment is being accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
and Exchange Commission ("SEC"), which requires discontinued operations not
disposed of within one year of the measurement date to be accounted for
D-5
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
prospectively in continuing operations as a net investment in assets held for
sale. The net realizable value of the assets are reevaluated on an ongoing basis
with adjustments to the existing reserve, if any, being charged to continuing
operations. No adjustment was required in 1995.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Directory and information services:
Domestic........................................................................ $ 1,058 $ 997 $ 61
International................................................................... 122 78 44
--------- --------- -----
1,180 1,075 105
Wireless communications:
Cellular service................................................................ 845 633 212
Cellular equipment.............................................................. 96 120 (24)
Paging sales and service (1).................................................... -- 28 (28)
--------- --------- -----
941 781 160
Cable and telecommunications...................................................... 215 18 197
Other............................................................................. 38 34 4
--------- --------- -----
Sales and other revenues.......................................................... $ 2,374 $ 1,908 $ 466
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------
(1)
The paging business was sold in June 1994. Results reflect operations for the
six months ending June 30, 1994.
Media Group sales and other revenues increased 15 percent, to $2,374 in
1995, excluding the effects of the 1994 Atlanta Systems acquisition and paging
sale. The increase was primarily due to strong growth in cellular service
revenue.
DIRECTORY AND INFORMATION SERVICES Revenues related to Yellow Pages
directory advertising increased 6.4 percent, to $1,026 in 1995, due to price
increases of 4.5 percent, higher revenue per advertiser and an increase in
Yellow Pages advertising volume.
International directory publishing revenues increased $44 in 1995, primarily
due to U S WEST's May 1994 purchase of Thomson Directories. The remaining
increase is due to an increase in advertisers and revenue per advertiser.
WIRELESS COMMUNICATIONS Cellular service revenues increased 34 percent, to
$845 in 1995, due to a 51 percent increase in subscribers during the last twelve
months (with 20 percent of the additions occurring in December), partially
offset by a 13 percent drop in average revenue per subscriber to $60.00 per
month. The increase in subscribers relates to continued growth in demand for
wireless services. The Media Group anticipates continued growth in its
subscriber base, although at slightly decreased rates.
New distribution programs are being developed which increase availability of
cellular products and simplify the cellular service activation process. These
programs have contributed to the shift in the customer base from businesses to
consumers. This shift, combined with competitive pressures on pricing, will
cause the average revenue per subscriber to continue to decline.
Cellular equipment revenues decreased 20 percent, to $96 in 1995, as a
result of lower cellular equipment costs. These lower equipment costs are being
passed on to retailers and to new customers. The Media Group expects this trend
to continue in 1996 as the cost of equipment continues to decline and as
penetration into the consumer market increases.
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 in 1994.
D-6
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CABLE AND TELECOMMUNICATIONS Domestic cable and telecommunications revenues
increased $197 in 1995, due to the December 1994 acquisition of the Atlanta
Systems.
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Directory and information services:
Domestic........................................................................... $ 399 $ 397 $ 2
International...................................................................... (1) (1) --
--------- --------- ---
398 396 2
Wireless communications:
Cellular........................................................................... 147 82 65
Paging sales and service (1)....................................................... -- 6 (6)
--------- --------- ---
147 88 59
Cable and telecommunications......................................................... 23 -- 23
Other (2)............................................................................ (101) (95) (6)
--------- --------- ---
Operating income..................................................................... $ 467 $ 389 $ 78
--------- --------- ---
--------- --------- ---
</TABLE>
- ------------------------------
(1)
The paging business was sold in June 1994. Results reflect operations for six
months ending June 30, 1994.
(2)
Primarily includes divisional expenses associated with equity investments.
During 1995, Media Group operating income increased 13 percent, to $467,
excluding the effects of the 1994 Atlanta Systems acquisition and paging sale.
EBITDA increased approximately 16 percent, to $716, on a comparable basis. The
Media Group considers EBITDA an important indicator of the operational strength
and performance of its businesses. The increases were primarily due to strong
growth in wireless communications operations.
DIRECTORY AND INFORMATION SERVICES During 1995, operating income related to
domestic Yellow Pages directory advertising increased $40. Revenue increases of
$61 and general cost savings of $15, including $8 associated with assuming the
management of certain data base services from the Communications Group
contributed to the increase. The revenue gains and cost savings were partially
offset by operating cost increases of $36, primarily due to an 11 percent
increase in paper, printing, delivery and distribution costs. New product
development activities reduced domestic directory and information services
operating income by $38 in 1995. The decrease is a result of higher costs
associated with the development of new database marketing and interactive
services, including a one-time charge of $8 to exit certain product lines.
On October 15, 1995, U S WEST Direct and the Communications Workers of
America ("CWA") reached a tentative agreement on their contract, subject to
ratification by the CWA membership. This contract would provide for salary
increases of 10.5 percent over three years and provides employees with a lump
sum payment of $850.
EBITDA related to domestic Yellow Pages directory advertising services
increased 9 percent, to $519 in 1995. Expansion of the business combined with
cost savings led to an EBITDA margin related to the Yellow Pages operations of
50.6 percent in 1995 compared with 49.4 percent in 1994.
Operating income for international directory publishing operations was
unchanged from 1994. The 1995 revenue gains of $44 were offset by increased
operating expenses, primarily associated with the May 1994 acquisition of
Thomson Directories and increased costs associated with business volume.
WIRELESS COMMUNICATIONS Cellular operating income increased 79 percent, to
$147 in 1995. The increase in operating income is a result of revenue increases
associated with the rapidly expanding subscriber
D-7
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
base combined with efficiency gains. The 1995 decline in revenue per subscriber
of 13 percent has been more than offset by decreases in the cost incurred to
acquire a customer ("acquisition costs") and the cost to maintain a customer
("support costs"). Support costs include charges for access and usage of
land-line telecommunications networks, subscriber billing, customer service and
general support costs, as well as costs associated with roaming, intralata toll
calls and fraud. Support costs per subscriber have declined 20 percent in 1995.
The decline is generally a result of the efficiencies gained from an expanding
customer base without corresponding increases in headcount and infrastructure.
The acquisition cost per subscriber added decreased 6 percent in 1995, as a
result of the expanding customer base and shifts in the distribution channel
resulting in generally less costly subscriber additions.
Cellular EBITDA increased 49 percent during 1995, to $268. The business is
realizing operating scale efficiencies that have resulted in lower costs on a
per subscriber basis. The efficiencies have resulted in an increase in 1995
cellular service EBITDA margin to 31.7 percent from 28.4 percent in 1994.
CABLE AND TELECOMMUNICATIONS Cable and telecommunications operating income
reflects the December 1994 acquisition of the Atlanta Systems. The Atlanta
Systems contributed operating income of $23 and EBITDA of $100 in 1995.
OTHER Other operating income decreased primarily due to costs associated
with growth in international operations.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Interest expense...................................................................... $ 100 $ 66 $ 34
Equity losses in unconsolidated ventures.............................................. 207 121 86
Other income.......................................................................... 5 46 (41)
</TABLE>
Interest expense increased $34, or 52 percent, primarily as a result of
financing costs associated with the December 1994 acquisition of the Atlanta
Systems, new domestic and international investments and a reclassification of
debt from net investment in assets held for sale.
Equity losses increased $86 in 1995, primarily due to costs related to the
expansion of the network and additional financing costs at TeleWest and
additional costs associated with the significant increase in customers at One 2
One. Start-up and other costs associated with new international cable and
telecommunications investments primarily located in the Czech Republic and
Malaysia contributed to the increase. These increased losses were partially
offset by earnings in the European wireless operations. Losses related to
domestic investments in TWE and PCS PrimeCo also increased. The Media Group
expects the PCS partnership to experience several years of operating losses
associated with the start-up phase of the PCS business.
Other income decreased $41, or 89 percent, primarily as a result of
increased minority interest expense associated with the domestic cellular
operations, costs associated with the Recapitalization Plan and a 1994 gain on
sale of nonstrategic operations.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1995 1994 (DECREASE)
----------- ----------- -------------
<S> <C> <C> <C>
Provision for income taxes...................................................... $ 163 $ 204 ($ 41)
Effective tax rate.............................................................. 52.9% 42.5% --
</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, higher state and foreign income taxes, and
expenses associated with the Recapitalization Plan. Additionally, a tax benefit
was recorded in 1994 related to the sale of paging assets that contributed to
the increase in the effective tax rate.
D-8
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS -- 1994 COMPARED WITH 1993
Income from continuing operations by industry segment and for significant
unconsolidated equity investments follows:
<TABLE>
<CAPTION>
PERCENT INCREASE
OWNERSHIP 1994(1) 1993(2) (DECREASE)
------------- --------- --------- -------------
<S> <C> <C> <C> <C>
Consolidated:
Directory and information services...................................... 100 $ 247 $ 220 $ 27
Wireless communications................................................. 100 67 (43) 110
Cable and telecommunications............................................ 100 (2) -- (2)
Unconsolidated equity investments:
Time Warner Entertainment (3)........................................... 25.5 (30) (19) (11)
TeleWest................................................................ 37.8 76 (21) 97
One 2 One............................................................... 50.0 (58) (22) (36)
Other (4)................................................................. (24) (30) 6
--------- --------- -----
Income from continuing operations......................................... $ 276 $ 85 $ 191
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------
(1)
1994 income from continuing operations includes a gain of $105 from the
partial sale of U S WEST's joint venture interest in TeleWest, and a gain of
$41 from the sale of U S WEST's paging operations.
(2)
1993 income from continuing operations was reduced by $76 for restructuring
charges; $31 pertaining to the directory and information services segment and
$45 pertaining to the wireless segment.
(3)
Percent ownership represents pro-rata priority capital and residual equity
interests.
(4)
Primarily includes interest expense and divisional expenses associated with
equity investments.
During 1994, income from continuing operations decreased 19 percent, to
$130, excluding the effects of the one-time items described in Notes 1 and 2 to
the table above. The decline in income 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.
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 prior 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.
DIRECTORY AND INFORMATION SERVICES Excluding the effect of the 1993
restructuring charge of $31, income from directory and information services
operations decreased 1.6 percent in 1994, to $247. Costs related to the
development and launching of new products in directory and information services
offset income growth from the Yellow Pages publishing operations.
WIRELESS COMMUNICATIONS Excluding the effects of the $41 gain on the sale
of paging operations in 1994 and a $45 restructuring charge in 1993, cellular
income increased $24 to $26 in 1994. The increase is due to the addition of
367,000 subscribers in 1994, a 61 percent increase compared with 1993.
D-9
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 which did not have a material impact on 1994 net income.
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 compared with three months in 1993. The
effects of lower prices for cable services also contributed to the higher loss
in 1994.
In 1994, losses related to international equity investments increased as a
result of expansion of the customer base at One 2 One and build out of the
network at TeleWest.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
1994 1993 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Directory and information services:
Domestic........................................................................ $ 997 $ 949 $ 48
International................................................................... 78 7 71
--------- --------- -----
1,075 956 119
Wireless communications:
Cellular service................................................................ 633 443 190
Cellular equipment.............................................................. 120 63 57
Paging sales and service (1).................................................... 28 55 (27)
--------- --------- -----
781 561 220
Cable and telecommunications...................................................... 18 -- 18
Other............................................................................. 34 32 2
--------- --------- -----
Sales and other revenues.......................................................... $ 1,908 $ 1,549 $ 359
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------
(1)
The paging business was sold in June 1994. Results reflect operations for the
six months ending June 30, 1994.
During 1994, Media Group sales and other revenues increased 25 percent to
$1,862, excluding the effect of the 1994 Atlanta Systems acquisition and paging
sale. The increase was primarily due to strong growth in cellular service
revenue.
DIRECTORY AND INFORMATION SERVICES Revenues related to Yellow Pages
directory advertising increased approximately $59, or 6.5 percent, 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 $11, including $7 related to new products. Partially
offsetting these increases was the absence of revenues related to certain
publishing, software development and marketing operations that were sold, which
reduced revenues by $22.
The increase in international directory publishing revenues is attributable
to U S WEST's May 1994 purchase of Thomson Directories.
WIRELESS COMMUNICATIONS Cellular service revenues increased 43 percent, to
$633 in 1994, due to a 61 percent increase in subscribers (with 24 percent of
the additions occurring in December), partially offset by an 8 percent drop in
average revenue per subscriber to $70.00 per month.
Cellular equipment revenues increased 90 percent, to $120 in 1994, 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.
D-10
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CABLE AND TELECOMMUNICATIONS Domestic cable and telecommunications revenues
reflect the December 1994 acquisition of the Atlanta Systems.
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
1994 1993(1) (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Directory and information services:
Domestic............................................................................ $ 397 $ 359 $ 38
International....................................................................... (1) (3) 2
--------- --------- -----
396 356 40
Wireless communications:
Cellular............................................................................ 82 (29) 111
Paging sales and service (2)........................................................ 6 -- 6
--------- --------- -----
88 (29) 117
Cable and telecommunications.......................................................... -- -- --
Other (3)............................................................................. (95) (89) (6)
--------- --------- -----
Operating income...................................................................... $ 389 $ 238 $ 151
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------
(1)
Includes pretax restructuring charges of $50 and $70 for the domestic
directory and information services and wireless segments, respectively.
(2)
The paging business was sold in June 1994. Results reflect operations for the
six months ending June 30, 1994.
(3)
Primarily includes divisional expenses associated with equity investments.
Media Group operating income increased 7 percent, to $383 in 1994, excluding
the effects of the one-time items described in Notes 1 and 2 to the table above.
Revenue growth, partially offset by higher operating expenses, provided an 10.5
percent increase in 1994 EBITDA, on a comparable basis.
DIRECTORY AND INFORMATION SERVICES Excluding the effect of the 1993
restructuring charge of $50, operating income from domestic directory and
information services operations decreased $12, or 3 percent, in 1994. Operating
income related to the domestic Yellow Pages directory business increased $20.
The increase was driven by strong revenue growth. Non-Yellow Pages operating
income decreased $32, primarily a result of increased costs related to
development of new database marketing and interactive services.
The increase in international directory publishing operating income is
attributable to U S WEST's May 1994 purchase of Thomson Directories.
WIRELESS COMMUNICATIONS Excluding the effect of the 1993 restructuring
charge of $70, cellular operating income doubled in 1994 to $41. This is a
result of revenue increases associated with the rapidly expanding subscriber
base and decreases in the costs incurred to acquire and maintain a customer.
Cellular EBITDA increased $55, or 44 percent in 1994. Cellular service EBITDA
margin was 28.4 percent, essentially unchanged compared with 1993.
OTHER Other operating income decreased primarily due to growth in
international operations and the inclusion of administrative costs related to
the TWE investment for the full year in 1994, compared with three months in
1993.
D-11
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
1994 1993 INCREASE
--------- ----- -------------
<S> <C> <C> <C>
Interest expense....................................................................... $ 66 $ 27 $ 39
Equity losses in unconsolidated ventures............................................... 121 74 47
Other income........................................................................... 46 9 37
</TABLE>
Interest expense increased $39, primarily as a result of incremental
financing costs associated with the September 1993 TWE investment.
Equity losses in unconsolidated ventures increased $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 One 2 One.
Other income increased $37, primarily due to an $18 increase in the TWE
management fee. This increase resulted from owning the investment for a full
year in 1994, compared with three months in 1993. Other income also includes a
$10 gain on the sale of certain software development and marketing operations in
1994.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1994 1993 INCREASE
----------- ----------- -----------
<S> <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.
LIQUIDITY AND CAPITAL RESOURCES --THREE YEARS ENDED DECEMBER 31, 1995
OPERATING ACTIVITIES
Cash provided by operating activities increased $89 in 1995, to $640. During
1995, an income tax payment related to the 1994 partial sale of the Media
Group's joint venture interest in TeleWest reduced cash provided by operations
by $60. Adjusted for this one-time income tax payment, operating cash flow of
the Media Group increased $149. Growth in operations from the cellular business
and acquisition of the Atlanta Systems contributed to the increase. Growth in
operating cash flow from directory and information services operations has been
reduced by investments related to its growth initiatives. Operating cash flow
from Media Group businesses was partially offset by a significant increase in
income taxes paid in 1995, primarily due to lower tax benefits generated from
the investment in TWE.
Cash provided by operating activities of the Media Group increased $28 in
1994 compared with 1993 primarily due to expansion of the cellular business.
The Media Group expects that cash from operations will not be adequate to
fund expected cash requirements. Additional financing will come primarily from
new debt.
INVESTING ACTIVITIES
Total capital expenditures of the Media Group were $363, $349 and $193 in
1995, 1994 and 1993, respectively, the majority was devoted to enhancement and
expansion of the cellular network. In 1996, capital expenditures are expected to
exceed $600, of which approximately 50 percent relates to expansion of the
cellular network to increase coverage and capacity, and nearly 40 percent
relates to enhancement of the Atlanta Systems. The Media Group is in the process
of upgrading its Atlanta Systems to 750 megahertz capacity, which will provide
more reliability, better signal quality and additional capacity. The upgrade
will enable the provision of enhanced cable, data and telecommunications
services to its Atlanta customers.
Investing activities of the Media Group also include equity investments in
international ventures. In 1995, the Media Group invested $681 in international
ventures, primarily investments in Malaysia, the
D-12
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Netherlands, the Czech Republic and the United Kingdom. The Media Group invested
approximately $444 in developing international businesses in 1994, including the
acquisition of Thomson Directories. The Media Group anticipates that investments
in international ventures will approximate $400 in 1996. This includes
investments for recently awarded licenses to provide cellular service using
digital technology in India and Poland. At December 31, 1995, U S WEST
guaranteed debt in the principal amount of approximately $140 related to
international ventures.
In March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets. The Media
Group's share of the cost of the licenses was approximately $268, all of which
was funded in 1995. Under the PCS PrimeCo partnership agreement, U S WEST is
required to fund approximately 24 percent of PCS PrimeCo's operating and capital
costs, including licensing costs. U S WEST anticipates that its total funding
obligations to PCS PrimeCo during the next three years will be approximately
$400.
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 1994 partial sale of its joint venture interest in TeleWest or from the
1995 merger. All proceeds from the 1994 sale have been used by TeleWest for
general business purposes, including financing both construction and operations,
and repaying debt.
On February 27, 1996, U S WEST announced a definitive agreement to merge
with Continental. Continental, the nation's third-largest cable operator, serves
4.2 million domestic customers, passes more than seven million domestic homes
and holds significant other domestic and international properties. U S WEST will
purchase all of Continental's stock for approximately $5.3 billion and will
assume Continental's debt and other obligations, which amount to approximately
$5.5 billion. Consideration for the $5.3 billion in equity will consist of
approximately $1 billion in U S WEST preferred stock, convertible to Media
Stock; and, at U S WEST's option, between $1 billion and $1.5 billion in cash,
and $2.8 billion to $3.3 billion in shares of Media Stock. The transaction,
which is expected to close in the fourth quarter of 1996, is subject to a number
of conditions and approvals, including approvals from Continental shareholders
and local franchising and government authorities.
FINANCING ACTIVITIES
During 1995, debt increased $287 primarily due to new investments in
international ventures, cash funding of the PCS licenses and a reclassification
of debt from net investment in assets held for sale. During fourth-quarter 1995,
U S WEST issued $130 of exchangeable notes, or Debt Exchangeable for Common
Stock ("DECS"), due December 15, 1998. Upon maturity, each DECS will be
mandatorily exchanged by U S WEST for shares of Enhance Financial Services
Group, Inc. ("Enhance") or, at U S WEST's option, redeemed at the cash
equivalent. The capital assets segment currently holds approximately 31.5
percent of the outstanding Enhance common stock.
These increases in debt were partially offset by reductions of debt related
to the investment in TWE and a refinancing of commercial paper by issuing
Company-obligated mandatorily redeemable preferred securities of a subsidiary
trust holding solely Company-guaranteed debentures ("Preferred Securities"). U S
WEST issued $600 of Preferred Securities in 1995. The payment of interest and
redemption amounts to holders of the securities are fully and unconditionally
guaranteed by U S WEST.
Excluding debt associated with the capital assets segment, the Media Group's
percentage of debt to total capital at December 31, 1995, was 29.1 percent
compared with 29.9 percent at December 31, 1994. Including debt associated with
the capital assets segment, Preferred Securities and other preferred stock, the
Media Group's percentage of debt to total capital was 44.2 percent at December
31, 1995, and 42.8 percent at December 31, 1994.
D-13
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Debt increased $288 in 1994, primarily due to the December 1994 acquisition
of the Atlanta Systems, partially offset by reductions in debt related to the
investment in TWE. The cash investment related to the acquisition of the Atlanta
Systems was $745, obtained through short-term borrowing.
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. U S WEST maintains 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 SEC, as of December 31,
1995, U S WEST is permitted to issue up to approximately $1.2 billion of new
debt securities, available to both the Media Group and the nonregulated
subsidiaries of the Communications Group.
Debt related to discontinued operations decreased $487 in 1995 and $213 in
1994. Cash to the 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
Financial Security Assurance Holdings, Ltd. ("FSA"), an investment of the
capital assets segment. For financial reporting purposes debt of the capital
assets segment is netted against the related assets. See Media Group Combined
Financial Statements -- Note 20: Net Investment in Assets Held for Sale.
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.
In connection with U S WEST's announcement on February 27, 1996 of a planned
merger with Continental, U S WEST, Inc.'s credit rating is being reviewed by
credit rating agencies, which may result in a downgrading.
Financing activities for the nonregulated Communications Group businesses
and the Media Group, including the issuance, repayment and repurchase of
short-term and long-term debt, and the issuance and repurchase of Preferred
Securities, is managed by U S WEST on a centralized basis. Financing activities
for U S WEST Communications is separately identified and accounted for in U S
WEST's records and U S WEST Communications continues to conduct its own
borrowing activities. Debt incurred and investments made by U S WEST and its
subsidiaries is specifically allocated to and reflected on the financial
statements of the Media Group except that debt incurred and investments made by
U S WEST and its subsidiaries on behalf of the nonregulated Communications Group
businesses and all debt incurred and investments made by U S WEST Communications
is specifically allocated to and reflected on the financial statements of the
Communications Group. Debt incurred by U S WEST or a subsidiary on behalf of a
Group is charged to such Group at the borrowing rate of U S WEST or such
subsidiary.
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. U S WEST does not use derivative financial instruments for
trading purposes.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt. Interest rate swaps are used to adjust the ratio of
fixed- to variable-rate debt. The market value of the debt portfolio, including
the interest rate swaps, is monitored and compared with predetermined benchmarks
to evaluate the effectiveness of the risk management program.
Notional amounts of interest rate swaps outstanding were $825 and $850 as of
December 31, 1995 and 1994, respectively, with various maturities that extend to
2004. The estimated effect of U S WEST's interest
D-14
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
rate derivative transactions was to adjust the level of fixed-rate debt of the
Media Group from 86 percent to 87 percent at December 31, 1995, and from 68
percent to 71 percent of the total debt portfolio at December 31, 1994
(including debt associated with the capital assets segment).
FOREIGN EXCHANGE RISK MANAGEMENT
U S WEST has entered into forward and option contracts to manage the market
risks associated with fluctuations in foreign exchange rates after consideration
of offsetting foreign exposures among international operations. The use of
forward and option contracts allow U S WEST 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 with predetermined levels
of acceptable risk.
Notional amounts of foreign exchange forward and option contracts
outstanding were $456 and $170 as of December 31, 1995 and 1994, respectively,
with maturities of one year or less. These contracts were primarily for the
purchase of Dutch guilders and British pounds in 1995 and British pounds in
1994.
The Media Group had foreign exchange risks associated with a Dutch
guilder-denominated payable in the translated principal amount of $216 at
December 31, 1995, and British pound-denominated receivables in the translated
principal amounts of $139 and $48 at December 31, 1995 and 1994, respectively,
of which $63 and $48 of these respective balances are with a wholly owned
subsidiary. These positions were 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 the 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.
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 common stock and received $154 in net proceeds from the
public offering. In December 1995, FSA merged with Capital Guaranty Corporation
for shares of FSA and cash of $51. The transaction was valued at approximately
$203 and reduced U S WEST's ownership interest in FSA to 50.3 percent and its
voting interest to 41.7 percent. U S WEST expects to monetize and ultimately
reduce its ownership in FSA through the issuance of Debt Exchangeable for Common
Stock ("DECS") in 1996. At maturity, each DECS will be mandatorily exchanged by
U S WEST for FSA common stock held by U S WEST or, at U S WEST's option,
redeemed at the cash equivalent.
On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of cumulative redeemable preferred stock for a total
of $50. The shares are mandatorily redeemable in year ten and, at the option of
FFC, the preferred stock also can be redeemed for common shares of FSA.
U S WEST Real Estate, Inc. has sold various properties totaling $120, $327
and $66 in 1995, 1994 and 1993, respectively. The sales proceeds were in line
with estimates. Proceeds from building sales were primarily used to repay
related debt. U S WEST has completed construction of existing buildings in the
commercial real estate portfolio and expects to substantially complete
liquidation of this portfolio by 1998. The remaining balance of assets subject
to sale is approximately $490, net of reserves, as of December 31, 1995.
COMPETITIVE STRATEGY
The Media Group's strategy is based on the belief that communication and
commerce are migrating from other mediums to electronic networks. Over time,
this global phenomenon will result in networks
D-15
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
replacing traditional distribution channels. To meet the needs of this growing
market, the Media Group provides local connections and then integrates
market-based service offerings to meet the needs of end users. The Media Group
executes this strategy through three lines of business -- cable and
telecommunications, wireless and directory and information services -- in
selected high-growth markets worldwide.
COMPETITIVE AND REGULATORY ENVIRONMENT
CABLE AND TELECOMMUNICATIONS The Telecommunications Act of 1996 (the "1996
Act") opens competition by permitting local telephone companies, long-distance
carriers and cable television companies to enter each other's businesses. This
legislation will enable the Media Group to provide "one-stop shopping" for
voice, video and data services, a key objective of the Media Group. The Media
Group is currently in the process of negotiating reasonable and
non-discriminatory local interconnection rates, terms and conditions with
BellSouth and is planning on entering the local exchange market, through the
Atlanta Systems, on a competitive basis by the end of 1996.
The Atlanta 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, satellite master antenna service
and direct broadcast satellite services. Cable television systems are also in
competition for both viewers and advertising in varying degrees with other
communications and entertainment media. Such competition may increase with the
development and growth of new technologies.
The 1996 Act has amended certain aspects of the Cable Television Consumer
Protection and Competition Act of 1992 ("the 1992 Cable Act"). Under the 1996
Act, cable rates are deregulated effective March 31, 1999, or earlier if
competition exists. In addition, the provisions of the 1996 Act simplify the
process of filing rate complaints, relax uniform rate requirements and
subscriber notice provisions, expand the definition of effective competition and
eliminate certain restrictions on the sale of cable systems. Current program
access restrictions applying to cable operators are extended to common carriers
by the 1996 Act. The 1996 Act also eliminates certain cross-ownership
restrictions between cable operators, broadcasters and multichannel, multipoint
distribution system operators.
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.
In 1995, the Georgia legislature removed the legal prohibition on local
telephone competition by authorizing competition in local telephone exchange
service. The Media Group has received certification from the Georgia Public
Service Commission to provide local switched and nonswitched telephone service
in Georgia and, with the passage of the 1996 Act, certain long-distance
services.
D-16
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
WIRELESS COMMUNICATIONS There are two competitive cellular licenses in each
market. Competition is based on the price of cellular service, the quality of
the service and the size of the geographic area served. The development of PCS
services will increase the number of competitors and the level of competition.
The Media Group is unable to estimate the impact of the availability of PCS
services on its cellular operations, though it could be significant.
The wireless operations are subject to regulation by federal and some state
and local authorities. The construction and transfer of cellular systems in the
United States are regulated by the FCC pursuant to the Communications Act of
1934. The FCC regulates 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.
The passage of the 1996 Act eliminates long-distance restrictions imposed by
the Modified Final Judgment ("MFJ"). As a result, the Media Group, including its
wireless partners, are now able to offer integrated local and long-distance
services. The 1996 Act also permits the Media Group to enter into activities
related to the manufacture of telecommunications equipment.
DIRECTORY AND INFORMATION SERVICES The Media Group may face emerging
competition in the provision of interactive services from cable and
entertainment companies, on-line services and other information providers.
Directory listings are beginning to be offered via electronic databases through
telephone company and third party networks. As such offerings expand and are
enhanced through interactivity and other features, the Media Group may
experience heightened competition in its directory publishing businesses. With
the passage of the 1996 Act, the Media Group will be able to provide certain
information services across LATA boundaries. The Media Group will continue to
expand its core products and develop and package new information products to
meet its customers' needs.
D-17
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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>
DIRECTORY AND INFORMATION
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS SERVICES
-------------------------------- -------------------------------- --------------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
--------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
C
O
N Thomson
S Directories
O U S WEST (UK)
L Atlanta Systems U S WEST Marketing 100%
I 100% NewVector Resources Group U S WEST
D 92% (1) 100% Polska
A (Poland)
T 100%
E
D
TeleWest
(UK) Mercury
26.8% One 2 One
TeleWest Europe (UK)
(Norway, 50%
Sweden, Westel
Hungary) Radiotelefon
Varies (Hungary)
A2000 (KTA) 49%
E (Netherlands) Westel 900
Q 50% (Hungary) Listel
U TWE Kabel Plus 47% (Brazil)
I 25.51% (Czech EuroTel 50%
T Republic) (Czech & Slovak
Y 29% Republics)
Binariang 24.5%
Communications Russian
Sdn Bhd Telecommunications
(Malaysia) Development
20% Corp.
ARIAWEST (Russia)
(Indonesia) 67%
35%
<FN>
- ------------------------------
(1) Proportionate information reflects an approximate 8 percent minority
interest in NewVector's underlying operations.
</TABLE>
D-18
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
The following table and discussion is not required by GAAP or intended to
replace the Combined Financial Statements prepared in accordance with GAAP. It
is presented supplementally because the Media Group believes that proportionate
financial and operating data facilitate the understanding and assessment of its
Combined Financial Statements. Proportionate accounting reflects the Media
Group's relative ownership interests in operating revenues and expenses for both
its consolidated and equity method investments. 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. 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 $429, $302
and $554 at December 31, 1995, 1994 and 1993, respectively. Previously reported
amounts have been reclassified to conform with current year presentation.
<TABLE>
<CAPTION>
CABLE AND WIRELESS DIRECTORY AND
TELECOMMUNICATIONS COMMUNICATIONS INFORMATION SERVICES
------------------------ -------------------- ------------------------
DOMESTIC(1) INTERN'L DOMESTIC INTERN'L DOMESTIC INTERN'L TOTAL
----------- ----------- --------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
YEAR ENDED 1995
Revenue................................ $ 2,661 $ 128 $ 824 $ 295 $ 1,065 $ 142 $ 5,115
EBITDA (2)............................. 589 (55) 226 (40) 426 3 1,149
Operating income (loss)................ 181 (117) 116 (92) 398 (10) 476
Income (loss) before extraordinary
item.................................. (68) 18 50 (80) 238 (13) 145
Debt................................... 4,417
YEAR ENDED 1994
Revenue................................ $ 2,196 $ 85 $ 662 $ 186 $ 1,005 $ 79 $ 4,213
EBITDA (2)............................. 436 (42) 161 (68) 413 2 902
Operating income (loss)................ 120 (73) 76 (103) 389 (8) 401
Income (loss) from continuing
operations............................ (42) 65 74 (68) 251 (4) 276
Debt................................... 3,865
YEAR ENDED 1993
Revenue................................ $ 568 $ 59 $ 487 $ 78 $ 958 $ 7 $ 2,157
EBITDA (2)............................. 81 (42) 121 (48) 418 (3) 527
Operating income (loss)................ (7) (64) (25) (53) 347 (3) 195
Income (loss) from continuing
operations............................ (31) (49) (31) (22) 221 (3) 85
Debt................................... 3,492
</TABLE>
D-19
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
CABLE AND WIRELESS DIRECTORY AND
TELECOMMUNICATIONS COMMUNICATIONS INFORMATION SERVICES
------------------------ -------------------- ------------------------
DOMESTIC(1) INTERN'L DOMESTIC INTERN'L DOMESTIC INTERN'L TOTAL
----------- ----------- --------- --------- ----------- ----------- ---------
OPERATING DATA (THOUSANDS):
<S> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED 1995
Subscribers/advertisers................ 2,945 617 1,339 308 479 271 5,959
Homes passed........................... 4,551 1,172 -- -- -- -- 5,723
POPs (3)............................... -- -- 33,800 44,300 -- -- 78,100
Telephone lines........................ -- 141 -- -- -- -- 141
YEAR ENDED 1994
Subscribers/advertisers................ 2,407 226 817 169 468 147 4,234
Homes passed........................... 3,952 576 -- -- -- -- 4,528
POPs (3)............................... -- -- 18,900 38,300 -- -- 57,200
Telephone lines........................ -- 69 -- -- -- -- 69
YEAR ENDED 1993
Subscribers/advertisers................ 1,837 215 509 41 459 25 3,086
Homes passed........................... 3,061 524 -- -- -- -- 3,585
POPs (3)............................... -- -- 18,200 38,300 -- -- 56,500
Telephone lines........................ -- 44 -- -- -- -- 44
</TABLE>
- ------------------------------
(1)
The proportionate results include 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.
(2)
Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entities' EBITDA. 1993 EBITDA excludes
restructuring charges of $59 and $50 related to the domestic wireless and
directory and information services segments, respectively.
(3)
POPs are the estimated market population multiplied by U S WEST's ownership
interest in the market.
PROPORTIONATE RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
In 1995, proportionate Media Group revenue increased 17 percent, to $5.12
billion, and EBITDA increased 17 percent, to $1.15 billion, excluding the
one-time impacts of the 1994 Atlanta Systems acquisition and the sale of paging
operations. Strong growth in both domestic cable and telecommunications and
wireless communications contributed to the increases.
CABLE AND TELECOMMUNICATIONS During 1995, proportionate revenue for the
Media Group domestic cable and telecommunications operations increased 12
percent, to $2,661, and proportionate EBITDA increased 11 percent, to $589,
excluding the one-time impact of the 1994 acquisition of the Atlanta systems.
Proportionate revenue and EBITDA growth is primarily due to the TWE cable,
programming and filmed entertainment operations. Cable growth is attributed to
subscriber growth of nearly six percent, excluding the impact of 1995 TWE cable
transactions, as well as increases in advertising and pay per view revenues.
During 1995, international cable and telecommunications proportionate
revenue increased $43, to $128, and proportionate EBITDA decreased $13 to ($55).
Results for new ventures in the Czech Republic, Netherlands and Malaysia, have
been included in the proportionate results beginning with the fourth quarter of
1995. The new ventures contributed revenue of $10 and EBITDA of ($14), which
reflect the start-up nature of the operations.
WIRELESS COMMUNICATIONS During 1995, proportionate revenue for the Media
Group domestic wireless operations increased 30 percent, to $824, and
proportionate EBITDA increased 52 percent, to $226,
D-20
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELECTED PROPORTIONATE FINANCIAL DATA (CONTINUED)
excluding the effect of the paging business, which was sold in 1994.
Proportionate cellular service revenue increased 39 percent, to $736 in 1995.
This increase is due to a 64 percent increase in proportionate subscribers
partially offset by a decrease in average revenue per subscriber.
During 1995, international wireless communications proportionate revenue
increased $109, to $295, and proportionate EBITDA increased $28, to ($40).
Venture results for Indonesia and Russia have been included in the proportionate
results beginning with the fourth quarter of 1995. These ventures contributed
revenue of $9 and EBITDA of ($4), which reflect the start-up nature of the
operations.
DIRECTORY AND INFORMATION SERVICES Proportionate revenue for domestic
directory and information services increased 6 percent, to $1,065 in 1995, and
proportionate EBITDA increased 3 percent, to $426. The proportionate revenue
increase is due to price and volume increases. Revenue increases were partially
offset by reinvestments in the business, resulting in the 3 percent increase in
EBITDA.
Proportionate revenue for international directories businesses increased
$63, to $142 in 1995, and proportionate EBITDA increased $1, to $3. Results for
Listel, a Brazilian directories operation, have been included in the Media Group
proportionate results beginning with the fourth quarter 1995. Listel contributed
proportionate revenue of $18 and EBITDA of $2.
PROPORTIONATE DEBT
Proportionate debt increased $552 in 1995. The increase is primarily related
to the Media Group's international investments. Both TeleWest and One 2 One
raised cash through the issuance of debt in 1995, primarily to fund the
continued expansion of their businesses.
D-21
<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 2 to the Combined Financial Statements) as of December 31,
1995 and 1994, and the related Combined Statements of Operations and Cash Flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, 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, 1995 and 1994, and the combined results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As more fully discussed in Note 2, 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.
We have also audited the Supplementary Selected Proportionate Results of
Operations for the three years in the period ended December 31, 1995, presented
on page D-55. The Supplementary Selected Proportionate Results of Operations
have been prepared by management to present relevant financial information that
is not provided by the Consolidated Financial Statements and is not intended to
be a presentation in accordance with generally accepted accounting principles.
In our opinion, the Supplementary Selected 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 D-55.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996, except for note 5, paragraph 3,
as to which the date is February 27, 1996
D-22
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
DOLLARS IN MILLIONS (EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Sales and other revenues:
Directory and information services............................................. $ 1,180 $ 1,075 $ 956
Wireless communications........................................................ 941 781 561
Cable and telecommunications................................................... 215 18 --
Other.......................................................................... 38 34 32
--------- --------- ---------
Total sales and other revenues............................................... 2,374 1,908 1,549
Operating expenses:
Cost of sales and other revenues............................................... 772 612 457
Selling, general and administrative expenses................................... 886 763 607
Depreciation and amortization.................................................. 249 144 127
Restructuring charge........................................................... -- -- 120
--------- --------- ---------
Total operating expenses..................................................... 1,907 1,519 1,311
--------- --------- ---------
Income from operations........................................................... 467 389 238
Interest expense................................................................. 100 66 27
Equity losses in unconsolidated ventures......................................... 207 121 74
Gains on merger and partial sale of joint venture interest....................... 157 164 --
Gain on sale of paging assets.................................................... -- 68 --
Guaranteed minority interest expense............................................. 14 -- --
Other income -- net.............................................................. 5 46 9
--------- --------- ---------
Income from continuing operations before income taxes and extraordinary item..... 308 480 146
Provision for income taxes....................................................... 163 204 61
--------- --------- ---------
Income from continuing operations before extraordinary item...................... 145 276 85
Discontinued operations.......................................................... -- -- (82)
--------- --------- ---------
Income before extraordinary item................................................. 145 276 3
Extraordinary item -- early extinguishment of debt, net of tax................... (4) -- --
--------- --------- ---------
NET INCOME....................................................................... $ 141 $ 276 $ 3
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock..................................................... 3 -- --
--------- --------- ---------
EARNINGS AVAILABLE FOR COMMON STOCK.............................................. $ 138 $ 276 $ 3
--------- --------- ---------
--------- --------- ---------
Pro forma earnings per common share:
Income before extraordinary item............................................... $ 0.30 $ 0.61
Extraordinary item -- early extinguishment of debt, net of tax................. (.01) --
--------- ---------
PRO FORMA EARNINGS PER COMMON SHARE.............................................. $ 0.29 $ 0.61
--------- ---------
--------- ---------
PRO FORMA AVERAGE COMMON SHARES
OUTSTANDING (thousands)......................................................... 470,549 453,316
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial Statements
D-23
<PAGE>
U S WEST MEDIA GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 20 $ 93
Accounts and notes receivable, less allowance for
credit losses of $58 and $33, respectively............................................... 287 212
Deferred directory costs.................................................................. 247 234
Receivable from Communications Group...................................................... 106 109
Deferred tax asset........................................................................ 24 52
Other..................................................................................... 57 56
--------- ---------
Total current assets........................................................................ 741 756
--------- ---------
Property, plant and equipment -- net........................................................ 1,148 956
Investment in Time Warner Entertainment..................................................... 2,483 2,522
Intangible assets -- net.................................................................... 1,798 1,858
Investments in international ventures....................................................... 1,511 881
Net investment in assets held for sale...................................................... 429 302
Other assets................................................................................ 505 119
--------- ---------
Total assets................................................................................ $ 8,615 $ 7,394
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt........................................................................... $ 836 $ 1,229
Accounts payable.......................................................................... 235 170
Deferred revenue and customer deposits.................................................... 87 76
Other..................................................................................... 411 458
--------- ---------
Total current liabilities................................................................... 1,569 1,933
--------- ---------
Long-term debt.............................................................................. 1,265 585
Deferred income taxes....................................................................... 382 344
Deferred credits and other.................................................................. 276 278
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures....................................................... 600 --
Preferred stock subject to mandatory redemption............................................. 51 51
Media Group equity.......................................................................... 4,599 4,390
Company LESOP guarantee..................................................................... (127) (187)
--------- ---------
Total equity................................................................................ 4,472 4,203
--------- ---------
Total liabilities and equity................................................................ $ 8,615 $ 7,394
--------- ---------
--------- ---------
Contingencies (see Note 6 to the Combined Financial Statements)
</TABLE>
The accompanying notes are an integral part of the Combined Financial Statements
D-24
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................................................................ $ 141 $ 276 $ 3
Adjustments to net income:
Restructuring charge............................................................ -- -- 120
Depreciation and amortization................................................... 249 144 127
Equity losses in unconsolidated ventures........................................ 207 121 74
Gains on merger and partial sale of joint venture interest...................... (157) (164) --
Gain on sale of paging assets................................................... -- (68) --
Deferred income taxes and amortization of investment tax credits................ 102 147 (34)
Provision for uncollectibles.................................................... 55 36 27
Discontinued operations......................................................... -- -- 82
Changes in operating assets and liabilities:
Restructuring payments.......................................................... (19) (10) --
Accounts and notes receivable................................................... (103) (76) (39)
Deferred directory costs, prepaid and other..................................... (28) (52) (33)
Accounts payable and accrued liabilities........................................ 36 143 63
Other -- net...................................................................... 157 54 133
--------- --------- ---------
Cash provided by operating activities............................................. 640 551 523
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................... (363) (349) (193)
Investment in Time Warner Entertainment........................................... -- -- (1,557)
Investments in international ventures............................................. (681) (350) (230)
Investment in PCS licenses........................................................ (286) -- --
Investment in Atlanta Systems..................................................... -- (745) --
Proceeds from sale of paging assets............................................... -- 143 --
Other -- net...................................................................... 92 (121) (7)
--------- --------- ---------
Cash (used for) investing activities.............................................. (1,238) (1,422) (1,987)
--------- --------- ---------
FINANCING ACTIVITIES
Net (repayments of) proceeds from short-term debt................................. (449) 936 --
Repayments of long-term debt...................................................... (724) (316) (143)
Proceeds from issuance of long-term debt.......................................... 1,085 -- --
Proceeds from issuance of trust originated preferred securities -- net............ 581 -- --
Proceeds from issuance of common stock............................................ 57 323 794
Proceeds from issuance of preferred stock......................................... -- 50 --
Repayment of advance from Communications Group.................................... -- -- 153
Other -- net...................................................................... (25) -- --
--------- --------- ---------
Cash provided by financing activities............................................. 525 993 804
--------- --------- ---------
Cash (used for) provided by continuing operations................................. (73) 122 (660)
Cash (to) from discontinued operations............................................ -- (101) 610
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................... (73) 21 (50)
Beginning balance................................................................. 93 72 122
--------- --------- ---------
Ending balance.................................................................... $ 20 $ 93 $ 72
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial Statements
D-25
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN MILLIONS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado") voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors of U S WEST, Inc.
(the "Board") to reincorporate in Delaware and create two classes of common
stock that are intended to reflect separately the performance of the
communications and multimedia businesses. Under the Recapitalization Plan,
shareholders approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware corporation ("U S WEST" or "Company"), pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger, the Certificate of Incorporation of U S WEST has been amended and
restated to designate two classes of common stock of U S WEST, one class of
which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado was converted into one share each of
Communications Stock and Media Stock.
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (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"), 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 Communications Group primarily provides regulated
communications services to more than 25 million residential and business
customers within a 14 state region.
The Media Group is comprised of U S WEST Marketing Resources Group, Inc.,
which publishes White and Yellow Pages telephone directories, and provides
directory and information services, U S WEST NewVector Group, Inc., which
provides communications and information products and services over wireless
networks, 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.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The Combined Financial Statements of the Groups
comprise all of the accounts included in the corresponding Consolidated
Financial Statements of U S WEST. Investments in less than majority-owned
ventures are generally accounted for using the equity method. The separate 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 intra-group
amounts and transactions eliminated; (ii) in the case of the Communications
Group Combined Financial Statements, certain corporate assets and liabilities of
U S WEST and related transactions identified with the Communications Group;
(iii) in the case of the Media Group 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 Group, holders of Communications Stock and Media Stock are
subject to risks associated with an investment in a single company and all of U
S WEST's businesses, assets and liabilities. Such allocation of assets and
liabilities and change in the equity structure of U S WEST does
D-26
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not result in a distribution or spin-off to shareholders of any assets or
liabilities of U S WEST or any of its subsidiaries or otherwise affect
responsibility for the liabilities of U S WEST or such subsidiaries. As a
result, the rights of the holders of U S WEST's or any of its subsidiaries' debt
are not affected. Financial effects arising from either Group that affect U S
WEST's results of operations or financial condition could, if significant,
affect the results of operations or financial position of the other Group or the
market price of the class of common stock relating to the other Group. Any net
losses of the Communications Group or the Media Group, and dividends or
distributions on, or repurchases of Communications Stock, Media Stock or
preferred stock, will reduce the funds of U S WEST legally available for payment
of dividends on both the Communications Stock and Media Stock. Accordingly, the
Media Group Combined Financial Statements should be read in conjunction with U S
WEST's Consolidated Financial Statements and the Communications Group Combined
Financial Statements.
The accounting policies described herein applicable to the preparation of
the Combined Financial Statements of the Media Group may be modified or
rescinded at 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 on the circumstances. Any determination
of the Board to modify or rescind such policies, or to add additional policies,
including any 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 U S
WEST 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.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
ALLOCATION OF SHARED SERVICES Certain costs relating to U S WEST's general
and administrative services (including certain executive management, legal,
accounting and auditing, tax, treasury, strategic planning and public policy
services) are directly assigned by U S WEST to each Group, and segment within
the 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. Beginning in 1996, certain shared services will no longer
be allocated to each segment of the Media Group but will be retained at Media
Group headquarters. U S WEST charges each Group for such services at fully
distributed cost. These direct and indirect allocations were $55, $38 and $43 in
1995, 1994 and 1993, respectively. In 1995, the direct allocations comprised
approximately 40 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, U S WEST believes that under the Recapitalization Plan each
Group would benefit from synergy's with the other, including lower operating
costs than might be incurred if each Group was a separate legal entity.
ALLOCATION OF INCOME TAXES Federal, state and local income taxes, which are
determined on a consolidated or combined basis, are allocated to each Group in
accordance with tax sharing agreements between U S WEST and the entities within
the Groups. The allocations will generally reflect each Group's contribution
(positive or negative) to consolidated taxable income and consolidated tax
credits. A Group will be compensated only at such time as, and to the extent
that, its tax attributes are utilized by U S WEST in a combined or consolidated
income tax filing. Federal and state tax refunds and carryforwards or carrybacks
of tax attributes will generally be allocated to the Group to which such tax
attributes relate.
D-27
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Media Group includes members which operate in states where U S WEST does
not file consolidated or combined state income tax returns. Separate state
income tax returns are filed by these 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 Statement of Financial
Accounting Standard ("SFAS") No. 109.
GROUP FINANCING Financing activities for the Media Group and the
nonregulated Communications Group businesses, including the issuance, repayment
and repurchase of short-term and long-term debt, and the issuance and repurchase
of preferred securities, are managed by U S WEST on a centralized basis.
Financing activities for U S WEST Communications are separately identified and
accounted for in U S WEST's records and U S WEST Communications conducts its own
borrowing activities. Debt incurred and investments made by U S WEST and its
subsidiaries on behalf of the Media Group are specifically allocated to and
reflected on the financial statements of the Media Group. Debt incurred and
investments made by U S WEST and its subsidiaries on behalf of the nonregulated
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 U S WEST
or a subsidiary on behalf of a Group is charged to such Group at the borrowing
rate of U S WEST or such subsidiary.
As of November 1, 1995, the effective date of the Recapitalization Plan, U S
WEST does not intend to transfer funds between the Groups, except for certain
short-term, ordinary course advances of funds at market rates associated with U
S WEST's centralized cash management. Such short-term transfers of funds 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.
DIVIDENDS Under the Recapitalization Plan, U S WEST 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.
EARNINGS PER COMMON SHARE Earnings per common share for 1995 and 1994 have
been presented on a pro forma basis to reflect the Media Group's Stock as if it
had been outstanding since January 1, 1994. For periods prior to the
recapitalization, the average common shares outstanding are assumed to be equal
to the average common shares outstanding for U S WEST.
INDUSTRY SEGMENTS 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 directory and information services,
wireless communications, cable and telecommunications and the capital assets
segment, which is held for sale.
D-28
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
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 costs are expensed as incurred.
Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. Amounts capitalized by the Media Group were $33, $8 and $5
in 1995, 1994 and 1993, respectively.
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 included in income.
INTANGIBLE ASSETS Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets. The costs of
identified intangible assets and goodwill are amortized by the straight-line
method over periods ranging from five to forty years. These assets are
evaluated, with other related assets, for impairment using a discounted cash
flow methodology.
FOREIGN CURRENCY TRANSLATION Assets and liabilities of international
investments are translated at year-end exchange rates, and income statement
items are translated at average exchanges rates for the year. Resulting
translation adjustments are recorded as a separate component of equity. Gains
and losses resulting from foreign currency transactions are included in income.
FINANCIAL INSTRUMENTS Net interest received or paid on interest rate swaps
is recognized over the life of the swaps as an adjustment to interest expense.
Foreign exchange contracts designated as hedges of firm equity investment
commitments are carried at market value, with gains and losses recorded in
equity until sale of the investment. Forward contracts designated as hedges of
foreign denominated loans are recorded at market value, with gains and losses
recorded in income.
INVESTMENTS IN DEBT SECURITIES Debt securities are classified as available
for sale and are carried at fair market value with unrealized gains and losses
included in equity.
REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS 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 of selling,
composition, printing and distribution are generally deferred and recognized
over the period during which directories are used, normally 12 months. For
international operations, directory advertising revenues and related directory
costs are deferred and recognized upon publication.
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
D-29
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 U S WEST's earlier adoption of SFAS No. 96.
NEW ACCOUNTING STANDARDS In 1996, U S WEST will adopt SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." SFAS No. 121 requires that long-lived assets and associated
intangibles be written down to fair value whenever an impairment review
indicates that the carrying value cannot be recovered on an undiscounted cash
flow basis. SFAS No. 121 also requires that a company no longer record
depreciation expense on assets held for sale. U S WEST expects that the adoption
of SFAS No. 121 will not have a material effect on its financial position or
results of operations.
In 1996, U S WEST will adopt SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. U S
WEST will adopt this standard through compliance with the disclosure
requirements set forth in SFAS No. 123. Adoption of the standard will have no
impact on the financial position or results of operations of U S WEST.
NOTE 3: RELATED PARTY TRANSACTIONS
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
market price. The charges for these services were $20, $29 and $26 in 1995, 1994
and 1993, respectively.
TELECOMMUNICATIONS SERVICES The domestic wireless operations purchase
telecommunications network access and usage from the Communications Group. The
charges for these services were $40, $30 and $24 in 1995, 1994 and 1993,
respectively.
NOTE 4: INDUSTRY SEGMENTS
Industry segment data is presented for the combined operations of the Media
Group. U S WEST's equity method investments and the capital assets segment,
which is held for sale, are included in "Corporate and other." Supplemental
Media Group information on a proportionate basis is presented in Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The directory and information 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 services over wireless
networks in 13 western and midwestern states. The cable and telecommunications
segment was created with the December 6, 1994 acquisition of cable television
systems in the Atlanta metropolitan area. (See Note 5 to the Media Group
Combined Financial Statements.)
D-30
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
Industry segment financial information follows:
<TABLE>
<CAPTION>
DIRECTORY AND CORPORATE
INFORMATION WIRELESS CABLE AND AND
SERVICES(1) COMMUNICATIONS TELECOMMUNICATIONS(2) OTHER(3) COMBINED
------------- --------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1995
Sales and other revenues............. $ 1,180 $ 941 $ 215 $ 38 $ 2,374
Operating income (loss).............. 398 147 23 (101) 467
Identifiable assets.................. 583 1,439 1,466 5,127 8,615
Depreciation and amortization........ 36 121 77 15 249
Capital expenditures................. 37 277 64 23 401
1994
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............. 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
</TABLE>
- ------------------------------
(1)
Includes revenue from directory publishing activities in Europe of $122, $78
and $7, operating losses of $(1), $(1) and $(3), and identifiable assets of
$133, $124 and $4 for 1995, 1994 and 1993, respectively.
(2)
Results of operations have been included since the date of acquisition of the
Atlanta Systems
(3)
Includes U S WEST's equity method investments and the capital assets segment,
which has been discontinued and is held for sale.
(4)
Includes pretax restructuring charges of $50 and $70 for the directory and
information services and wireless communications segments, respectively.
Operating income represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other income and income taxes. Identifiable assets are those assets
used in each segment's operations. Corporate and other assets consist primarily
of cash, debt securities, investments in international ventures, the investment
in Time Warner Entertainment, the net investment in assets held for sale and
other assets. Corporate and other operating losses include general corporate
expenses and administrative costs primarily associated with the Media Group
equity investments.
To ensure consistency and quality of service, the wireless segment uses
Motorola as its primary vendor for infrastructure equipment and cellular mobile
telephone equipment and accessories. In addition, Motorola provides ongoing
technological support for the infrastructure equipment. The infrastructure of
approximately 75 percent of the Media Group's major cellular markets is
comprised of Motorola equipment.
During 1994, U S WEST 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. During Phase I, which U S WEST entered effective November
1, 1995, the two companies are operating their cellular properties separately. A
Wireless Management Company (the "WMC") has been formed and is providing
centralized services to both companies on a contract basis. In Phase II,
AirTouch
D-31
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
and U S WEST will contribute their domestic cellular assets to the WMC. In this
phase, the Media Group will reflect its share of the combined operating results
of the WMC using the equity method of accounting. The recent passage of the
Telecommunications Act of 1996 has removed significant regulatory barriers to
completion of Phase II of the business combination. U S WEST expects that Phase
II closing could take place by the end of 1996 or early 1997.
NOTE 5: ACQUISITION OF CABLE SYSTEMS
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 combined results of operations of the Media Group since the date
of acquisition. Had the acquisition occurred as of January 1, 1994, the Media
Group revenue and net income for 1994 would have been $2,098 and $265,
respectively.
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.
CONTINENTAL CABLEVISION, INC. (SUBSEQUENT EVENT) On February 27, 1996, U S
WEST announced a definitive agreement to merge with Continental Cablevision,
Inc. ("Continental"). Continental, the nation's third-largest cable operator,
serves 4.2 million domestic customers, passes more than seven million domestic
homes and holds significant other domestic and international properties. U S
WEST will purchase all of Continental's stock for approximately $5.3 billion and
will assume Continental's debt and other obligations, which amount to
approximately $5.5 billion. Consideration for the $5.3 billion in equity will
consist of approximately $1 billion in U S WEST preferred stock, convertible to
Media Stock; and, at U S WEST's option, between $1 billion and $1.5 billion in
cash, and $2.8 billion to $3.3 billion in shares of Media Stock. The
transaction, which is expected to close in the fourth quarter of 1996, is
subject to a number of conditions and approvals, including approvals from
Continental shareholders and local franchising and government authorities.
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment") for an
aggregate purchase price of $2.553 billion. TWE owns and operates substantially
all of the entertainment assets previously owned by Time Warner Inc. ("Time
Warner"), consisting primarily of its filmed entertainment, programming-HBO and
cable businesses.
Upon U S WEST's admission to the partnership, certain wholly-owned
subsidiaries of Time Warner ("General Partners") and subsidiaries of Toshiba
Corporation and ITOCHU Corporation held pro-rata priority capital and residual
equity interests of 63.27, 5.61 and 5.61 percent, respectively. In 1995, Time
Warner acquired the limited partnership interests previously held by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation.
U S WEST has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or part, between January 1, 1999, and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or U S WEST may elect that the exercise price for
the option be paid with partnership interests rather than cash.
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the General Partners); pro-rata priority capital (A
D-32
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
preferred - held pro-rata by the general and limited partners); junior priority
capital (B preferred - held by the General Partners); and common (residual
equity interests held pro-rata by the general and limited partners). Of the
$2.553 billion contributed by U S WEST, $1.658 billion represents A preferred
capital and $895 represents common capital. The TWE Partnership Agreement
provides for special allocations of income and distributions of partnership
capital. Partnership income, to the extent earned, is allocated as follows: (1)
to the partners so that the economic burden of the income tax consequences of
partnership operations is borne as though the partnership was taxed as a
corporation ("special tax allocations"); (2) to the partners' preferred capital
accounts in order of priority described above, at various rates of return
ranging from 8 percent to 13.25 percent; and (3) to the partners' 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 are allocated in reverse
order, first to eliminate prior allocations of partnership income, except senior
preferred and special tax income, next to reduce initial capital amounts, other
than senior preferred, then to reduce the senior preferred account and finally,
to eliminate special tax allocations.
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
TIME LIMITED PARTNERS
WARNER --------------------
CONTRIBUTED GENERAL TIME
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) PARTNERS WARNER U S WEST
- ----------------------------------------- ----------- ---------- --------- ---------
PRIORITY
CAPITAL RATES
OF RETURN(B)
-------------
(% PER ANNUM
COMPOUNDED
QUARTERLY) (OWNERSHIP %)
<S> <C> <C> <C> <C> <C>
Senior preferred......................... $ 1,400(c) 8.00% 100.00% -- --
Pro-rata priority capital................ 5,600 13.00%(d) 63.27% 11.22% 25.51%
Junior priority capital.................. 2,900(e) 13.25%(f) 100.00% -- --
Residual equity capital.................. 3,300 -- 63.27% 11.22% 25.51%
</TABLE>
- ------------------------------
(a)
Estimated fair value of net assets contributed excluding partnership income or
loss allocated thereto.
(b)
Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c)
The senior preferred is scheduled to be distributed in three annual
installments beginning July 1, 1997.
(d)
11.00 percent to the extent concurrently distributed.
(e)
Includes $300 for the September 1995 reacquisition of assets previously
excluded from the partnership (the Time Warner service partnership assets) for
regulatory reasons.
(f)
11.25 percent to the extent concurrently distributed.
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions were previously subject to
restrictions until July 1995, and are now paid to the partners on a current
basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the General Partners receive
their full share of distributions. No cash distributions have been made to U S
WEST.
D-33
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
U S WEST accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by U S WEST's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
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 before extraordinary item
was $(31), $(18) and $(20) in 1995, 1994 and 1993, respectively. In addition,
TWE recorded an extraordinary loss for the early extinguishment of debt in 1995.
The Media Group's share of this extraordinary loss was $4, net of an income tax
benefit of $2.
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, $26
and $8 were recorded to other income in 1995, 1994 and 1993, respectively. The
Media Group Combined Balance Sheet includes a note payable to TWE of $169 and
$771 and management fee receivables of $50 and $34 at December 31, 1995 and
1994, respectively.
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1995 1994 1993
- --------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................. $ 9,517 $ 8,460 $ 7,946
Operating expenses (1)............................................... 8,557 7,612 7,063
Interest and other expense, net (2).................................. 777 647 611
--------- --------- ---------
Income before income taxes and extraordinary item.................... $ 183 $ 201 $ 272
Income before extraordinary item..................................... 97 161 208
--------- --------- ---------
Net income........................................................... $ 73 $ 161 $ 198
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1)
Includes depreciation and amortization of $1,039, $943 and $902 in 1995, 1994
and 1993, respectively.
(2)
Includes corporate services of $64, $60 and $60 in 1995, 1994 and 1993,
respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
SUMMARIZED FINANCIAL POSITION 1995 1994
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets (3)............................................................... $ 2,909 $ 3,573
Noncurrent assets (4)............................................................ 15,996 15,089
Current liabilities.............................................................. 3,214 2,857
Noncurrent liabilities, including minority interest.............................. 7,787 7,909
Senior preferred capital......................................................... 1,426 1,663
Partners' capital (5,6).......................................................... 6,478 6,233
</TABLE>
- ------------------------------
(3)
Includes cash of $209 and $1,071 at December 31, 1995 and 1994, respectively.
(4)
Includes a loan receivable from Time Warner of $400 at December 31, 1995 and
1994.
(5)
Net of a note receivable from U S WEST of $169 and $771 at December 31, 1995
and 1994, respectively.
(6)
Contributed capital is based on the estimated fair value of the net assets
that each partner contributed to the partnership. The aggregate of such
amounts is significantly higher than TWE's partner's capital as reflected in
the Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
D-34
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
In early 1995, Time Warner announced its intention to simplify its corporate
structure by establishing an enterprise that will be responsible for the overall
management and financing of the cable and telecommunications properties. Any
change in the structure of TWE would require U S WEST's approval in addition to
certain creditors' and regulatory approvals.
CONTINGENCIES
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court
to enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against U
S WEST on October 11, 1995, alleging misrepresentation, breach of contract and
other misconduct on the part of U S WEST. Time Warner's countersuit seeks a
reformation of the Time Warner Entertainment partnership agreement, an order
that enjoins U S WEST from breaching the partnership agreement, and unspecified
compensatory damages. U S WEST has denied each of the claims in Time Warner's
countersuit. The trial for this action concluded on March 22, 1996. A ruling by
the Delaware Chancery Court is expected in June 1996.
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES
The significant investments in international ventures follows:
<TABLE>
<CAPTION>
NET INVESTMENT AT
DECEMBER 31,
LINE OF OWNERSHIP --------------------
VENTURE LOCATION BUSINESS PERCENTAGE 1995 1994
- --------------------------- --------------------------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
TeleWest................... United Kingdom C&T 26.8 $ 540 $ 456
Binariang Sdn Bhd.......... Malaysia C&T 20 224 50
A2000 (KTA)................ Netherlands C&T 50 218 --
One 2 One.................. United Kingdom W 50 73 123
All other.................. 456 252
--------- ---------
Total.................. $ 1,511 $ 881
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(C&T)
Cable and Telecommunications
(W)Wireless
The following table shows summarized combined financial information for the
Media Group's significant equity method investments in international ventures:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMBINED OPERATIONS 1995 1994 1993
- ----------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue................................................................ $ 1,163 $ 580 $ 296
Operating expenses..................................................... 1,264 684 354
Depreciation and amortization.......................................... 272 140 60
--------- --------- ---------
Operating loss....................................................... (373) (244) (118)
Interest and other, net................................................ (141) (75) (40)
--------- --------- ---------
Loss before extraordinary item....................................... (514) (319) (158)
Extraordinary gain -- interest rate swaps.............................. -- 11 --
--------- --------- ---------
Net loss............................................................. $ (514) $ (308) $ (158)
--------- --------- ---------
--------- --------- ---------
</TABLE>
D-35
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
COMBINED FINANCIAL POSITION 1995 1994
- ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets.................................................................... $ 1,469 $ 714
Property, plant and equipment -- net.............................................. 3,545 1,462
Other assets...................................................................... 1,644 343
--------- ---------
Total assets...................................................................... $ 6,658 $ 2,519
--------- ---------
--------- ---------
Current liabilities............................................................... $ 1,260 $ 344
Long-term debt.................................................................... 2,065 463
Other liabilities................................................................. 58 71
Owners' equity.................................................................... 3,275 1,641
--------- ---------
Total liabilities and equity...................................................... $ 6,658 $ 2,519
--------- ---------
--------- ---------
</TABLE>
In November 1994, TeleWest plc ("TeleWest") made an initial public offering
of its ordinary shares. Following the offering, in which U S WEST sold part of
its 50 percent joint venture interest, U S WEST owned approximately 37.8 percent
of TeleWest. Net proceeds of approximately $650 were used by TeleWest to finance
construction and operating costs, invest in affiliated companies and repay debt.
It is U S WEST'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.
On October 2, 1995, TeleWest and SBC CableComms (UK) completed a merger of
their UK cable television and telecommunications interests, creating the largest
provider of combined cable and telecommunications services in the United
Kingdom. Following completion of the merger, U S WEST and Tele-Communications,
Inc., the major shareholders, each own 26.8 percent of the combined company. The
Media Group recognized a gain of $95 in 1995, net of $62 in deferred income
taxes, in conjunction with the merger.
TeleWest, which is the only equity method investment for which a quoted
market price is available, had a market value of $914 at December 31, 1995, and
$1,004 at December 31, 1994.
FOREIGN CURRENCY TRANSACTIONS U S WEST enters into forward and zero-cost
combination option contracts to manage foreign currency risk. Under a forward
contract, U S WEST agrees with another party to exchange a foreign currency and
U.S. dollars at a specified price at a future date. Under combination options, U
S WEST combines purchased options to cap the foreign exchange rate to be paid at
a future date with written options to finance the premium of the purchased
options. The commitments, forward contracts and combination options are for
periods up to one year.
Forward exchange contracts are carried at market value. Gains or losses on
the portion of the contracts designated as hedges of firm equity investment
commitments are deferred as a component of Media Group equity and are recognized
in income upon sale of the investment. Gains or losses on the portion of the
contracts designated to offset translation of investee net income are recorded
in income.
Forward contracts are also used to hedge foreign denominated loans. These
contracts are carried at market value with gains or losses recorded in income.
D-36
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: INVESTMENTS IN INTERNATIONAL VENTURES (CONTINUED)
Foreign exchange contracts outstanding follow:
<TABLE>
<CAPTION>
$U.S. EQUIVALENT
DECEMBER 31,
--------------------
TYPE 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Forwards:
Dutch Guilders........................................................................... Buy $ 225 $ --
British pounds........................................................................... Buy 130 135
British pounds........................................................................... Sell 37 --
Japanese yen............................................................................. Buy 25 --
French francs............................................................................ Buy 19 --
Combination options:
British pounds........................................................................... -- $ -- $ 35
French francs............................................................................ -- 20 --
</TABLE>
Cumulative deferred gains on foreign exchange contracts of $9 and deferred
losses of $25, including deferred taxes (benefits) of $4 and ($10),
respectively, are included in Media Group equity at December 31, 1995.
Cumulative deferred gains on foreign exchange contracts of $7 and deferred
losses of $25, including deferred taxes (benefits) of $3 and ($10),
respectively, are included in Media Group equity at December 31, 1994.
The counterparties to these contracts are major financial institutions. U S
WEST is exposed to credit loss in the event of nonperformance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
NOTE 8: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Land and buildings............................................................................. $ 168 $ 151
Cellular systems............................................................................... 733 585
Cable distribution systems..................................................................... 167 148
General purpose computers and other............................................................ 471 412
Construction in progress....................................................................... 167 140
--------- ---------
1,706 1,436
Less accumulated depreciation.................................................................. 558 480
--------- ---------
Property, plant and equipment -- net........................................................... $ 1,148 $ 956
--------- ---------
--------- ---------
</TABLE>
The Media Group depreciates buildings between 15 to 35 years, cellular and
cable distribution systems between 5 to 15 years, and general purpose computer
and other between 3 to 20 years.
Depreciation expense was $173, $121, and $113 in 1995, 1994 and 1993,
respectively.
D-37
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value.............................................. $ 1,183 $ 1,166
Goodwill....................................................................................... 743 762
--------- ---------
1,926 1,928
Less accumulated amortization.................................................................. 128 70
--------- ---------
Total intangible assets -- net................................................................. $ 1,798 $ 1,858
--------- ---------
--------- ---------
</TABLE>
Amortization expense was $76, $23 and $14 in 1995, 1994 and 1993,
respectively.
NOTE 10: RESTRUCTURING CHARGE
The Media Group's 1993 results reflected a $120 restructuring charge
(pretax) of which $50 related to the directory and information services segment
and $70 related to the wireless segment. The restructuring charge includes only
specific, incremental and direct costs which can be estimated with reasonable
accuracy and are clearly identifiable with the restructuring plan.
Following is a schedule of the costs included in the 1993 restructuring
charge and amounts remaining at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
BALANCE AT DECEMBER
31,
RESTRUCTURING --------------------
CHARGE 1995 1994
--------------- --------- ---------
<S> <C> <C> <C>
Asset write-down and other....................................................... $ 70 $ -- $ --
System development............................................................... 40 15 30
Employee separation costs and other.............................................. 10 6 10
----- --------- ---------
Total........................................................................ $ 120 $ 21 $ 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.
System development costs includes 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 Media
Group expects the restructuring to be substantially completed by the end of
1996. 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.
D-38
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper.............................................................................. $ 203 $ 868
Bank loan..................................................................................... 216 --
Current portion of long-term debt............................................................... 568 561
Allocated to the capital assets segment -- net.................................................. (151) (200)
--------- ---------
Total........................................................................................... $ 836 $ 1,229
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.79 percent and
6.04 at December 31, 1995 and 1994, respectively.
The bank loan, in the translated principal amount of $216, is denominated in
Dutch guilders. The loan was entered into in connection with U S WEST's
investment in a cable television venture in the Netherlands and was repaid in
February 1996.
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. Additional lines of credit aggregating approximately $1.3 billion are
available to the Media Group as well as the nonregulated subsidiaries of the
Communications Group in accordance with their borrowing needs. The Media Group
expects that cash from operations will not be adequate to fund expected cash
requirements. Additional financing will come primarily from new debt.
LONG-TERM DEBT
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1997 1998 1999 2000 THEREAFTER 1995 1994
- -------------------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%.......................................... $ -- $ -- $ -- $ -- $ -- $ -- $ 271
Above 5% to 6%.................................... -- 130 -- -- -- 130 13
Above 6% to 7%.................................... -- -- 55 106 857 1,018 --
Above 7% to 8%.................................... -- -- -- -- 737 737 1,057
Above 8% to 9%.................................... -- -- 107 -- 40 147 194
Above 9% to 10%................................... 29 -- 15 25 10 79 79
Above 10%......................................... 1 1 -- -- -- 2 --
--------- --------- --------- --------- ----------- --------- ---------
$ 30 $ 131 $ 177 $ 131 $ 1,644 2,113 1,614
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other............... 2 5
Unamortized discount -- net....................... (494) (524)
Allocated to the capital assets segment -- net.... (356) (510)
--------- ---------
Total............................................. $ 1,265 $ 585
--------- ---------
--------- ---------
</TABLE>
Long-term debt consists principally of debentures, medium-term notes, debt
associated with U S WEST's Leveraged Employee Stock Ownership Plans ("LESOP"),
and zero coupon subordinated notes convertible at any time into equal shares of
Communications Stock and Media Stock. The zero coupon notes have a yield to
maturity of approximately 7.3 percent and are recorded at a discounted value of
$245 and $234 at December 31, 1995 and 1994, respectively.
D-39
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: DEBT (CONTINUED)
In 1995, U S WEST issued $130 of Debt Exchangeable for Common Stock
("DECS"), due December 15, 1998 in the principal amount of $24.00 per note. The
notes bear interest at 7.625 percent, of which 1.775 percent has been included
in the assets held for sale reserve. Upon maturity, each DECS will be
mandatorily redeemed by U S WEST for shares of Enhance Financial Services Group,
Inc. ("Enhance") held by U S WEST or the cash equivalent at U S WEST's option.
The number of shares to be delivered at maturity varies based on the per share
market price of Enhance. If the market price is $24.00 per share or less, one
share of Enhance will be delivered for each note; if the market price is between
$24.00 and $28.32 per share, a fractional share equal to $24.00 is delivered; if
the market value is greater than $28.32 per share, .8475 shares are delivered.
The capital assets segment currently owns approximately 31.5 percent of the
outstanding Enhance common stock.
At December 31, 1995, U S WEST guaranteed debt in the principal amount of
approximately $140, primarily related to international ventures.
Interest payments, net of amounts capitalized, were $140, $167 and $272 for
1995, 1994 and 1993, respectively, of which $87, $134 and $272, respectively,
relate to the capital assets segment.
INTEREST RATE RISK MANAGEMENT
Interest rate swap agreements are used to effectively convert existing
commercial paper to fixed-rate debt. This allows U S WEST to achieve interest
savings over issuing fixed-rate debt directly.
Under an interest rate swap, U S WEST agrees with another party to exchange
interest payments at specified intervals over a defined term. Interest payments
are calculated by reference to the notional amount based on the fixed- and
variable-rate terms of the swap agreements. The net interest received or paid as
part of the interest rate swap is accounted for as an adjustment to interest
expense.
The following table summarizes terms of swaps. Variable rates are indexed to
the 30-day commercial paper rate.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1995 1994
-------------------------------------------------- --------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
RATE RATE
NOTIONAL ------------------------ NOTIONAL ------------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed....... $ 55 1997-2004 5.85 9.30 $ 75 1995-2004 6.06 9.17
Fixed to variable....... -- -- -- -- 5 1995 6.61 5.87
</TABLE>
The counterparties to these interest rate contracts are major financial
institutions. The Media Group is exposed to credit loss in the event of
nonperformance by these counterparties. U S WEST manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations which correspond to the respective credit rating of each
counterparty. U S WEST does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
NOTE 12: 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 and long-term
receivables, based on discounting future cash flows, approximate the carrying
values. The fair value of foreign exchange contracts, based on estimated amounts
U S WEST would receive or pay to terminate such agreements, approximate the
carrying values. It is not practicable to estimate the fair value of financial
guarantees associated with international operations because there are no quoted
market prices for similar transactions.
D-40
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of interest rate swaps, including swaps associated with the
capital assets segment, are based on estimated amounts U S WEST would receive or
pay to terminate such agreements taking into account current interest rates and
creditworthiness of the counterparties.
The fair values of long-term debt, including debt associated with the
capital assets segment, preferred securities and preferred stock, are based on
quoted market prices where available or, if not available, are based on
discounting future cash flows using current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................................... $ 2,897 $ 3,000 $ 3,097 $ 3,100
Interest rate swap agreements -- assets.................................. -- (13) -- --
Interest rate swap agreements -- liabilities............................. -- 34 -- 20
----------- --------- ----------- ---------
Debt -- net.............................................................. $ 2,897 $ 3,021 $ 3,097 $ 3,120
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Preferred Securities..................................................... $ 600 $ 636 $ -- $ --
Preferred stock.......................................................... 51 55 51 51
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Investments in debt securities are classified as available for sale and are
carried at market value. These securities have various maturity dates through
the year 2001. The market value of these securities is based on quoted market
prices where available or, if not available, is based on discounting future cash
flows using current interest rates.
The amortized cost and estimated market value of debt securities follow:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
1995 1994
------------------------------------------------------ --------------------------
GROSS GROSS GROSS
DEBT UNREALIZED UNREALIZED FAIR UNREALIZED
SECURITIES COST GAINS LOSSES VALUE COST GAINS
- ----------------------------------- --- ------------- ------------- ----- --- -------------
<S> <C> <C> <C> <C> <C> <C>
Corporate debt..................... $ 20 $ -- $ -- $ 20 $ 19 $ --
Securitized loan................... 55 -- (5) 50 -- --
--- ----- --- --- --- -----
Total.............................. $ 75 $ -- $ (5) $ 70 $ 19 $ --
--- ----- --- --- --- -----
--- ----- --- --- --- -----
<CAPTION>
GROSS
DEBT UNREALIZED FAIR
SECURITIES LOSSES VALUE
- ----------------------------------- ------------- -----
<S> <C> <C>
Corporate debt..................... $ -- $ 19
Securitized loan................... -- --
----- ---
Total.............................. $ -- $ 19
----- ---
----- ---
</TABLE>
The 1995 net unrealized losses of $3 (net of a deferred tax benefit of $2)
are included in Media Group equity.
NOTE 13: LEASING ARRANGEMENTS
U S WEST has entered into operating leases for office facilities, equipment
and real estate. Rent expense under operating leases was $60, $63 and $57 in
1995, 1994 and 1993, respectively. Minimum future lease payments as of December
31, 1995, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ----------------------------------------------------------------------------
<S> <C>
1996........................................................................ $ 55
1997........................................................................ 49
1998........................................................................ 43
1999........................................................................ 33
2000........................................................................ 24
Thereafter.................................................................. 83
---------
Total....................................................................... $ 287
---------
---------
</TABLE>
D-41
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
On September 11, 1995, U S WEST Financing I, a wholly owned subsidiary of U
S WEST ("Financing I"), issued $600 million of 7.96 percent Trust Originated
Preferred Securities (the "Preferred Securities") and $19 of common securities.
U S WEST holds all of the outstanding common securities of Financing I.
Financing I used the proceeds from such issuance to purchase from U S WEST
Capital Funding, Inc., a wholly owned subsidiary of U S WEST ("Capital
Funding"), $619 principal amount of Capital Funding's 7.96 percent Subordinated
Deferrable Interest Notes due 2025 (the "Subordinated Debt Securities"), the
obligations under which are fully and unconditionally guaranteed by U S WEST
(the "Debt Guarantee"). The sole assets of Financing I are and will be the
Subordinated Debt Securities and the Debt Guarantee.
In addition, U S WEST has guaranteed the payment of interest and redemption
amounts to holders of Preferred Securities when Financing I has funds available
for such payments (the "Payment Guarantee") as well as Capital Funding's
undertaking to pay all of Financing I's costs, expenses and other obligations
(the "Expense Undertaking"). The Payment Guarantee and the Expense Undertaking,
including U S WEST's guarantee with respect thereto, considered together with
Capital Funding's obligations under the indenture and Subordinated Debt
Securities and U S WEST's obligations under the indenture, declaration and Debt
Guarantee, constitute a full and unconditional guarantee by U S WEST of
Financing I's obligations under the Preferred Securities. The interest and other
payment dates on the Subordinated Debt Securities correspond to the distribution
and other payment dates on the Preferred Securities. Under certain
circumstances, the Subordinated Debt Securities may be distributed to the
holders of Preferred Securities and common securities in liquidation of
Financing I. The Subordinated Debt Securities are redeemable in whole or in part
by Capital Funding at any time on or after September 11, 2000, at a redemption
price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest.
If Capital Funding redeems the Subordinated Debt Securities, Financing I is
required to redeem the Preferred Securities concurrently at $25.00 per share
plus accrued and unpaid distributions. As of December 31, 1995, 24,000,000
Preferred Securities were outstanding.
NOTE 15: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On September 2, 1994, the Company issued to Fund American Enterprises
Holdings Inc. ("FFC") 50,000 shares of a class of 7 percent Series C 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
was recorded at fair market value of $51 at the issue date. 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, an investment held by the capital
assets segment. The market value of the option was $20 and $22 (based on the
Black-Scholes Model) at December 31, 1995 and 1994, with no carrying value.
D-42
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 16: MEDIA GROUP EQUITY
Following are the changes in Media Group equity:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period....................................................... $ 4,203 $ 3,139 $ 2,265
Net income........................................................................... 141 276 3
Equity issuances prior to recapitalization........................................... 37 790 786
Media stock issuances................................................................ 7 -- --
Market value adjustment for debt securities.......................................... 36 (64) 35
Foreign currency translation......................................................... (9) 6 (1)
Company LESOP guarantee.............................................................. 60 56 51
Preferred dividends.................................................................. (3) -- --
--------- --------- ---------
Balance at end of period............................................................. $ 4,472 $ 4,203 $ 3,139
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST has issued 392,000 shares of Media Stock since the November 1, 1995
recapitalization and has 472,314,000 shares outstanding at December 31, 1995.
Included in Media Group equity is the cumulative foreign currency
translation adjustment of $(38), $(29) and $(35) at December 31, 1995, 1994 and
1993, respectively, net of income tax benefits of $24, $18 and $9, respectively.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP")
The Media Group and the Communications Group participate in the defined
contribution savings plan sponsored by U S WEST. Employees of the Media Group
are covered by the plan except for Atlanta Systems and foreign national
employees. U S WEST matches a percentage of eligible employee contributions with
shares of Media Stock and/or Communications Stock in accordance with participant
elections. Participants may also elect to reallocate past company contributions
between Media Stock and Communications Stock. In 1989, U S WEST established two
LESOPs to provide Company stock for matching contributions to the savings plan.
Shares in the LESOP are released as principal and interest are paid on the debt.
At December 31, 1995, 10,145,485 shares each of Media Stock and Communications
Stock had been allocated from the LESOP to participants accounts while 2,839,435
shares each of Media Stock and Communications Stock remained unallocated.
The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are included in the accompanying Media Group Combined
Financial Statements. Contributions from the Communications Group and the Media
Group as well as dividends on unallocated shares held by the LESOP ($8, $11 and
$14 in 1995, 1994, and 1993, respectively) are used for debt service. Beginning
with the dividend paid in fourth-quarter 1995, dividends on allocated shares are
being paid annually to participants. Previously, dividends on allocated shares
were used for debt service with participants receiving additional shares from
the LESOP. Tax benefits related to dividend payments on eligible shares in the
savings plan have been allocated to the Communications Group, which paid the
dividends.
U S WEST recognizes expense based on the cash payments method. Contributions
to the plan related to the Media Group were $16, $12, and $7 in 1995, 1994 and
1993, respectively, of which $3, $3 and $4, respectively, have been classified
as interest expense.
NOTE 17: STOCK INCENTIVE PLANS
U S WEST maintains stock incentive plans for executives and key employees,
and nonemployees. The Amended 1994 Stock Plan (the "Plan") was approved by
shareowners on October 31, 1995 in connection with the Recapitalization Plan.
The Plan is a successor plan to the U S WEST, Inc. Stock Incentive Plan and the
U S WEST 1991 Stock Incentive Plan (the "Predecessor Plans"). No further grants
of options or
D-43
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: STOCK INCENTIVE PLANS (CONTINUED)
restricted stock may be made under the Predecessor Plans. The Plan is
administered by the Human Resources Committee of the board of directors with
respect to officers, executive officers and outside directors and by a special
committee with respect to all other eligible employees and eligible
nonemployees.
During calendar year 1995, up to 1,485,000 shares of Media Stock were
available for grant. The maximum aggregate number of shares of Media Stock that
may be granted in any other calendar year for all purposes under the Plan is
three-quarters of one percent (0.75 percent) of the shares of such class
outstanding (excluding shares 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 either class available for issuance in any calendar year are issued in
any such year, the shares not issued shall be added to the shares of such class
available for issuance in any subsequent year or years. Options may be exercised
no later than 10 years after the date on which the option was granted.
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
MEDIA GROUP U S WEST INC.
--------------------- ----------------------
AVERAGE AVERAGE
NUMBER OF OPTION NUMBER OF OPTION
SHARES PRICE SHARES* PRICE
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding January 1, 1993........................................ 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
----------- ---------
Granted.......................................................... 3,062,920 43.63
Exercised........................................................ (430,631) 34.03
Canceled or expired.............................................. (175,147) 39.76
----------- ---------
Outstanding October 31, 1995....................................... 9,843,179 $ 40.39
----------- ---------
Recapitalization Plan.............................................. 9,843,179 $ 16.28 (9,843,179) $ (40.39)
---------- ---------
Granted.......................................................... 71,580 18.51
Exercised........................................................ (191,243) 14.71
Canceled or expired.............................................. (15,350) 16.82
---------- --------- ----------- ---------
Outstanding December 31, 1995...................................... 9,708,166 $ 16.33 -- --
---------- --------- ----------- ---------
---------- --------- ----------- ---------
</TABLE>
- ------------------------------
*Includes options granted in tandem with SARs.
Options to purchase 3,021,166 shares of Media Stock were exercisable at
December 31, 1995. Options to purchase 2,374,394 shares of U S WEST stock were
exercisable at December 31, 1994. A total of 1,419,795 shares of Media Stock
were available for grant under the plans in effect at December 31, 1995. A total
of 914,816 shares of U S WEST common stock were available for grant under the
plans in effect at December 31, 1994. A total of 11,121,186 shares of Media
Stock were reserved for issuance under the Plan at December 31, 1995.
D-44
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: EMPLOYEE BENEFITS
PENSION PLAN
The Communications Group and the Media 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 Atlanta Systems and 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 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 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 1995, 1994 or 1993. 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.
The composition of the net pension cost and the actuarial assumptions of the
plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period......................... $ 173 $ 197 $ 148
Interest cost on projected benefit obligation............................. 558 561 514
Actual return on plan assets.............................................. (1,918) 188 (1,320)
Net amortization and deferral............................................. 1,185 (946) 578
--------- --------- ---------
Net pension cost............................................................ $ (2) $ 0 $ (80)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1995, 8.50 percent for 1994 and 9.00 percent
for 1993.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $5,839 and $5,044,
respectively............................................................................. $ 6,617 $ 5,616
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds..................................... $ 9,874 $ 8,388
Less: Projected benefit obligation........................................................ 8,450 7,149
--------- ---------
Plan assets in excess of projected benefit obligation..................................... 1,424 1,239
Unrecognized net (gain) loss.............................................................. (101) 161
Prior service cost not yet recognized in net periodic pension cost........................ (62) (67)
Balance of unrecognized net asset at January 1, 1987...................................... (705) (785)
--------- ---------
Prepaid pension cost...................................................................... $ 556 $ 548
--------- ---------
--------- ---------
</TABLE>
D-45
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Discount rate............................................................................... 7.00% 8.00%
Weighted average rate of compensation increase.............................................. 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 1) offset
the company-wide service cost, interest cost and amortizations by the return on
plan assets; and 2) allocate the remaining net pension cost to the Media Group
based on 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 on service cost is reasonable since service cost is a primary
factor in determining pension cost. Net pension costs allocated to the Media
Group were $0, $0 and $(9) in 1995, 1994 and 1993, respectively. The service and
interest costs for 1995 and the projected benefit obligation at December 31,
1995 attributed to the Media Group were $24, $29 and $429, 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. In conjunction with the Company's 1992 adoption of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
the Company elected to immediately recognize the accumulated postretirement
benefit obligation for current and future retirees.
U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net postretirement benefit costs and actuarial assumptions
underlying plan benefits follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1995 1994 1993
--------------------------------- --------------------------------- ----------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL MEDICAL LIFE
----------- --------- --------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service cost -- benefits earned
during the period.................. $ 59 $ 6 $ 65 $ 62 $ 13 $ 75 $ 60 $ 11
Interest on accumulated benefit
obligation......................... 235 32 267 221 39 260 235 36
Actual return on plan assets........ (319) (96) (415) 3 1 4 (73) (52)
Net amortization and deferral....... 228 58 286 (68) (31) (99) 27 22
----- --- --------- ----- --- --------- ----- ---
Net postretirement benefit costs.... $ 203 $ 0 $ 203 $ 218 $ 22 $ 240 $ 249 $ 17
----- --- --------- ----- --- --------- ----- ---
----- --- --------- ----- --- --------- ----- ---
<CAPTION>
TOTAL
---------
<S> <C>
Service cost -- benefits earned
during the period.................. $ 71
Interest on accumulated benefit
obligation......................... 271
Actual return on plan assets........ (125)
Net amortization and deferral....... 49
---------
Net postretirement benefit costs.... $ 266
---------
---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1995, 8.50 percent in 1994 and
9.00 percent in 1993.
D-46
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994
------------------------------- ---------------------------------
MEDICAL LIFE TOTAL MEDICAL LIFE TOTAL
--------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retirees............................................ $ 1,866 $ 271 $ 2,137 $ 1,733 $ 248 $ 1,981
Fully eligible plan participants.................... 293 34 327 264 38 302
Other active plan participants...................... 1,059 165 1,224 940 135 1,075
--------- --------- --------- ----------- --------- ---------
Total accumulated postretirement benefit obligation... 3,218 470 3,688 2,937 421 3,358
Unrecognized net gain................................. 378 161 539 243 90 333
Unamortized prior service cost........................ -- (34) (34) -- -- --
Fair value of plan assets, primarily stocks, bonds and
life insurance (1)................................... (1,385) (460) (1,845) (894) (374) (1,268)
--------- --------- --------- ----------- --------- ---------
Accrued postretirement benefit obligation............. $ 2,211 $ 137 $ 2,348 $ 2,286 $ 137 $ 2,423
--------- --------- --------- ----------- --------- ---------
--------- --------- --------- ----------- --------- ---------
</TABLE>
- ------------------------------
(1)
Medical plan assets include Communications Stock of $210 and Media Stock of
$112 in 1995 and U S WEST common stock of $164 in 1994.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Discount rate..................................................................... 7.00% 8.00%
Medical trend*.................................................................... 9.00% 9.70%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5 percent in
2011.
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1995 net postretirement benefit cost by approximately $40 and
increased the 1995 accumulated postretirement benefit obligation by
approximately $350.
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 the 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.
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.
D-47
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: EMPLOYEE BENEFITS (CONTINUED)
Net postretirement medical benefit costs recognized by the Media Group for
1995, 1994 and 1993 were $14, $11 and $11, respectively. The percentage of
postretirement medical assets attributed to the Media Group at December 31, 1995
and 1994, based upon historical voluntary contributions, was 4 and 5 percent,
respectively. The accumulated postretirement medical benefit obligation
attributed to the Media Group was $161 at December 31, 1995.
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. U S WEST will generally fund the amount allowed for tax
purposes and no funding of postretirement life insurance occurred in 1995, 1994
and 1993. U S WEST believes its method of allocating postretirement life costs
is reasonable.
Net postretirement life benefit costs allocated to the Media Group for 1995,
1994 and 1993 were $0, $3, and $3, respectively. The service and interest costs
for 1995 and the accumulated postretirement life benefit obligation at December
31, 1995 attributed to the Media Group were $1, $3 and $45, respectively.
NOTE 19: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.................................................................................. $ 47 $ 50 $ 72
Deferred................................................................................. 48 104 (32)
--------- --------- ---
95 154 40
Foreign:
Current.................................................................................. 6 -- --
Deferred................................................................................. 33 14 2
--------- --------- ---
39 14 2
State and local:
Current.................................................................................. 8 (6) 23
Deferred................................................................................. 21 42 (4)
--------- --------- ---
29 36 19
--------- --------- ---
Provision for income taxes................................................................. $ 163 $ 204 $ 61
--------- --------- ---
--------- --------- ---
</TABLE>
Amounts U S WEST paid for income taxes were $566, $313 and $391 in 1995,
1994 and 1993, respectively, inclusive of the capital assets segment, of which
$55, ($178) and $94 related to the Media Group. The Media Group, including the
capital assets segment, had taxes payable of $90 and $88 as of December 31, 1995
and 1994, respectively.
D-48
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: INCOME TAXES (CONTINUED)
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
IN PERCENT
<S> <C> <C> <C>
Federal statutory tax rate.................................................................. 35.0 35.0 35.0
Foreign taxes -- net of federal effect...................................................... 8.3 1.9 .6
State income taxes -- net of federal effect................................................. 6.1 4.9 6.6
Amortization................................................................................ 2.5 -- .2
Restructuring charge........................................................................ -- -- 1.1
Other....................................................................................... 1.1 .7 (1.7)
--- --- ---
Effective tax rate.......................................................................... 53.0 42.5 41.8
--- --- ---
--- --- ---
</TABLE>
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................................. $ 107 $ 76
Leases......................................................................................... 662 684
State deferred taxes -- net of federal effect.................................................. 178 174
Intangible assets.............................................................................. 112 164
Investments in partnerships.................................................................... 213 142
Other.......................................................................................... 12 13
--------- ---------
Deferred tax liabilities....................................................................... 1,284 1,253
--------- ---------
Postemployment benefits, including pension..................................................... 22 29
Restructuring, assets held for sale and other.................................................. 98 130
Currency translation........................................................................... 15 16
Start-up expenditures.......................................................................... 17 9
State deferred taxes -- net of federal effect.................................................. 33 38
Other.......................................................................................... 55 61
--------- ---------
Deferred tax assets............................................................................ 240 283
--------- ---------
Net deferred tax liability..................................................................... $ 1,044 $ 970
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $24 and $52 at December
31, 1995 and 1994, respectively, resulting primarily from restructuring charges
and compensation-related items.
The net deferred tax liability includes $686 in 1995 and $678 in 1994
related to the capital assets segment.
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.
D-49
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
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 is reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, charged to continuing operations.
No such adjustment was required in 1995. 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. U S WEST received
$154 in net proceeds from the offering. The Media Group retained certain risks
in asset-backed obligations related to the commercial real estate portfolio. 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 15 to the Combined Financial
Statements.) In December 1995, FSA merged with Capital Guaranty Corporation for
shares of FSA and cash of $51. The transaction was valued at approximately $203
and reduced U S WEST's ownership interest in FSA to 50.3 percent and its voting
interest to 41.7 percent. U S WEST expects to monetize and ultimately reduce its
ownership in FSA through the issuance of Debt Exchangeable for Common Stock
("DECS") in 1996. At maturity, each DECS will be mandatorily exchanged by U S
WEST for shares of FSA common stock held by U S WEST or, at U S WEST's option,
redeemed at the cash equivalent.
U S WEST entered into a transaction to reduce its investment in Enhance
Financial Services Group, Inc. ("Enhance") during fourth-quarter 1995. U S WEST
issued DECS due December 15, 1998. Upon maturity, each DECS will be mandatorily
exchanged by U S WEST for shares of Enhance Common Stock or, at U S WEST's
option, redeemed at the cash equivalent. The capital assets segment currently
owns approximately 31.5 percent of the outstanding Enhance common stock. (See
Note 11 to the Combined Financial Statements.)
U S WEST Real Estate, Inc. has sold various properties totaling $120, $327
and $66 in each of the three years ended December 31, 1995, respectively. The
sales proceeds were in line with estimates. Proceeds from building sales were
primarily used to repay related debt. U S WEST has completed 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 $490, net of reserves, as of
December 31, 1995.
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. Sales
proceeds of $2.1 billion were used primarily to repay related debt. The pretax
gain on the sale of approximately $100, net of selling expenses, was in line
with management's estimate and was included in the Media Group's estimate of
provision for loss on disposal. The management team that previously operated the
entire capital assets segment transferred to NationsBank.
Building sales and operating revenues of the capital assets segment were
$237, $553 and $710 in 1995, 1994 and 1993, respectively. Income from
discontinued operations for 1993 (to June 1) totaled $38. Income (loss) from the
capital assets segment subsequent to June 1, 1993 is being deferred and is
included within the reserve for assets held for sale.
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.
D-50
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................... $ 38 $ 7
Finance receivables -- net.................................................................. 953 1,073
Investment in real estate -- net of valuation allowance..................................... 368 465
Bonds, at market value...................................................................... 149 155
Investment in FSA........................................................................... 384 329
Other assets................................................................................ 177 347
--------- ---------
Total assets................................................................................ $ 2,069 $ 2,376
--------- ---------
--------- ---------
LIABILITIES
Debt........................................................................................ $ 796 $ 1,283
Deferred income taxes....................................................................... 686 678
Accounts payable, accrued liabilities and other............................................. 148 103
Minority interests.......................................................................... 10 10
--------- ---------
Total liabilities........................................................................... 1,640 2,074
--------- ---------
Net investment in assets held for sale...................................................... $ 429 $ 302
--------- ---------
--------- ---------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases that U S WEST intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
nonrecourse debt which is netted against the related lease receivable.
The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Receivables................................................................................. $ 921 $ 1,095
Unguaranteed estimated residual values...................................................... 447 467
--------- ---------
1,368 1,562
Less: Unearned income....................................................................... 390 459
Credit loss and other allowances....................................................... 25 30
--------- ---------
Finance receivables -- net.................................................................. $ 953 $ 1,073
--------- ---------
--------- ---------
</TABLE>
Investments in debt securities are classified as available for sale and are
carried at market value. Any resulting unrealized holding gains or losses, net
of applicable deferred income taxes, are reflected as a component of Media Group
equity.
D-51
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The amortized cost and estimated market value of investments in debt
securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------------------------
1995 1994
------------------------------------------------------ ---------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED
DEBT SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES
- --------------------------------- --------- --------------- --------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Municipal........................ $ 91 $ 1 $ 1 $ 91 $ 113 $ -- $ 13
Other............................ 58 -- -- 58 65 10
-- --
--------- --------- --------- ----- ---
Total............................ $ 149 $ 1 $ 1 $ 149 $ 178 $ -- $ 23
-- --
-- --
--------- --------- --------- ----- ---
--------- --------- --------- ----- ---
<CAPTION>
FAIR
DEBT SECURITIES VALUE
- --------------------------------- ---------
<S> <C>
Municipal........................ $ 100
Other............................ 55
---------
Total............................ $ 155
---------
---------
</TABLE>
Note: Also included in Media Group equity are unrealized gains and losses on
debt securities associated with the Media Group's equity investment in
FSA. 1995 includes unrealized gains of $24, net of deferred taxes of $13,
and 1994 includes unrealized losses of $49, net of deferred tax benefits
of $26.
The 1995 net unrealized gains of $39 (net of deferred taxes of $21 ) and the
1994 net unrealized losses of $64 (net of deferred tax benefits of $34), are
included in Media Group equity.
DEBT
Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------ TOTAL TOTAL
INTEREST RATES 1997 1998 1999 2000 1995 1994
- ------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Up to 5%............................................... $ -- $ -- $ -- $ -- $ -- $ 55
Above 5% to 6%......................................... 10 -- -- -- 10 15
Above 6% to 7%......................................... 54 -- -- -- 54 154
Above 7% to 8%......................................... 5 -- -- -- 5 17
Above 8% to 9%......................................... -- -- 134 4 138 189
Above 9% to 10%........................................ 48 5 -- -- 53 114
Above 10% to 11%....................................... -- 29 -- -- 29 29
--------- --------- --------- --------- --------- ---------
$ 117 $ 34 $ 134 $ 4 289 573
--------- --------- --------- ---------
--------- --------- --------- ---------
Allocated to the capital assets segment -- net......... 507 710
--------- ---------
Total.................................................. $ 796 $ 1,283
--------- ---------
--------- ---------
</TABLE>
Debt of $71 and $119 at December 31, 1995 and 1994, respectively, was
collateralized by first deeds of trust on associated real estate and assignment
of rents from leases.
The following table summarizes terms of swaps associated with the capital
assets segment. Variable rates are indexed to three- and six-month LIBOR.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 AND 1994
--------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
RECEIVE RATE PAY RATE
NOTIONAL -------------------- --------------------
AMOUNT MATURITIES 1995 1994 1995 1994
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Variable to fixed (1)........................................ $ 380 1996-1997 5.96 5.69 9.03 9.03
Fixed to variable (1)........................................ 380 1996-1997 7.29 7.29 5.87 5.80
Variable rate basis adjustment (2)........................... 10 1997 5.92 5.89 5.85 7.04
</TABLE>
- ------------------------------
(1)
The fixed to variable swaps have the same terms as the variable to fixed swaps
and were entered into to terminate the variable to fixed swaps. The net loss
on the swaps is deferred and amortized over the remaining life of the swaps
and is included in the reserve for assets held for sale.
(2)
Variable rate debt based on Treasuries is swapped to a LIBOR-based interest
rate.
D-52
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK -- FINANCIAL GUARANTEES
The Media Group retained certain risks in asset-backed obligations related
to the commercial real estate portfolio. The principal amounts insured on the
asset-backed obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TERMS TO MATURITY 1995 1994
- ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
0 to 5 Years...................................................................... $ 639 $ 540
5 to 10 Years..................................................................... 450 537
10 to 15 Years.................................................................... 10 391
--------- ---------
Total............................................................................. $ 1,099 $ 1,468
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1995 1994
- ---------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate.......................................................... $ 442 $ 530
Corporate secured............................................................... 657 888
Other asset-backed................................................................ -- 50
--------- ---------
Total............................................................................. $ 1,099 $ 1,468
--------- ---------
--------- ---------
</TABLE>
ADDITIONAL FINANCIAL INFORMATION
Information for U S WEST Financial Services, Inc., a member of the capital
assets segment, follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED FINANCIAL INFORMATION 1995 1994 1993
- ------------------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.............................................................................. $ 44 $ 54 $ 410
Net finance receivables.............................................................. 931 981 1,020
Total assets......................................................................... 1,085 1,331 1,797
Total debt........................................................................... 274 533 957
Total liabilities.................................................................... 1,024 1,282 1,748
Equity............................................................................... 61 49 49
</TABLE>
D-53
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1995
Sales and other revenues................................................. $ 536 $ 585 $ 604 $ 649
Income before income taxes and extraordinary item........................ 38 54 84 132
Income before extraordinary item......................................... 15 25 33 72
Net income............................................................... 15 25 29 72
Pro forma earnings per common share before
extraordinary item...................................................... 0.03 0.05 0.07 0.15
Pro forma earnings per common share...................................... 0.03 0.05 0.06 0.15
1994
Sales and other revenues................................................. $ 418 $ 459 $ 482 $ 549
Income from continuing operations before income taxes.................... 55 153 92 180
Income from continuing operations and net income......................... 29 86 51 110
Pro forma earnings per common share...................................... 0.07 0.19 0.11 0.24
</TABLE>
- ------------------------------
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock. Earnings
per common share have been presented on a pro forma basis to reflect the two
classes of stock as if they had been outstanding since January 1, 1994. For
periods prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST, Inc.
1995 third-quarter net income includes costs of $5 ($0.01 per share)
associated with the Recapitalization Plan and costs of $4 ($.01 per share) for
the early extinguishment of debt. 1995 fourth-quarter net income includes a gain
of $95 ($0.20 per share) from the merger of U S WEST's joint venture interest in
TeleWest. 1995 fourth-quarter net income also includes costs of $4 ($.01 per
share) associated with the Recapitalization Plan.
1994 second-quarter net income includes a gain of $41 ($.09 per share) on
the sale of paging operations. 1994 fourth-quarter net income includes a gain of
$105 ($.23 per share) from the partial sale of U S WEST's joint venture interest
in TeleWest.
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------------
1995 PER SHARE MARKET DATA HIGH LOW CLOSE
- --------------------------------------------------------------------------------- --------- --------- ---------
(WHOLE DOLLARS)
<S> <C> <C> <C>
November 1, 1995 through December 31, 1995....................................... $ 20.000 $ 17.375 $ 19.000
</TABLE>
D-54
<PAGE>
U S WEST MEDIA GROUP
SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
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 directory and information services operations.
The financial information included below departs materially from generally
accepted accounting principles ("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. This table is not intended to
replace the Combined Financial Statements prepared in accordance with GAAP.
Supplemental Media Group information on a proportionate basis is presented in
Management's Discussion and Analysis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Sales and other revenues............................................................. $ 5,115 $ 4,213 $ 2,157
Operating expenses................................................................... 3,966 3,311 1,630
--------- --------- ---------
EBITDA(1)............................................................................ 1,149 902 527
Restructuring charge................................................................. -- -- 109
Depreciation and amortization........................................................ 673 501 223
--------- --------- ---------
Operating income..................................................................... 476 401 195
Income from continuing operations before extraordinary item.......................... 145 276 85
Net income........................................................................... $ 141 $ 276 $ 3
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
Note: Certain reclassifications within the Selected Proportionate Results of
Operations have been made to conform to the current year presentation.
(1) Earnings before interest, taxes, depreciation and amortization ("EBITDA").
D-55
<PAGE>
EXHIBIT 3b
BYLAWS
OF
U S WEST, INC.
AS ADOPTED ON NOVEMBER 1, 1995
AND AMENDED ON MARCH 15, 1996
1
<PAGE>
BYLAWS
OF
U S WEST, INC.
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office of U S WEST,
Inc. (the "Corporation") in the State of Delaware shall be at 1209 Orange
Street, in the City of Wilmington, County of New Castle, 19801 and its
registered agent at such address shall be The Corporation Trust Company, or such
other office or agent as the Board of Directors of the Corporation (the "Board")
shall from time to time select.
SECTION 2. OTHER OFFICES. The Corporation may also have an office or
offices, and keep the books and records of the Corporation, except as may
otherwise be required by law, at such other place or places, either within or
without the State of Delaware, as the Board may from time to time determine or
the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the stockholders of the
Corporation shall be held at the office of the Corporation or at such other
places, within or without the State of Delaware, as may from time to time be
fixed by the Board.
SECTION 2. ANNUAL MEETINGS. The annual meeting of 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 June
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
2
<PAGE>
of the entire Board. Only such business as is specified in the notice of any
special meeting of the stockholders shall come before such meeting.
SECTION 4. NOTICE OF MEETINGS. Except as otherwise provided by law,
written notice of each meeting of the stockholders, whether annual or special,
shall be given, either by personal delivery or by mail, not less than 10 nor
more than 60 days before the date of the meeting to each stockholder of record
entitled to notice of the meeting. If mailed, such notice shall be deemed given
when deposited in the United States mail, postage prepaid, directed to the
stockholder at such stockholder's address as it appears on the records of the
Corporation. Each such notice shall state the place, date and hour of the
meeting, and the purpose or purposes for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
who shall attend such meeting in person or by proxy without protesting, prior to
or at the commencement of the meeting, the lack of proper notice to such
stockholder, or who shall sign a written waiver of notice thereof, whether
before or after such meeting. Notice of adjournment of a meeting of
stockholders need not be given if the time and place to which it is adjourned
are announced at such meeting, unless the adjournment is for more than 30 days
or, after adjournment, a new record date is fixed for the adjourned meeting.
SECTION 5. QUORUM. Except as otherwise provided by law or by the
Certificate, the holders of a majority of the votes entitled to be cast by the
stockholders entitled to vote generally, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of the
stockholders; PROVIDED, HOWEVER, that in the case of any vote to be taken by
classes, the holders of a majority of the votes entitled to be cast by the
stockholders of a particular class shall constitute a quorum for the transaction
of business by such class.
SECTION 6. ADJOURNMENTS. The chairman of the meeting or the holders
of a majority of the votes entitled to be cast by the stockholders who are
present in person or by proxy may adjourn the meeting from time to time whether
or not a quorum is present. In the event that a quorum does not exist with
respect to any vote to be taken by a particular class, the chairman of the
meeting or the holders of a majority of the votes entitled to be cast by the
stockholders of such class who are present in person or by proxy may adjourn the
meeting with respect to the vote(s) to be taken by such class. At such
adjourned meeting at which a quorum may be present, any business may be
transacted which might have been transacted at the meeting as originally called.
SECTION 7. ORDER OF BUSINESS. (a) At each meeting of the
stockholders, the Chairman of the Board or, in the absence of the Chairman of
the Board, such person as shall be selected by the Board shall act as chairman
of the meeting. The order of business at each such meeting shall be as
determined by the chairman of the meeting. The chairman of the meeting shall
have the right and authority to prescribe such rules, regulations and procedures
and to do all such acts and things as are necessary or desirable for the proper
conduct of the meeting, including, without limitation, the establishment of
procedures for the maintenance of order and safety, limitations on the time
allotted to questions or comments on the affairs of the Corporation,
restrictions on entry to such meeting after the time prescribed for the
commencement thereof, and the opening and closing of the voting polls.
3
<PAGE>
(b) At any annual meeting of stockholders, only such business shall
be conducted as shall have been brought before the annual meeting (i) by or at
the direction of the chairman of the meeting, (ii) pursuant to the notice
provided for in this Section 4 of this Article II or (iii) by any stockholder
who is a holder of record at the time of the giving of such notice provided for
in this Section 7, who is entitled to vote at the meeting and who complies with
the procedures set forth in this Section 7.
(c) For business properly to be brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in proper
written form to the Secretary of the Corporation (the "Secretary"). To be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days prior
to the date of an annual meeting of stockholders. To be in proper written form,
a stockholder's notice to the Secretary shall set forth in writing as to each
matter the stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting; (ii) the name
and address of the stockholder proposing such business and all persons or
entities acting in concert with the stockholder; (iii) the class and number of
shares of the Corporation which are beneficially owned by the stockholder and
all persons or entities acting in concert with such stockholder; and (iv) any
material interest of the stockholder in such business. The foregoing notice
requirements shall be deemed satisfied by a stockholder if the stockholder has
notified the Corporation of his or her intention to present a proposal at an
annual meeting and such stockholder's proposal has been included in a proxy
statement that has been prepared by management of the Corporation to solicit
proxies for such annual meeting; PROVIDED, HOWEVER, that if such stockholder
does not appear or send a qualified representative to present such proposal at
such annual meeting, the Corporation need not present such proposal for a vote
at such meeting, notwithstanding that proxies in respect of such vote may have
been received by the Corporation. Notwithstanding anything in the bylaws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section 7. The chairman of an
annual meeting shall, if the facts warrant, determine that business was not
properly brought before the annual meeting in accordance with the provisions of
this Section 7 and, if the chairman should so determine, the chairman shall so
declare to the annual meeting and any such business not properly brought before
the annual meeting shall not be transacted.
SECTION 8. LIST OF STOCKHOLDERS. It shall be the duty of the
Secretary or other officer who has charge of the stock ledger to prepare and
make, at least 10 days before each meeting of the stockholders, a complete list
of the stockholders entitled to vote thereat, arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in such stockholder's name. Such list shall be produced and kept available at
the times and places required by law.
4
<PAGE>
SECTION 9. VOTING. (a) Except as otherwise provided by law or by the
Certificate, each stockholder of record of any class or series of capital stock
of the Corporation shall be entitled at each meeting of stockholders to such
number of votes for each share of such stock as may be fixed in the Certificate
or in the resolution or resolutions adopted by the Board providing for the
issuance of such stock, registered in such stockholder's name on the books of
the Corporation:
(1) on the date fixed pursuant to Section 6 of Article VII of these
bylaws as the record date for the determination of stockholders entitled to
notice of and to vote at such meeting; or
(2) if no such record date shall have been so fixed, then at the
close of business on the day next preceding the day on which notice of such
meeting is given, or, if notice is waived, at the close of business on the
day next preceding the day on which the meeting is held.
(b) Each stockholder entitled to vote at any meeting of stockholders
may authorize not in excess of three persons to act for such stockholder by
proxy. Any such proxy shall be delivered to the secretary of such meeting at or
prior to the time designated for holding such meeting. No such proxy shall be
voted or acted upon after three years from its date, unless the proxy provides
for a longer period.
(c) At each meeting of the stockholders, all corporate actions to be
taken by vote of the stockholders (except as otherwise required by law and
except as otherwise provided in the Certificate or these bylaws) shall be
authorized by a majority of the votes cast by the stockholders entitled to vote
thereon who are present in person or represented by proxy, and where a separate
vote by class is required, a majority of the votes cast by the stockholders of
such class who are present in person or represented by proxy shall be the act of
such class.
(d) Unless required by law or determined by the chairman of the
meeting to be advisable, the vote on any matter, including the election of
directors, need not be by written ballot. In the case of a vote by written
ballot, each ballot shall be signed by the stockholder voting, or by such
stockholder's proxy.
SECTION 10. INSPECTORS. The chairman of the meeting shall appoint
one or more inspectors to act at any meeting of stockholders. Such inspectors
shall perform such duties as shall be specified by the chairman of the meeting.
Inspectors need not be stockholders. No director or nominee for the office of
director shall be appointed such inspector.
5
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by or under the direction of the Board, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by law or by the Certificate directed or required to be
exercised or done by the stockholders.
SECTION 2. NUMBER, QUALIFICATION AND ELECTION. (a) Except as
otherwise fixed by or pursuant to the provisions of Article V of the Certificate
relating to the rights of the holders of any class or series of stock having
preference over the common stock of the corporation as to dividends or upon
liquidation, the number of directors of the Corporation shall be determined from
time to time by the Board by the affirmative vote of directors constituting at
least a majority of the entire Board; provided that the number thereof may not
be less than six nor more than seventeen.
(b) The directors, other than those who may be elected by the holders
of shares of any class or series of stock having a preference over the common
stock of the Corporation as to dividends or upon liquidation pursuant to the
terms of Article V of the Certificate or any resolution or resolutions providing
for the issuance of such stock adopted by the Board, shall be classified, with
respect to the time for which they severally hold office, into three classes as
nearly equal in number as possible, with each class to hold office until its
successors are elected and qualified. Subject to the rights of the holders of
any class or series of stock having a preference over the common stock of the
Corporation as to dividends or upon liquidation, at each such annual meeting of
the stockholders, the successors of the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election.
(c) Each director shall be at least 21 years of age. Directors need
not be stockholders of the Corporation.
(d) In any election of directors held at a meeting of stockholders,
the persons receiving a plurality of the votes cast by the stockholders entitled
to vote thereon at such meeting who are present or represented by proxy, up to
the number of directors to be elected in such election, shall be deemed elected.
SECTION 3. NOTIFICATION OF NOMINATION. Subject to the rights of the
holders of any class or series of stock having a preference over the common
stock as to dividends or upon liquidation, nominations for the election of
directors may be made by the Board or by any stockholder who is a stockholder of
record at the time of giving of the notice of nomination provided for in this
Section 3 of this Article III and who is entitled to vote for the election of
directors. Any stockholder of record entitled to vote for the election of
directors at a meeting may nominate persons for election as directors only if
timely written notice of such stockholder's intent to make such nomination is
given, either by personal delivery or by United States mail, postage
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prepaid, to the Secretary. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation (i) with respect to an election to be held at an annual meeting of
stockholders, not less than 60 days prior to the date of such annual meeting and
(ii) with respect to an election to be held at a special meeting of stockholders
for the election of directors, not less than 15 days following the public
announcement of the date of such special meeting. Each such notice shall set
forth: (a) the name and address of the stockholder who intends to make the
nomination, of all persons or entities acting in concert with the stockholder,
and of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or entities acting in concert with the stockholder (naming such
person or entities) pursuant to which the nomination or nominations are to be
made by the stockholder; (d) such other information regarding each nominee
proposed by the stockholder as would have been required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had each nominee been nominated, or intended to be nominated, by the
Board; (e) the class and number of shares of the Corporation that are
beneficially owned by the stockholder and all persons or entities acting in
concert with the stockholder; and (f) the consent of each nominee to being named
in a proxy statement as nominee and to serve as a director of the Corporation if
so elected. The chairman of the meeting may refuse to acknowledge the
nomination of any person not made after compliance with the foregoing procedure.
Only such persons who are nominated in accordance with the procedures set forth
in this Section 3 of this Article III shall be eligible to serve as directors of
the Corporation.
SECTION 4. QUORUM AND MANNER OF ACTING. Except as otherwise provided
by law, the Certificate or these bylaws, a majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting of the Board,
and, except as so provided, the vote of a majority of the directors present at
any meeting at which a quorum is present shall be the act of the Board. The
chairman of the meeting or a majority of the directors present may adjourn the
meeting to another time and place whether or not a quorum is present. At any
adjourned meeting at which a quorum is present, any business may be transacted
which might have been transacted at the meeting as originally called.
SECTION 5. PLACE OF MEETING. The Board may hold its meetings at such
place or places within or without the State of Delaware as the Board may from
time to time determine or as shall be specified or fixed in the respective
notice or waivers of notice thereof.
SECTION 6. REGULAR MEETINGS. Regular meetings of the Board shall be
held at such times and places as the Chairman of the Board or the Board shall
from time to time by resolution determine. If any day fixed for a regular
meeting shall be a legal holiday under the laws of the place where the meeting
is to be held, the meeting which would otherwise be held on that day shall be
held at the same hour on the next succeeding business day.
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SECTION 7. SPECIAL MEETINGS. Special meetings of the Board shall be
held whenever called by the Chairman of the Board or by a majority of the
directors.
SECTION 8. NOTICE OF MEETINGS. Notice of regular meetings of the
Board or of any adjourned meeting thereof need not be given. Notice of each
special meeting of the Board shall be given by overnight delivery service or
mailed to each director, in either case addressed to such director at such
director's residence or usual place of business, at least two days before the
day on which the meeting is to be held or shall be sent to such director at such
place by telegraph or telecopy or be given personally or by telephone, not later
than the day before the meeting is to be held, but notice need not be given to
any director who shall, either before or after the meeting, submit a signed
waiver of such notice or who shall attend such meeting without protesting, prior
to or at its commencement, the lack of notice to such director. Every such
notice shall state the time and place but need not state the purpose of the
meeting.
SECTION 9. RULES AND REGULATIONS. The Board may adopt such rules and
regulations not inconsistent with the provisions of law, the Certificate or
these bylaws for the conduct of its meetings and management of the affairs of
the Corporation as the Board may deem proper.
SECTION 10. PARTICIPATION IN MEETING BY MEANS OF COMMUNICATION
EQUIPMENT. Any one or more members of the Board or any committee thereof may
participate in any meeting of the Board or of any such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at such meeting.
SECTION 11. ACTION WITHOUT MEETING. Any action required or permitted
to be taken at any meeting of the Board or any committee thereof may be taken
without a meeting if all of the members of the Board or of any such committee
consent thereto in writing and the writing or writings are filed with the
minutes or proceedings of the Board or of such committee.
SECTION 12. RESIGNATIONS. Any director of the Corporation may at any
time resign by giving written notice to the Board, the Chairman of the Board,
the President or the Secretary. Such resignation shall take effect at the time
specified therein or, if the time be not specified therein, upon receipt
thereof; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 13. REMOVAL OF DIRECTORS. Directors may be removed only as
provided in Section 5 of Article VI of the Certificate.
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SECTION 14. VACANCIES. Subject to the rights of the holders of any
class or series of stock having a preference over the common stock of the
Corporation as to dividends or upon liquidation, any vacancies on the Board
resulting from death, resignation, removal or other cause shall only be filled
by the Board by the affirmative vote of a majority of the remaining directors
then in office, even though less than a quorum of the Board, or by a sole
remaining director, and newly created directorships resulting from any increase
in the number of directors shall be filled by the Board, or if not so filled, by
the stockholders at the next annual meeting thereof or at a special meeting
called for that purpose in accordance with Section 3 of Article II of these
bylaws. Any director elected in accordance with the preceding sentence of this
Section 14 of this Article III shall hold office for the remainder of the full
term of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been elected and
qualified.
SECTION 15. COMPENSATION. Each director, in consideration of such
person serving as a director, shall be entitled to receive from the Corporation
such amount per annum and such fees for attendance at meetings of the Board or
of committees of the Board, or both, as the Board shall from time to time
determine. In addition, each director shall be entitled to receive from the
Corporation reimbursement for the reasonable expenses incurred by such person in
connection with the performance of such person's duties as a director. Nothing
contained in this Section 15 of this Article III shall preclude any director
from serving the Corporation or any of its subsidiaries in any other capacity
and receiving proper compensation therefor.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 1. ESTABLISHMENT OF COMMITTEES OF THE BOARD OF DIRECTORS;
ELECTION OF MEMBERS OF COMMITTEES OF THE BOARD OF DIRECTORS; FUNCTIONS OF
COMMITTEES OF THE BOARD OF DIRECTORS. The Board may, in accordance with and
subject to the General Corporation Law of the State of Delaware, from time to
time establish committees of the Board to exercise such powers and authorities
of the Board, and to perform such other functions, as the Board may from time to
time determine.
SECTION 2. PROCEDURE; MEETINGS; QUORUM. Regular meetings of
committees of the Board, of which no notice shall be necessary, may be held at
such times and places as shall be fixed by resolution adopted by a majority of
the members thereof. Special meetings of any committee of the Board shall be
called at the request of a majority of the members thereof. Notice of each
special meeting of any committee of the Board shall be given by overnight
delivery service or mailed to each member, in either case addressed to such
member at such member's residence or normal place of business, at least two days
before the day on which the meeting is to be held or shall be sent to such
members at such place by telegraph or telecopy or be given personally or by
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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 bylaws for the conduct of its meetings as such committee of the Board may
deem proper. A majority of the members of any committee of the Board shall
constitute a quorum for the transaction of business at any meeting, and the vote
of a majority of the members thereof present at any meeting at which a quorum is
present shall be the act of such committee. Each committee of the Board shall
keep written minutes of its proceedings and shall report on such proceedings to
the Board.
ARTICLE V
OFFICERS
SECTION 1. NUMBER; TERM OF OFFICE. The officers of the Corporation
shall be such officers, which may include a Chairman of the Board, Chief
Executive Officer, President, Chief Financial Officer, General Counsel and one
or more Vice Presidents (including, without limitation, Assistant, Executive and
Senior Vice Presidents) and a Treasurer, Secretary and Controller and such other
officers or agents with such titles and such duties as the Board may from time
to time determine, each to have such authority, functions or duties as provided
in these bylaws or as the Board may from time to time determine, and each to
hold office for such term as may be prescribed by the Board and until such
person's successor shall have been chosen and shall qualify, or until such
person's death or resignation, or until such person's removal in the manner
hereinafter provided. One person may hold the offices and perform the duties of
any two or more of said officers; PROVIDED, HOWEVER, that no officer shall
execute, acknowledge or verify any instrument in more than one capacity if such
instrument is required by law, the Certificate or these bylaws to be executed,
acknowledged or verified by two or more officers. The Board may from time to
time authorize any officer to appoint and remove any such other officers and
agents and to prescribe their powers and duties. The Board may require any
officer or agent to give security for the faithful performance of such person's
duties.
SECTION 2. REMOVAL. Any officer may be removed, either with or
without cause, by the Board at any meeting thereof or, except in the case of any
officer elected by the Board, by any superior officer upon whom such power may
be conferred by the Board.
SECTION 3. RESIGNATION. Any officer may resign at any time by giving
notice to the Board, the Chairman of the Board or the Secretary. Any such
resignation shall take effect at the date of receipt of such notice or at any
later date specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
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SECTION 4. VACANCIES. A vacancy in any office because of death,
resignation, removal or any other cause may be filled for the unexpired portion
of the term in the manner prescribed in these bylaws for election to such
office.
SECTION 5. CHAIRMAN OF THE BOARD; POWERS AND DUTIES. The Chairman of
the Board shall be the chief executive officer of the Corporation. Subject to
the control of the Board, the Chairman of the Board shall supervise and direct
generally all the business and affairs of the Corporation. The Chairman of the
Board shall preside at all meetings of the stockholders and the Board. Any
document may be signed by the Chairman of the Board or any other person who may
be thereunto authorized by the Board or the Chairman of the Board. The Chairman
of the Board may appoint such assistant officers as are deemed necessary.
SECTION 6. PRESIDENT, EXECUTIVE VICE PRESIDENTS, SENIOR VICE
PRESIDENTS AND VICE PRESIDENTS; POWERS AND DUTIES. The President shall be the
chief operating officer of the Corporation. The President and each Executive
Vice President, each Senior Vice President, and each Vice President shall have
such powers and perform such duties as may be assigned by the Board of Directors
or the Chairman of the Board. In case of the absence or disability of the
Chairman of the Board or a vacancy in the office, the President, an Executive
Vice President, a Senior Vice President, or a Vice President designated by the
Chairman of the Board or the Board shall exercise all the powers and perform all
the duties of the Chairman of the Board.
SECTION 7. SECRETARY AND ASSISTANT SECRETARIES; POWERS AND DUTIES.
The Secretary shall attend all meetings of the stockholders and the Board and
shall keep the minutes for such meetings in one or more books provided for that
purpose. The Secretary shall be custodian of the corporate records, except
those required to be in the custody of the Treasurer or the Controller, shall
keep the seal of the Corporation, and shall execute and affix the seal of the
Corporation to all documents duly authorized for execution under seal on behalf
of the Corporation, and shall perform all of the duties incident to the office
of Secretary, as well as such other duties as may be assigned by the Chairman of
the Board or the Board.
The Assistant Secretaries shall perform such of the Secretary's duties
as the Secretary shall from time to time direct. In case of the absence or
disability of the Secretary or a vacancy in the office, an Assistant Secretary
designated by the Chairman of the Board or by the Secretary, if the office is
not vacant, shall perform the duties of the Secretary.
SECTION 8. CHIEF FINANCIAL OFFICER; POWERS AND DUTIES. The Chief
Financial Officer shall be responsible for maintaining the financial integrity
of the Corporation, shall prepare the financial plans for the Corporation, and
shall monitor the financial performance of the Corporation and its subsidiaries,
as well as performing such other duties as may be assigned by the Chairman of
the Board or the Board.
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SECTION 9. TREASURER AND ASSISTANT TREASURERS; POWERS AND DUTIES.
The Treasurer shall have care and custody of the funds and securities of the
Corporation, shall deposit such funds in the name and to the credit of the
Corporation with such depositories as the Treasurer shall approve, shall
disburse the funds of the Corporation for proper expenses and dividends, and as
may be ordered by the Board, taking proper vouchers for such disbursements. The
Treasurer shall perform all of the duties incident to the office of Treasurer,
as well as such other duties as may be assigned by the Chairman of the Board or
the Board.
The Assistant Treasurers shall perform such of the Treasurer's duties
as the Treasurer shall from time to time direct. In case of the absence or
disability of the Treasurer or a vacancy in the office, an Assistant Treasurer
designated by the Chairman of the Board or by the Treasurer, if the office is
not vacant, shall perform the duties of the Treasurer.
SECTION 10. GENERAL COUNSEL; POWERS AND DUTIES. The General Counsel
shall be a licensed attorney at law and shall be the chief legal officer of the
Corporation. The General Counsel shall have such power and exercise such
authority and provide such counsel to the Corporation as deemed necessary or
desirable to enforce the rights and protect the property and integrity of the
Corporation, shall also have the power, authority, and responsibility for
securing for the Corporation all legal advice, service, and counseling, and
shall perform all of the duties incident to the office of General Counsel, as
well as such other duties as may be assigned by the Chairman of the Board or the
Board.
SECTION 11. CONTROLLER AND ASSISTANT CONTROLLERS; POWERS AND DUTIES.
The Controller shall be the chief accounting officer of the Corporation and
shall keep and maintain in good and lawful order all accounts required by law
and shall have sole control over, and ultimate responsibility for, the accounts
and accounting methods of the Corporation and the compliance of the Corporation
with all systems of accounts and accounting regulations prescribed by law. The
Controller shall audit, to such extent and at such times as may be required by
law or as the Controller may think necessary, all accounts and records of
corporate funds or property, by whomsoever kept, and for such purposes shall
have access to all such accounts and records. The Controller shall make and
sign all necessary and proper accounting statements and financial reports of the
Corporation, and shall perform all of the duties incident to the office of
Controller, as well as such other duties as may be assigned by the Chairman of
the Board or the Board.
The Assistant Controllers shall perform such of the Controller's
duties as the Controller shall from time to time direct. In case of the absence
or disability of the Controller or a vacancy in the office, an Assistant
Controller designated by the Chairman of the Board or the Controller, if the
office is not vacant, shall perform the duties of the Controller.
SECTION 12. SALARIES. The salaries of all officers of the
Corporation shall be fixed by or in the manner provided by the Board. If
authorized by a resolution of the Board, the salary of any officer other than
the Chairman of the Board may be fixed by the Chairman of the Board or a
Committee of the Board. No officer shall be disqualified from receiving a
salary by reason of also being a director of the Corporation.
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ARTICLE VI
INDEMNIFICATION
SECTION 1. SCOPE OF INDEMNIFICATION. (a) The Corporation shall
indemnify an indemnified representative against any liability incurred in
connection with nay 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 statue, 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 resumption 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
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Corporation that would disqualify the Corporation's counsel from representing
the indemnified representative under the rules of professional conduct
applicable to attorneys, it shall be the policy of the Corporation to waive any
or all of the foregoing conditions subject to such limitations or conditions as
the Corporation shall deem to be reasonable in the circumstances.
(e) For purposes of this Article:
(1) "indemnified capacity" means any and all past, present, or future
services by an indemnified representative in one or more capacities as a
director, officer, employee, or agent of the Corporation or, at the request of
the Corporation, as a director, officer, employee, agent, fiduciary, or trustee
of another corporation, partnership, joint venture, trust, employee benefit
plan, or other entity or enterprise; any indemnified representative serving an
affiliate of the Corporation in any capacity shall be deemed to be doing so at
the request of the Corporation;
(2) an "affiliate of the Corporation" means an entity that directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, the Corporation;
(3) "indemnified representative" means any and all directors,
officers, and employees of the Corporation and any other person designated as an
indemnified representative by the Board;
(4) "liability" means any damage, judgment, amount paid in settlement,
fine, penalty, punitive damage, excise tax assessed with respect to an employee
benefit plan, or cost or expense of any nature (including, without limitation,
expert witness fees, costs of investigation, litigation and appeal costs,
attorneys' fees, and disbursements); and
(5) "proceeding" means any threatened, pending, or completed action,
suit, appeal, or other proceeding of any nature, whether civil, criminal,
administrative, or investigative, whether formal or informal, whether external
or internal to the Corporation, and whether brought by or in the right of the
Corporation, a class of its security holders or otherwise.
SECTION 2. ADVANCING EXPENSES. All reasonable expenses incurred in
good faith by an indemnified representative in advance of the final disposition
of a proceeding described in Section 1 of this Article VI shall be advanced to
the indemnified representative by the Corporation. Before making any such
advance payment of expenses, the Corporation shall receive an undertaking by or
on behalf of the indemnified representative to repay such amount if it shall
ultimately be determined that such indemnified representative is not entitled to
be indemnified by the Corporation pursuant to this Article VI. No advance shall
be made by the Corporation if a determination is reasonably and promptly made by
a majority vote of disinterested directors, even if the disinterested directors
constitute less than a quorum, or (if such a quorum is not obtainable or, even
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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 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.
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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 bylaw may be adopted, repealed, altered or amended by two-thirds
of the entire Board at any meeting thereof. The stockholders of the Corporation
shall have the power to amend, alter or repeal any provision of these bylaws
only to the extent and in the manner provided in the Certificate.
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EXHIBIT 10U
[FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT]
U S WEST, INC.
NON-QUALIFIED STOCK OPTION AGREEMENT
[EXECUTIVE HRC VERSION]
THIS AGREEMENT is made between U S WEST, Inc. (the "Company") and the
Optionee ("Optionee") named in the letter attached to and made part of this
Agreement (the "Letter"), as of the date set forth in the Letter.
Pursuant to the U S WEST, Inc. 1994 Stock Plan as amended effective
November 1, 1995 (the "Plan"), the Human Resources Committee of the Company's
Board of Directors (the "Committee") has approved the granting to Optionee of an
option to purchase shares of Common Stock (the "Option"), without par value on
the terms and conditions set forth in this Agreement, as a matter of separate
inducement in connection with Optionee's engagement with the Company or a
Related Entity, and not in lieu of salary or other compensation for Optionee's
services.
In consideration of the foregoing and of the mutual covenants set forth
herein, and other good and valuable consideration, the Company and Optionee
agree as follows:
1. INCORPORATION OF PLAN AND DEFINED TERMS. The Option is granted
pursuant to the Plan, the terms of which are incorporated by reference and apply
to this Agreement as if they were fully set forth herein. Terms used in this
Agreement and not otherwise defined shall have the meanings set forth in the
Plan.
2. SHARES OPTIONED; OPTION PRICE. Optionee may purchase all or any part
(in whole shares) of an aggregate of the number of shares of Common Stock, at a
purchase price per share (which is not less than the Fair Market Value on the
date of this Agreement) as specified in the Letter, on the terms and conditions
set forth herein.
3. OPTION TERM; VESTING; TIMES OF EXERCISE. The Option shall become Vested
in one-third increments upon each of the first three (3) anniversaries following
the date hereof. The vesting on any such increment shall be subject to the
continuous employment of Optionee until the anniversary date on which such
increment is scheduled to vest, and provided further that the Option shall
expire and shall no longer be exercisable following ten (10) years from the date
of this Agreement (the "Expiration Date"). Except as otherwise specifically set
forth below and elsewhere in this Agreement, the Option shall become Vested only
to the extent that the foregoing continuous employment requirement is satisfied,
regardless of the circumstances under which Optionee's employment is terminated.
<PAGE>
(i) DEATH. In the event of the death of Optionee, the Option shall
become Vested and the estate of the Optionee shall have the right, at any
time and from time to time within one year after the date of death or such
longer period, if any, as the Committee in its sole discretion shall
determine (but not after the Expiration Date), to exercise all or any
portion of the Option.
(ii) DISABILITY. Except as otherwise set forth in this Agreement, if
the employment of Optionee is terminated because of Disability, the Option
shall be retained by Optionee, and the Option, if not then Vested, shall
become Vested as set forth in the vesting schedule in Paragraph 3 of this
Agreement. Upon vesting, Optionee shall have the right to exercise the
Option, at any time and from time to time, but not after the Expiration
Date.
(iii) RETIREMENT. Except as otherwise set forth in this Agreement,
upon Optionee's Retirement, the Option shall be retained by Optionee, and
the Option, if not then Vested, shall become Vested as set forth in the
vesting schedule in Paragraph 3 of this Agreement, unless the Committee, in
its sole discretion, determines otherwise; provided, however, that the
continuation of vesting shall be contingent upon Optionee's execution and
delivery to the Company, on or prior to the effective date of Optionee's
Retirement, of the Company's standard form of "Waiver & Release" of claims,
available from the Human Resources Department of the Company. Upon vesting,
Optionee shall have the right to exercise the Option, at any time and from
time to time, until the Expiration Date, unless otherwise provided in this
Agreement.
(iv) OTHER TERMINATION. If Optionee's employment with the Company or a
Related Entity is terminated for any reason other than for death,
Disability or Retirement and other than "for cause," as such term is
defined in the Plan, Optionee shall have the right to exercise all or any
portion of the Option, if the Option is then Vested, at any time and from
time to time within ninety (90) days of termination or such other period,
if any, as the Committee in its sole discretion shall determine (but not
after the Expiration Date).
(v) EXECUTIVE SEVERANCE AGREEMENT. If Optionee has executed an
Executive Severance Agreement with the Company, the Option will be Vested
in accordance with the terms of the Executive Severance Agreement if
Optionee becomes entitled to the receipt of "Severance Benefits," as set
forth in that Executive Severance Agreement and sixteen (16) days have
passed following the execution of a standard form of "Waiver & Release" of
claims and compliance with the "Conditions" by Optionee as set forth in the
Company's standard Executive Severance Agreement.
(vi) CHANGE OF CONTROL. Upon the occurrence of a Change of Control,
the Option shall be Vested immediately. For purposes of this paragraph,
"Change of Control" shall have the identical meaning as set forth in the
Change of Control Agreement, if any, that Optionee has executed with the
Company. To ensure parallel application, for purposes of this paragraph
only, defined terms contained in the definition of "Change of Control" set
forth in Optionee's Change of Control Agreement shall have the same meaning
here as
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set forth in that Change of Control Agreement. If Optionee has not executed
any such Change of Control Agreement, "Change of Control" shall have the
identical meaning as set forth in the Plan.
(vii) TERMINATION FOR CAUSE. Notwithstanding any other provision in
this Agreement, if Optionee's employment is terminated by the Company or
any Related Entity "for cause," as such term is defined in the Plan,
Optionee shall forfeit immediately all rights under the Option except as to
the shares of Common Stock already purchased prior to such termination.
4. EXERCISE: PAYMENT FOR AND DELIVERY OF STOCK. The Option may be
exercised only by Optionee or his or her transferee(s) by last will and
testament or the laws of descent and distribution. The Option may be exercised
by giving written notice of exercise to the Company specifying the number of
shares (minimum of 100, unless the unexercised balance of the Option is less
than 100) to be purchased and the total purchase price, accompanied by cashier's
check or other certified funds or shares of Common Stock in payment of the
purchase price. Any shares of Common Stock so tendered shall be valued as of the
Option exercise date.
5. NON-TRANSFERABILITY OF OPTION. The Option is not transferable otherwise
than by last will and testament or the laws of descent and distribution. The
Option shall not be otherwise transferred or assigned, pledged, hypothecated or
otherwise disposed of in any way, whether by operation of law or otherwise, and
shall not be subject to execution, attachment or similar process. The Option
shall not be assignable or transferable pursuant to a domestic relations order.
During the lifetime of Optionee, the Option shall be exercisable only by
Optionee, or Optionee's guardian or legal representative. Upon any attempt to
transfer the Option otherwise than by last will and testament or the laws of
descent and distribution, or to assign, pledge, hypothecate or otherwise dispose
of the Option, or upon the levy of any execution, attachment or similar process
upon the Option, the Option shall immediately terminate and become null and
void.
6. PERFORMANCE FOR COMPETITORS. If at any time following the date of this
Agreement and before the Option is Vested, regardless of whether Optionee has
Retired, Optionee directly or indirectly receives payment for services rendered
to, or is otherwise employed by, any person, firm or corporation that is in
competition with the Company or engaged in providing any goods or services that
are substantially the same as any goods or services provided or under
development by the Company, Optionee immediately shall forfeit all rights under
the Option, unless the Committee in its sole discretion determines otherwise, or
unless Optionee is in full compliance with the Company's Policy on Service on
Outside Boards of Directors, as interpreted solely by the Company's Senior
Management Compliance Committee. If at any time Optionee renders services to or
becomes otherwise employed by any person, firm or corporation that is in
competition with the Company or engaged in providing any goods or services that
are substantially the same as goods or services provided or under development by
the Company, Optionee shall have ninety (90) days after the date of such
employment to exercise any Vested and non-expired Option. Any determination
under this Paragraph 6, including whether a person, firm or corporation is "in
competition with" the Company or providing "substantially the same"
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goods or services as the Company provides or is developing, will be subject to
the sole discretion of the Committee or its designee.
7. NON-SOLICITATION OF EMPLOYEES. Optionee agrees that he or she will not
for a period of one (1) year immediately following the termination of his or her
employment with the Company for any reason, either on Optionee's own account or
in conjunction with or on behalf of any other person or entity whatsoever,
directly or indirectly induce, solicit, or entice away any person who, at any
time during the three (3) months immediately preceding Optionee's termination of
employment, is a managerial level employee of the Company (including, but not
limited to, any Officer, Executive Director or director-level employee, or any
equivalent or successor term for any such employees). If Optionee engages in any
conduct contrary to the provisions of this Paragraph 7, Optionee shall forfeit
the Option to the extent the Option has not Vested, unless the Committee
determines otherwise. Such forfeiture is in addition to any other remedies
available under law.
8. CONFIDENTIAL INFORMATION AND TRADE SECRETS Optionee agrees that any
inventions, discoveries, creations (including without limitation software,
writings, drawings and other works), improvements, confidential information or
other intellectual property that he or she may develop or create, or assist in
developing or creating, during his or her employment with the Company, whether
or not patentable or eligible for copyright, that relate to the actual, planned,
or foreseeable business or other activities of the Company, or that result from
his or her work for the Company, are the exclusive property of the Company.
Optionee agrees to disclose promptly such property to the Company and will, both
during and after his or her employment, and without additional compensation,
execute all assignments and other documents and do all things reasonably
necessary to secure and enforce U.S. and foreign intellectual property rights
for the Company, including patents and copyrights. Such forfeiture is in
addition to any other remedies available under law.
Optionee agrees to hold in a fiduciary capacity for the benefit of the
Company all confidential, legal, financial, marketing, business, technical, or
other information, including specifically but not exclusively, information that
Optionee prepared, caused to be prepared, or received in connection with
Optionee's employment with the Company, such as management and business plans,
business strategies, software, software evaluations, trade secrets, personnel
information, marketing methods and techniques, and any of the above-recited
information as it relates to the Company that shall have been obtained and/or
learned during his or her employment and that shall not be public knowledge.
After termination of Optionee's employment with the Company, Optionee will not,
without prior written consent of the Company, communicate or divulge any such
information, knowledge or data to anyone other than the Company or its
designated representatives. This provision does not apply to (a) information or
knowledge that already is or subsequently may come into the public domain after
the termination of employment other than by way of unauthorized disclosure by
Optionee, or (b) information or knowledge that Optionee is required to disclose
by order of a court or governmental agency after timely notice is provided to
the Company to allow the Company to take legal action with respect to the
matter. If Optionee engages in any conduct contrary to the provisions of this
Paragraph 8, Optionee shall forfeit the Option to the extent the Option has not
Vested, unless the Committee determines otherwise.
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9. DECISIONS OF COMMITTEE. Any decision, interpretation or other action
made or taken in good faith by the Committee arising out of or in connection
with the Plan or the Option shall be final, binding and conclusive on the
Company and Optionee and any respective heir, executor, administrator, successor
or assign.
10. ARBITRATION. Any claim, controversy or dispute between Optionee and
the Company, whether sounding in contract, statute, tort, fraud,
misrepresentation, discrimination or any other legal theory, including, but not
limited to, disputes relating to the interpretation of this Agreement; claims
under Title VII of the Civil Rights Act of 1964, as amended; claims under the
Civil Rights Act of 1991; claims under the Age Discrimination in Employment Act
of 1967, as amended; claims under 42 U.S.C. Section 1981, Section 1981a,
Section 1983, Section 1985, or Section 1988; claims under the Family and Medical
Leave Act of 1993; claims under the Americans with Disabilities Act of 1990, as
amended; claims under the Fair Labor Standards Act of 1938, as amended; claims
under the Employees Retirement Income Security Act of 1974, as amended; claims
under the Colorado Anti-Discrimination Act; or claims under any other similar
federal, state or local law or regulation, whenever brought, shall be resolved
by arbitration. The only legal claims between Optionee and the Company that are
not included for arbitration within this Agreement are claims by Optionee for
workers' compensation or unemployment compensation benefits and/or claims for
benefits under any Company benefit plan, if the plan does not provide for
arbitration of such disputes. BY SIGNING THIS AGREEMENT, OPTIONEE VOLUNTARILY,
KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHT HE OR SHE MAY OTHERWISE HAVE TO
SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL AND
THE RIGHT TO RECOVER PUNITIVE DAMAGES ON ANY COMMON LAW AND/OR CONTRACT CLAIMS.
The Federal Arbitration Act, 9 U.S.C. Sections 1-16 ("FAA") shall govern the
arbitrability of all claims, provided that they are enforceable under the FAA,
as it may be amended from time to time. In the event the FAA does not govern,
the Colorado Uniform Arbitration Act shall apply. Additionally, the substantive
law of Colorado, to the extent it is consistent with the terms stated in this
Agreement for arbitration, shall apply to any common law claims. This Agreement
for arbitration supersedes any other arbitration agreement between Optionee and
the Company to the extent they are inconsistent.
A single arbitrator engaged in the practice of law shall conduct the
arbitration under the applicable rules and procedures of the American
Arbitration Association ("AAA"). Any dispute, that relates directly or
indirectly to Optionee's employment with the Company or to the termination of
Optionee's employment will be conducted under the AAA Employment Dispute
Resolution Rules, effective November 1993. The arbitrator shall be chosen from a
state other than Optionee's state of residence and other than Colorado. Other
than as set forth herein, the arbitrator shall have no authority to add to,
detract from, change, amend, or modify existing law. All arbitration
proceedings, including without limitation, settlements and awards, under this
Agreement will be confidential. The parties shall share equally the hourly fees
of the arbitrator. The Company shall pay the expenses (such as travel and
lodging) of the arbitrator. The prevailing party in any arbitration may be
entitled to receive reasonable attorneys' fees. The arbitrator's decision and
award shall be final and binding, as to all claims that were, or could have
been, raised in the arbitration, and judgment upon the award rendered by the
arbitrator may be entered to any court having jurisdiction thereof. If any party
hereto files a judicial or administrative action asserting claims subject to
this arbitration provision, and another party
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successfully stays such action and/or compels arbitration of such claims, the
party filing said action shall pay the other party's costs and expenses incurred
in seeking such stay and/or compelling arbitration, including reasonable
attorneys' fees.
11. MISCELLANEOUS.
(i) NOTICES. Any notice to be given to the Company shall be personally
delivered to or addressed to its Vice President - Law & Human Resources, and any
notice to be given to Optionee shall be addressed to him or her at the address
given beneath his or her signature below or such other address as the Company
reasonably believes to be his or her most current address. Any notice to the
Company is deemed given when received on behalf of the Company by the Vice
President - Law & Human Resources, of the Company at 188 Inverness Drive West,
Suite 800, Englewood, Colorado 80112. Any notice to Optionee is deemed given
when personally delivered or enclosed in a properly sealed envelope addressed as
aforesaid and deposited, postage prepaid, in a post office or branch post office
regularly maintained by the United States Postal Service.
(II) EMPLOYMENT. THE COMPANY MAY TERMINATE OPTIONEE'S EMPLOYMENT
AT ANY TIME, WITH OR WITHOUT CAUSE, UNLESS THE TERM OF EMPLOYMENT IS COVERED BY
SEPARATE CONDITIONS CONTAINED IN ANOTHER AUTHORIZED WRITTEN AGREEMENT SIGNED BY
BOTH PARTIES, AND NOTHING CONTAINED IN THIS AGREEMENT CREATES OR IMPLIES AN
EMPLOYMENT CONTRACT OR TERM OF EMPLOYMENT OR ANY PROMISE OF SPECIFIC TREATMENT
UPON WHICH THE OPTIONEE MAY RELY.
(iii) GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of Colorado.
(iv) AMENDMENTS. The Company may at any time propose to amend this
Agreement, but any such alteration or amendment shall be effective only if in
writing, signed by a duly authorized officer of the Company and by Optionee.
U S WEST, Inc. OPTIONEE
By:__________________________ __________________________
Full Name
Title:_______________________ __________________________
Street Address
__________________________
City, State and Zip Code
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EXHIBIT 10v
[FORM OF RESTRICTED STOCK AGREEMENT]
U S WEST, INC.
RESTRICTED STOCK AGREEMENT
THIS AGREEMENT is entered into between U S WEST, Inc. (the "Company") and
the Grantee ("Grantee") named in the Letter attached hereto and made a part of
this Agreement (the "Letter"), as of the date set forth in the Letter.
Pursuant to the U S WEST, Inc. 1994 Stock Plan as amended effective
November 1, 1995 (the "Plan"), the Human Resources Committee of the Board of
Directors (the "Committee") has granted to Grantee restricted shares of Common
Stock ("Restricted Shares") on the terms and conditions set forth in this
Agreement, as a matter of separate inducement in connection with Grantee's
engagement with the Company or a Related Entity, and not in lieu of salary or
other compensation for Grantee's services.
In consideration of the foregoing and of the mutual covenants set forth
herein and other good and valuable consideration, the Company and Grantee agree
as follows:
1. INCORPORATION OF PLAN AND DEFINED TERMS. The Restricted Stock is
granted pursuant to the Plan, the terms of which are incorporated by reference
and apply to this Agreement as though they were fully set forth herein. Terms
used in this Agreement and not otherwise defined shall have the meanings set
forth in the Plan.
2. GRANT OF RESTRICTED STOCK. On the terms and conditions set forth in
this Agreement, the Company hereby grants to Grantee the aggregate number of
shares of Restricted Stock set forth in the Letter.
3. RESTRICTED PERIOD. The Restricted Stock shall become Vested in
accordance with the schedule set forth in the Letter (the "Restricted Period").
Except as specifically set forth below and elsewhere in this Agreement, the
Restricted Stock shall not become Vested before the expiration of the Restricted
Period, regardless of the circumstances under which Grantee's employment is
terminated, and the Restricted Stock shall consequently remain subject to
forfeiture during the Restricted Period.
(i) DEATH. In the event of the death of Grantee, the Restricted
Stock shall no longer be subject to any restriction and shall be Vested
immediately.
<PAGE>
(ii) DISABILITY. Except as otherwise set forth in this Agreement, if
Grantee's employment with the Company or a Related Entity is terminated because
of Disability, the Restricted Stock shall no longer be subject to any
restriction and shall be Vested immediately.
(iii) RETIREMENT. Except as otherwise set forth in this Agreement,
if the Restricted Stock is not Vested upon Grantee's Retirement, the Restricted
Period shall continue and all restrictions respecting such Restricted Stock
shall lapse as of the date(s) such Restricted Stock is scheduled to Vest, unless
the Committee, in its sole discretion, determines otherwise. The continuation
of the Restricted Period after Retirement shall be contingent upon Grantee's
execution and delivery to the Company, on or prior to the effective date of
Grantee's Retirement, of the Company's standard form of "Waiver & Release" of
claims, available from the Human Resources Department of the Company.
(iv) OTHER TERMINATION. If Grantee's employment with the Company or
a Related Entity is terminated for any reason other than for death, Disability,
or Retirement, the Restricted Stock shall be forfeited immediately unless (i)
such forfeiture is contrary to the terms of an Executive Severance Agreement
executed by Grantee and an authorized officer of the Company, or (ii) the
Committee, in its sole discretion, determines that such Restricted Stock then is
Vested or sets alternative terms on which such Restricted Stock may become
Vested.
(v) EXECUTIVE SEVERANCE AGREEMENT. If Grantee has executed an
Executive Severance Agreement with the Company, the restrictions on the
Restricted Stock will lapse in accordance with the terms of the Executive
Severance Agreement if Grantee becomes entitled to the receipt of "Severance
Benefits," as set forth in that Executive Severance Agreement and sixteen (16)
days have passed following the execution of the Company's standard "Waiver &
Release" of claims and compliance with the "Conditions" by Grantee as set forth
in that Executive Severance Agreement.
(vi) CHANGE OF CONTROL. Upon the occurrence of a Change of Control,
the Restricted Stock shall no longer be subject to restrictions and shall be
Vested immediately. For purposes of this paragraph, "Change of Control" shall
have the identical meaning as set forth in the Change of Control Agreement that
Grantee has executed with the Company, as may be amended with the consent of
both parties. To ensure parallel application, for purposes of this paragraph
only, defined terms contained in the definition of "Change of Control" set forth
in Grantee's Change of Control Agreement shall have the same meaning here as set
forth in that Change of Control Agreement. If Grantee has not executed any such
Change of Control Agreement, then "Change of Control" shall have the identical
meaning as set forth in the Plan.
4. CUSTODY; VOTING AND DIVIDENDS. The Company shall hold the Restricted
Stock in an account on behalf of Grantee. Grantee shall execute and return the
attached Stock Power in favor of the Company, to be exercised by the Company
only in the case of the forfeiture or other return of the Restricted Stock to
the Company as provided in this Agreement. Grantee shall receive such dividends
as may be declared on such Restricted Stock and shall be entitled to voting
privileges associated with such Restricted Stock.
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5. NON-TRANSFERABILITY OF RESTRICTED STOCK. The Restricted Stock is not
transferable other than by last will and testament or the laws of descent and
distribution. The Restricted Stock shall not be otherwise transferred or
assigned, pledged, hypothecated or otherwise disposed of in any way, whether by
operation of law or otherwise, and shall not be subject to execution, attachment
or similar process. The Restricted Stock shall not be assignable or
transferable pursuant to a domestic relations order. Upon any attempt to
transfer the Restricted Stock other than by last will and testament or the laws
of descent and distribution, or to assign, pledge, hypothecate or otherwise
dispose of the Restricted Stock, or upon the levy of any execution, attachment
or similar process upon the Restricted Stock, the Restricted Stock shall be
canceled immediately.
6. PERFORMANCE FOR COMPETITORS. If at any time following the date of this
Agreement and before the Restricted Stock is Vested, whether or not Grantee is
Retired, Grantee directly or indirectly receives payment for services rendered
to, or is otherwise employed by, any person, firm or corporation that is in
competition with the Company or engaged in providing any goods or services that
are substantially the same as goods or services provided or under development by
the Company, Grantee immediately shall forfeit all rights under the Restricted
Stock, unless the Committee in its sole discretion determines otherwise, or
unless Grantee is in full compliance with the Company's Policy on Service on
Outside Boards of Directors, as interpreted solely by the Company's Senior
Management Compliance Committee. Any determination under this Paragraph 6,
including whether a person, firm or corporation is "in competition with" the
Company or providing "substantially the same" goods or services as the Company
provides or is developing, will be subject to the sole discretion of the
Committee.
7. NON-SOLICITATION OF EMPLOYEES. Grantee agrees that he or she will not
for a period of one (1) year immediately following the termination of his or her
employment with the Company for any reason, either on Grantee's own account or
in conjunction with or on behalf of any other person or entity whatsoever,
directly or indirectly induce, solicit, or entice away any person who is a
managerial level employee of the Company (including, but not limited to, any
Officer, Executive Director or director-level employee, or any equivalent or
successor term for any such employees) at any time during the three (3) months
immediately preceding Grantee's termination of employment. If Grantee engages
in any conduct contrary to the provisions of this Paragraph 7, Grantee shall
forfeit the Restricted Stock to the extent the Restricted Stock has not Vested,
unless the Committee determines otherwise. Such forfeiture shall be in addition
to any other remedies available under law.
8. CONFIDENTIAL INFORMATION AND TRADE SECRETS. Grantee agrees that any
inventions, discoveries, creations (including without limitation software,
writings, drawings and other works), improvements, confidential information or
other intellectual property that he or she may develop or create, or assist in
developing or creating, during his or her employment with the Company, whether
or not patentable or eligible for copyright, that relate to the actual, planned,
or foreseeable business or other activities of the Company, or that result from
his or her work for the Company, are the exclusive property of the Company.
Grantee agrees to disclose promptly such property to the Company and will, both
during and after his or her employment, and without additional compensation,
execute all assignments and other documents and do all things
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reasonably necessary to secure and enforce U.S. and foreign intellectual
property rights for the Company, including patents and copyrights.
Grantee agrees to hold in a fiduciary capacity for the benefit of the
Company all confidential, legal, financial, marketing, business, technical, or
other information, including specifically but not exclusively, information that
Grantee prepared, caused to be prepared, or received in connection with
Grantee's employment with the Company, such as management and business plans,
business strategies, software, software evaluations, trade secrets, personnel
information, marketing methods and techniques, and any of the above-recited
information as it relates to the Company that shall have been obtained and/or
learned during his or her employment and that shall not be public knowledge.
After termination of Grantee's employment with the Company, Grantee will not,
without prior written consent of the Company, communicate or divulge any such
information, knowledge or data to anyone other than the Company or its
designated representatives. This provision does not apply to (a) information or
knowledge that already is or subsequently may come into the public domain after
the termination of employment other than by way of unauthorized disclosure by
Grantee, or (b) information or knowledge that Grantee is required to disclose by
order of a court or governmental agency after timely notice is provided to the
Company to allow the Company to take legal action with respect to the matter. If
Grantee engages in any conduct contrary to the provisions of this Paragraph 8,
Grantee shall forfeit the Restricted Stock to the extent the Restricted Stock
has not Vested, unless the Committee determines otherwise. Such forfeiture
shall be in addition to any other remedies available under law.
9. DECISIONS OF COMMITTEE. Any decision, interpretation or other action
made or taken in good faith by the Committee arising out of or in connection
with the Plan or the Restricted Stock shall be final, binding and conclusive on
the Company and Grantee and any respective heir, executor, administrator,
successor or assign.
10. ARBITRATION. Any claim, controversy or dispute between Grantee and
the Company, whether sounding in contract, statute, tort, fraud,
misrepresentation, discrimination or any other legal theory, including, but not
limited to, disputes relating to the interpretation of this Agreement; claims
under Title VII of the Civil Rights Act of 1964, as amended; claims under the
Civil Rights Act of 1991; claims under the Age Discrimination in Employment Act
of 1967, as amended; claims under 42 U.S.C. Section 1981, Section 1981a, Section
1983, Section 1985, or Section 1988; claims under the Family and Medical Leave
Act of 1993; claims under the Americans with Disabilities Act of 1990, as
amended; claims under the Fair Labor Standards Act of 1938, as amended; claims
under the Employee Retirement Income Security Act of 1974, as amended; claims
under the Colorado Anti-Discrimination Act; or claims under any other similar
federal, state or local law or regulation, whenever brought, shall be resolved
by arbitration. The only legal claims between Grantee and the Company that are
not included for arbitration within this Agreement are claims by Grantee for
workers' compensation or unemployment compensation benefits and/or claims for
benefits under any Company benefit plan, if the plan does not provide for
arbitration of such disputes. BY SIGNING THIS AGREEMENT, GRANTEE VOLUNTARILY,
KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHT HE OR SHE MAY OTHERWISE HAVE TO
SEEK REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL AND
THE RIGHT TO RECOVER PUNITIVE DAMAGES ON ANY
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COMMON LAW AND/OR CONTRACT CLAIMS. The Federal Arbitration Act, 9 U.S.C.
Sections 1-16 ("FAA") shall govern the arbitrability of all claims, provided
that they are enforceable under the FAA, as it may be amended from time to time.
In the event the FAA does not govern, the Colorado Uniform Arbitration Act shall
apply. Additionally, the substantive law of Colorado, to the extent it is
consistent with the terms stated in this Agreement for arbitration, shall apply
to any common law claims. This Agreement for arbitration supersedes any other
arbitration agreement between Grantee and the Company to the extent they are
inconsistent.
A single arbitrator engaged in the practice of law shall conduct the
arbitration under the applicable rules and procedures of the American
Arbitration Association ("AAA"). Any dispute, that relates directly or
indirectly to Grantee's employment with the Company or to the termination of
Grantee's employment will be conducted under the AAA Employment Dispute
Resolution Rules, effective November, 1993. The arbitrator shall be chosen from
a state other than Grantee's state of residence and other than Colorado. Other
than as set forth herein, the arbitrator shall have no authority to add to,
detract from, change, amend, or modify existing law. All arbitration
proceedings, including without limitation, settlements and awards, under this
Agreement will be confidential. The parties shall share equally the hourly fees
of the arbitrator. The Company shall pay the expenses (such as travel and
lodging) of the arbitrator. The prevailing party in any arbitration may be
entitled to receive reasonable attorneys' fees. The arbitrator's decision and
award shall be final and binding, as to all claims that were, or could have
been, raised in the arbitration, and judgment upon the award rendered by the
arbitrator may be entered to any court having jurisdiction thereof. If any
party hereto files a judicial or administrative action asserting claims subject
to this arbitration provision, and another party successfully stays such action
and/or compels arbitration of such claims, the party filing said action shall
pay the other party's costs and expenses incurred in seeking such stay and/or
compelling arbitration, including reasonable attorneys' fees.
11. MISCELLANEOUS.
(i) NOTICES. Any notice to be given to the Company shall be
personally delivered to or addressed to its Vice President - Law and Human
Resources, and any notice to be given to Grantee shall be addressed to him/her
at the address given beneath his/her signature below, or such other address as
the Company reasonably believes to be his/her most current address. Any notice
to the Company is deemed given when received on behalf of the Company by its
Vice President - Law and Human Resources at 188 Inverness Drive West, Suite 800,
Englewood, Colorado 80112. Any notice to Grantee is deemed given when
personally delivered or enclosed in a properly sealed envelope addressed as
described above and deposited, postage prepaid, in a post office or branch post
office regularly maintained by the United States Postal Service.
(ii) EMPLOYMENT. THE COMPANY MAY TERMINATE ANY GRANTEE'S EMPLOYMENT
AT ANY TIME, WITH OR WITHOUT CAUSE, UNLESS THE TERM OF EMPLOYMENT IS COVERED BY
SEPARATE CONDITIONS CONTAINED IN ANOTHER AUTHORIZED WRITTEN AGREEMENT SIGNED BY
THE COMPANY AND THE GRANTEE. NOTHING CONTAINED IN THIS AGREEMENT CREATES OR
IMPLIES AN EMPLOYMENT CONTRACT OR TERM OF EMPLOYMENT OR ANY PROMISE OF SPECIFIC
TREATMENT UPON WHICH GRANTEE MAY RELY.
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(iii) GOVERNING LAW. This Agreement shall be construed and enforced
in accordance with the laws of the State of Colorado.
(iv) AMENDMENTS. The Company may at any time propose to amend this
Agreement, but any such alteration or amendment shall be effective only if in
writing, signed by a duly authorized officer of the Company and by Grantee.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth in the Letter.
U S WEST, Inc. GRANTEE
By:__________________________ ___________________________
Name
___________________________
Street Address
___________________________
City, State and Zip Code
___________________________
Social Security Number
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<PAGE>
IRREVOCABLE STOCK POWER
FOR VALUE RECEIVED, the undersigned does (do) hereby sell, assign and
transfer to:
U S WEST, INC.
84-0926774
(Tax Identification Number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
((NOShrs)) shares of Common Stock issued by U S WEST, Inc. (the "Company")
represented by Grant Number ((Grant no)), standing in the name of the
undersigned on the books of the Company.
The undersigned does (do) hereby irrevocably constitute and appoint the
Executive Vice President - Law and Human Resources for the Company as attorney
to transfer the said stock on the books of the Company, with full power of
substitution in the premises.
__________________________________ Dated:_____________________
((FirstName))((MidName))((LastName))
IMPORTANT -- READ CAREFULLY: The signature(s) of this Stock Power must
correspond with the name(s) as written upon the face of the certificate(s) or
account(s) in every particular without alteration or enlargement or any change
whatever.
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EXHIBIT 10y
[FORM OF EXECUTIVE CHANGE OF CONTROL AGREEMENT]
February 12, 1996
[Name]
[Title]
[Company]
7800 East Orchard Road
Englewood, Colorado 80111
Dear [Name]:
U S WEST, Inc. (the "Company"), on behalf of itself, its subsidiaries
and its shareholders, wishes to encourage your continued service and dedication
in the performance of your duties, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined in Subsection I(h)) of the
Company. The Board of Directors of the Company (the "Board") believes that the
prospect of a pending or threatened Change of Control inevitably creates
distractions and personal risks and uncertainties for its executives, and that
it is in the best interests of the Company to minimize such distractions to
certain executives and the Company. The Board further believes that it is in the
best interests of the Company to encourage its executives' full attention and
dedication to their duties, both currently and in the event of any threatened or
pending Change of Control.
Accordingly, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued retention of certain members of
the Company's management, including yourself, and the attention and dedication
of management to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change of
Control of the Company.
In order to induce you (the "Executive") to remain in the employ of
the Company and in consideration of your continued service to the Company, the
Company agrees that you shall receive the benefits set forth in this letter
agreement (the "Agreement") in the event that your employment with the Company
is terminated subsequent to a Change of Control of the Company in the
circumstances hereinafter described. For purposes of this Agreement, references
to employment with the Company shall include employment with a Subsidiary of the
Company (as defined in Subsection I(w)).
I. DEFINITIONS
The meaning of each defined term that is used in this Agreement is set
forth below.
(a) AAA. The American Arbitration Association.
(b) ADDITIONAL PAY. The meaning of this term is set forth in
Subsection IV(b).
(c) AGREEMENT. The meaning of this term is set forth in the third
paragraph of this Agreement.
<PAGE>
(d) AGREEMENT PAYMENTS. The meaning of this term is set forth in
Subsection IV(e)(i).
(e) BENEFICIARIES. The meaning of this term is set forth in Subsection
VI(b).
(f) BOARD. The meaning of this term is set forth in the first
paragraph of this Agreement.
(g) CAUSE. For purposes of this Agreement, "Cause" shall mean the
Executive's willfully breaching or failing to perform his employment duties. For
purposes of this Subsection I(g), no act, or failure to act, on the part of the
Executive shall be deemed "willful" unless done, or omitted to be done, by the
Executive not in good faith and without reasonable belief that such action or
omission was in the best interest of the Company. Notwithstanding the foregoing,
the Executive shall not be deemed to have been terminated for Cause unless and
until there shall have been delivered to the Executive a certificate of a
resolution duly adopted by the affirmative vote of not less than seventy-
five percent (75%) of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to the Executive
and an opportunity for the Executive, together with the Executive's counsel, to
be heard before the Board), finding that in the good faith opinion of the Board,
the Executive has engaged in the conduct set forth in this Subsection I(g) and
specifying the particulars thereof in detail.
(h) CHANGE OF CONTROL. For purposes of this Agreement, a "Change of
Control" shall be deemed to have occurred if there is a change of control of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided that, without limitation, such a
Change of Control shall be deemed to have occurred if:
i) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of 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;
(ii) 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;
(iii) 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);
(iv) 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
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share exchange; provided, however, that notwithstanding the foregoing,
no Change of Control for purposes of this Subsection I(h)(iv) 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;
(v) the Company: (A) redeems all of the outstanding shares of the
U.S WEST Communications Group Common Stock or the U S WEST Media Group
Common Stock in exchange for shares of one or more wholly-owned
subsidiaries of the Company that hold all or substantially all of the
assets that are attributed to that Group; (B) distributes to the
shareholders of U S WEST Communications Group or U S WEST Media Group
the shares of one or more wholly-owned subsidiaries that hold all or
substantially all of the assets attributed to that Group; (C) converts
all of the outstanding shares of U S WEST Communications Group Common
Stock into the shares of U S WEST Media Group Common Stock, or vice
versa; or (D) distributes the stock of one or more wholly-owned
subsidiaries holding all or substantially all of the assets of the
Company, under applicable law, at a time when there are no classes of
Common Stock that separately track the performance of certain Company
businesses; or
(vi) any other event that a majority of the Board, in its sole
discretion, shall determine constitutes a Change of Control.
(i) CODE. The meaning of this term is set forth in
Subsection IV(e)(i).
(j) COMPANY. The meaning of this term is set forth in the first
paragraph of this Agreement and Subsection VI(a).
(k) CONTROLLED GROUP. For purposes of this Agreement, "Controlled
Group" shall mean the Company and all of the Company's Subsidiaries.
(l) DISABILITY. For purposes of this Agreement, "Disability" shall
mean an illness, injury or similar incapacity which 52 weeks after its
commencement continues to render the Executive unable to perform the material
and substantial duties of the Executive's position or any occupation or
employment for which the Executive is qualified or may reasonably become
qualified by training, education or experience. Any question as to the existence
of a Disability upon which the Executive and the Company cannot agree shall be
determined by a qualified independent physician selected by the Executive (or,
if the Executive is unable to make such selection, by any adult member of the
Executive's immediate family or the Executive's legal representative), and
approved by the Company, such approval not to be unreasonably withheld. The
determination of such physician made in writing to the Company, and to the
Executive, shall be final and conclusive for all purposes of this Agreement.
(m) EMPLOYER. For purposes of this Agreement, "Employer" shall mean
the Company or the Subsidiary, as the case may be, with which the Executive has
an employment relationship.
(n) EXCHANGE ACT. This term shall have the meaning set forth in
Subsection I(h).
(o) EXECUTIVE. This term shall have the meaning set forth in the third
paragraph of this Agreement.
(p) EXCISE TAX. This term shall have the meaning set forth in
Subsection IV(e)(i).
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<PAGE>
(q) GOOD REASON. For purposes of this Agreement, "Good Reason" shall
mean the occurrence, without the Executive's express written consent, of any of
the following circumstances:
(i) The assignment to the Executive of any duties inconsistent
with, or any substantial diminution in, such Executive's status or
responsibilities as in effect immediately prior to a Change of Control
of the Company, including imposition of travel obligations which
differ materially from required business travel immediately prior to
the Change of Control;
(ii) Any diminution in the status or responsibilities of the
Executive's position from that which existed immediately prior to the
Change of Control, whether by reason of the Company ceasing to be a
public company under the Exchange Act, becoming a subsidiary of a
successor public company, or otherwise;
(iii) (A) A reduction in the Executive's annual base salary as in
effect immediately before the Change of Control; or (B) the failure to
pay a bonus award to which the Executive is otherwise entitled under
any of the short-term incentive plan in which the Executive
participates, the U S WEST Executive Long-Term Incentive Plan, or any
successor incentive compensation plans at the time such awards are
usually paid;
(iv) A change in the principal place of the Executive's
employment, as in effect immediately prior to the Change of Control of
the Company, to a location more than thirty-five (35) miles distant
from the location of such principal place at such time;
(v) The failure by the Company to continue in effect any
incentive compensation plan or stock option plan in which the
Executive participates immediately prior to the Change of Control,
unless an equivalent alternative compensation arrangement (embodied in
an ongoing substitute or alternative plan) has been provided to the
Executive, or the failure by the Company to continue the Executive's
participation in any such incentive or stock option plan on
substantially the same basis, both in terms of the amount of benefits
provided and the level of the Executive's participation relative to
other participants, as existed immediately prior to the time of the
Change of Control;
(vi) (A) Except as required by law, the failure by the Company to
continue to provide to the Executive benefits substantially
equivalent, in the aggregate, to those enjoyed by the Executive under
the qualified and non-qualified employee benefit and welfare plans of
the Company, including, without limitation, any pension, life
insurance, medical, dental, health and accident, disability,
retirement or savings plans in which the Executive was eligible to
participate immediately prior to the Change of Control; (B) the taking
of any action by the Company which would directly or indirectly
materially reduce or deprive the Executive of any other perquisite
enjoyed by the Executive immediately prior to the Change of Control
(including Company-paid and/or reimbursed club memberships, financial
counseling fees and the like); or (C) the failure by the Company or
its successor to treat the Executive under the Company's vacation
policy, past practice or special agreement in the same manner and to
the same extent as was in effect immediately prior to the Change of
Control;
(vii) The failure of the Company or any successor to obtain a
satisfactory written agreement from any successor to assume and agree
to perform this Agreement, as contemplated in Subsection VI(a); or
(viii) Any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying
the requirements of Subsection III(b) or, if
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applicable, Subsection I(g). For purposes of this Agreement, no such
purported termination shall be effective except as constituting Good
Reason.
The Executive's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstances constituting Good Reason
hereunder.
(r) GROSS-UP PAYMENT. The meaning of this term is set forth in
Subsection IV(e)(i).
(s) NOTICE OF TERMINATION. The meaning of this term is set forth in
Subsection III(b).
(t) OTHER PAYMENTS. The meaning of this term is set forth in
Subsection IV(e)(i).
(u) PAYMENTS. The meaning of this term is set forth in Subsection
IV(e)(i).
(v) RETIREMENT. For purposes of this Agreement, "Retirement" shall
mean the Executive's voluntary termination of employment with the Company, other
than for Good Reason, and in accordance with the Company's retirement policy
generally applicable to its employees or in accordance with any prior or
contemporaneous retirement arrangement established with the Executive's consent
with respect to the Executive.
(w) SUBSIDIARY. For purposes of this Agreement, "Subsidiary" shall
mean any corporation of which more than fifty percent (50%) of the voting stock
is owned directly or indirectly by the Company.
(x) TAX COUNSEL. The meaning of this term is set forth in Subsection
IV(e)(ii).
(y) TERMINATION. The meaning of this term is set forth in Subsection
III(a).
(z) TERMINATION DATE. For purposes of this Agreement, "Termination
Date" shall mean:
(i) If the Executive's employment is terminated for Disability,
thirty (30) days after Notice of Termination is given (provided that
the Executive shall not have returned to the full-time performance of
his duties during such thirty-day period); and
(ii) If the Executive's employment is terminated for Cause or
Good Reason or for any reason other than death or Disability, the date
specified in the Notice of Termination (which in the case of a
termination for Cause shall not be less than thirty (30) days and in
the case of a termination for Good Reason shall not be less than
thirty (30) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
II. TERM OF AGREEMENT
(a) GENERAL. Upon execution by the Executive, this Agreement shall
commence as of February 12, 1996. This Agreement shall continue in effect
through December 31, 1999; provided, however, that commencing on January 1,
2000, and every third January 1 thereafter, the term of this Agreement shall
automatically be extended for three additional years unless, not later than
ninety days prior to the January 1 on which this Agreement would otherwise
automatically be extended, the Company shall have given notice that it does not
wish to extend this Agreement; provided further, however, that if a Change of
Control of the Company shall have occurred during the original or any extended
term of this Agreement, this Agreement shall continue in effect for a period of
thirty-six months beyond the month in which the Change of Control occurred.
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(b) DISPOSITION OF EMPLOYER. In the event the Executive is employed by
a Subsidiary, the terms of this Agreement shall expire if such Subsidiary is
sold or otherwise disposed of prior to a Change of Control unless the Executive
continues in employment with the Controlled Group after such sale or other
disposition. If the Executive's Employer is sold or disposed of following a
Change of Control, this Agreement shall continue through its original term or
any extended term then in effect.
(c) DEEMED CHANGE OF CONTROL. If the Executive's employment with the
Employer is terminated prior to the date on which a Change of Control occurs,
and such termination was at the request of a third party who has taken steps to
effect a Change of Control or was otherwise caused by the Change of Control,
then for all purposes of this Agreement, a Change of Control shall be deemed to
have occurred prior to such termination.
(d) EXPIRATION OF AGREEMENT. No termination or expiration of this
Agreement shall affect any rights, obligations or liabilities of either party
that shall have accrued on or prior to the date of such termination or
expiration.
III. TERMINATION FOLLOWING CHANGE OF CONTROL
(a) ENTITLEMENT TO BENEFITS. If a Change of Control of the Company
shall have occurred, the Executive shall be entitled to the benefits provided in
Section IV hereof upon the subsequent termination of her employment with the
Company within three years after the date of the Change of Control unless such
termination is (i) a result of the Executive's death or Retirement, (ii) for
Cause, (iii) a result of the Executive's Disability, or (iv) by the Executive
other than for Good Reason. A termination of the Executive's employment which is
not as a result of the Executive's death, Retirement or Disability and (x) if by
the Company, is not for Cause, or (y) if by the Executive, is for Good Reason,
shall be referred to hereinafter as a "Termination."
(b) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Company or by the Executive shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section VIII. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice which shall indicate the specific provision of this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. If the Executive's employment shall be terminated
for Cause or by the Executive for other than Good Reason, the Company shall pay
the Executive his full base salary through the Termination Date at the rate in
effect at the time Notice of Termination is given and shall pay any amounts to
be paid to the Executive pursuant to any other compensation plans, programs or
employment agreements then in effect, and the Company shall have no further
obligations to the Executive under this Agreement.
If within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice notifies the other party that a dispute exists
concerning the grounds for termination, then, notwithstanding the meaning of
"Termination Date" set forth in Subsection I(z), the Termination Date shall be
the date on which the dispute is finally resolved, whether by mutual written
agreement of the parties or by a decision rendered pursuant to Section XI;
provided that the Termination Date shall be extended by a notice of dispute only
if such notice is given in good faith and the party giving such notice pursues
the resolution of such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, the Company will continue to pay the Executive his
full compensation in effect when the notice giving rise to the dispute was
given, and continue the Executive as a participant in all benefits plans or
perquisites in which the Executive was participating or which he was enjoying
when the Notice of Termination giving rise to the dispute was given, until the
dispute is finally resolved. Amounts paid under this Subsection III(b) are in
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addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
IV. COMPENSATION UPON A TERMINATION
Following a Change of Control of the Company, upon a Termination of
the Executive's employment, the Executive shall be entitled to the following
benefits, provided that the Termination occurs during the three-year period
immediately following the date of the Change of Control:
(a) STANDARD BENEFITS. The Company shall pay the Executive his full
base salary through the Termination Date at the rate in effect at the time the
Notice of Termination is given, no later than the second day following the
Termination Date, plus all other amounts to which the Executive is entitled
under any compensation plan of the Company applicable to the Executive at the
time such payments are due. Without limitation, amounts payable pursuant to this
Subsection IV(a) shall include, pursuant to the express terms of the short-term
incentive plan in which the Executive participates or otherwise, the Executive's
annual bonus under such short-term incentive plan, pro-rated to the Termination
Date.
(b) ADDITIONAL BENEFITS. The Company shall pay to the Executive as
additional pay ("Additional Pay"), the product of (i) the lesser of (x) three
(3) or (y) the difference between sixty-five (65) and the Executive's age as of
the date of the Notice of Termination (calculated to the nearest twelfth of a
year), multiplied by (ii) the sum of (x) the Executive's annual base salary rate
in effect immediately prior to the Termination Date and (y) the Executive's
annual bonus amount under the short-term incentive plan in which the Executive
participates, such bonus amount to be calculated on the basis of the extent to
which the performance factors targeted by the Human Resources Committee of the
Board have been achieved (for this purpose, the Company's performance through
the Termination Date shall be annualized based upon the actual number of days
elapsed from the beginning of the fiscal year in which the Termination occurs
through the Termination Date over a year of 360 days), which shall be deemed to
be 100% unless the performance actually achieved is greater than 100%, in which
case the actual performance levels shall be utilized. The Company shall pay to
the Executive the Additional Pay in a lump sum, in cash, not later than the
fifteenth day following the Termination Date.
(c) RETIREMENT PLAN BENEFITS. If not already vested, the Executive
shall be deemed fully vested in all Company retirement plans and/or other
written agreements relating to pay upon retirement in which the Executive was a
participant, party or beneficiary immediately preceding a Change of Control, and
any additional plans and/or agreements in which such Executive became a
participant, party or beneficiary thereafter. In addition to the foregoing, for
purposes of determining the amounts to be paid to the Executive under such plans
and/or agreements, the years of service with the Company and the age of the
Executive under all such plans and agreements shall be deemed increased by the
lesser of thirty-six (36) months or such shorter period of time as would render
the Executive sixty-five (65) years of age. For purposes of this Subsection
IV(c), "plans" include, without limitation, the Company's qualified pension
plan, non-qualified and mid-career retirement plans, and "agreements" encompass
the terms of any offer letters leading to the Executive's employment with the
Company where the Executive was a signatory thereto and any written amendments
to the foregoing. In the event that the terms of the plans referenced in this
Subsection IV(c) do not for any reason (e.g., if plan amendments would cause
disqualification of qualified plans) coincide with the provisions of this
Subsection IV(c), the Executive shall be entitled to receive from the Company
under the terms of this Agreement an amount equivalent to all amounts he would
have received had all such plans continued in existence as in effect on the date
of this Agreement after being amended to coincide with the terms of this
Subsection IV(c).
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(d) HEALTH BENEFITS. Following the Termination Date, the Company shall
continue to provide health, vision and dental benefits to the Executive and the
Executive's eligible dependents on terms substantially equivalent to those on
which the Company provides such benefits to retired employees who were service
pension-eligible at the time of the Change of Control and whose retirement date
most closely approximates the date of the Change of Control. The eligibility of
the Executive's dependents shall be determined by the terms of the health,
vision and dental benefit plans in effect prior to the Change of Control.
(e) GROSS-UP PAYMENTS.
(i) In the event that any payment or the value of any benefit
received or to be received by the Executive in connection with the
Executive's Termination or contingent upon a Change of Control of the
Company (whether received or to be received pursuant to the terms of
this Agreement (the "Agreement Payments") or of any other plan,
arrangement or agreement of the Company, its successors, any person
whose actions result in a Change of Control of the Company or any
person affiliated with any of them (or which, as a result of the
completion of the transactions causing a Change of Control, will
become affiliated with any of them) ("Other Payments" and, together
with the Agreement Payments, the "Payments")) would be subject to the
excise tax imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code") or any comparable federal, state or
local excise tax (such excise tax, together with any interest and
penalties, are hereinafter collectively referred to as the "Excise
Tax"), as determined as provided below, the Company shall pay to the
Executive an additional amount (the "Gross-Up Payment") such that the
net amount retained by the Executive, after deduction of the Excise
Tax on Agreement Payments and Other Payments and any federal, state
and local income tax and Excise Tax upon the payment provided for by
this Subsection IV(e)(i), and any interest, penalties or additions to
tax payable by the Executive with respect thereto shall be equal to
the total present value of the Agreement Payments and Other Payments
at the time such Payments are to be made. The intent of the parties is
that the Company shall be solely responsible for and shall pay, any
Excise Tax on any Payments and Gross-Up Payment and any income and
employment taxes (including, without limitation, penalties and
interest) imposed on any Gross-Up Payments as well as any loss of
deduction caused by the Gross-Up Payment.
(ii) All determinations required to be made under this Subsection
IV(e), including, without limitation, whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determinations, shall
be made by tax counsel selected by the Company and reasonably
acceptable to the Executive ("Tax Counsel"). The Company shall cause
the Tax Counsel to provide detailed supporting calculations to the
Company and the Executive within fifteen (15) business days after
notice is given by the Executive to the Company that any or all of the
Payments have occurred, or such earlier time as is requested by the
Company. Within two (2) business days after such notice is given to
the Company, the Company shall instruct the Tax Counsel to timely
provide the data required by this Subsection IV(e) to the Executive.
All fees and expenses of the Tax Counsel shall be paid solely by the
Company. Any Excise Tax as determined pursuant to this Subsection
IV(e) shall be paid by the Company to the Internal Revenue Service
and/or other appropriate taxing authority on the Executive's behalf
within five (5) days after receipt of the Tax Counsel's determination.
If the Tax Counsel determines that there is substantial authority
(within the meaning of Section 6662 of the Code) that no Excise Tax is
payable by the Executive, the Tax Counsel shall furnish the Executive
with a written opinion that failure to disclose or report the Excise
Tax on the Executive's federal income tax return will not constitute a
substantial understatement of tax or be reasonably likely to result in
the imposition of a negligence or similar penalty. Any determination
by the Tax Counsel shall be binding upon the
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Company and the Executive in the absence of material mathematical or
legal error. As a result of the uncertainty in the application of
Section 4999 of the Code at the time the initial determination by the
Tax Counsel hereunder, it is possible that Gross-Up Payments will not
have been made by the Corporation that should have been made or that
Gross-Up Payments have been made that should not have been made, in
each case, consistent with the calculations required to be made
hereunder. In the event the Company exhausts its remedies pursuant to
Subsection IV(e)(iii) below and the Executive is thereafter required
to make a payment of any Excise Tax, the Tax Counsel shall determine
the amount of underpayment of Excise Taxes that has occurred and any
such underpayment shall be promptly paid by the Company to the
Internal Revenue Service or other appropriate taxing authority on the
Executive's behalf or, if such underpayment has been previously paid
by the Executive, to the Executive. In the event that the Tax Counsel
determines that an overpayment of Gross-Up Payments has occurred, any
such overpayment shall be treated for all purposes as a loan to the
Executive with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code, due and payable within ninety (90)
days after written demand to the Executive by the Company; provided,
however, that the Executive shall have no duty or obligation
whatsoever to repay such loan unless the Executive's receipt of the
overpayment, or any portion thereof, is includible in the Executive's
income and the Executive's repayment of the same is not deductible by
the Executive for federal and state income tax purposes.
(iii) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service or state or local taxing
authority, that, if successful, would result in any Excise Tax or an
underpayment of Gross-Up Payments. Such notice shall be given as soon
as practicable but no later than fifteen (15) business days after the
Executive is informed in writing of the claim and shall inform the
Company of the nature of the claim, the administrative or judicial
appeal period, and the date on which any payment of the claim must be
paid. The Executive shall not pay any portion of the claim prior to
the expiration of the thirty (30) day period following the date on
which the Executive gives such notice to the Company (or such shorter
period ending on the date that any amount under the claim is due). If
the Company notifies the Executive in writing prior to the expiration
of such thirty (30) day period that it desires to contest the claim,
the Executive shall:
(A) give the Company any information reasonably requested by
the Company relating to the claim;
(B) take such action in connection with contesting the claim
as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation concerning the claim by an attorney selected by
the Company who is reasonably acceptable to the Executive; and
(C) cooperate with the Company in good faith in order to
effectively contest the claim; provided, however, that the
Company shall bear and pay directly all costs and expenses
(including, without limitation, additional interest and penalties
and attorneys' fees) incurred in such contests and shall
indemnify and hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including, without limitation,
interest and penalties thereon) imposed as a result of such
representation. Without limitation upon the foregoing provisions
of this Subsection IV(e) (iii), except as provided below, the
Company shall control all proceedings concerning such contest
and, in its sole opinion, may pursue or forego any and all
administrative appeal, proceedings, hearings and conferences with
the taxing authority pertaining to the claim. At the written
request of the Company and upon payment to the Executive of an
amount at least equal to the claim plus any
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additional amount necessary to obtain the jurisdiction of the
appropriate tribunal and/or court, the Executive shall pay the
same and sue for a refund. The Executive agrees to prosecute any
contest of a claim to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided,
however, that if the Company requests the Executive to pay the
claim and sue for a refund, the Company shall advance the amount
of such payment to the Executive, on an interest-free basis, and
shall indemnify and hold the Executive harmless on an after-tax
basis, from any Excise Tax or income tax (including, without
limitation, interest and penalties thereon) imposed on such
advance or for any imputed income on such advance. Any extension
of the statute of limitations relating to assessment of any
Excise Tax for the taxable year of the Executive which is the
subject of the claim is to be limited solely to the claim.
Furthermore, the Company's control of the contest shall be
limited to issues for which a Gross-Up Payment would be payable
hereunder. The Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(iv) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Subsection IV(e)(iii) above, the Executive
receives any refund of a claim and/or any additional amount that was
necessary to obtain jurisdiction, the Executive shall promptly pay to
the Company the amount of such refund (together with any interest paid
or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant
to Subsection IV(e)(iii) above, a determination is made that the
Executive shall not be entitled to any refund of the claim and the
Company does not notify the Executive in writing of its intent to
contest such denial of refund of a claim prior to the expiration of
thirty (30) days after such determination, then the portion of such
advance attributable to a claim shall be forgiven and shall not be
required to be repaid. The amount of such advance attributable to a
claim shall offset, to the extent thereof, the amount of the
underpayment required to be paid by the Company to the Executive.
(v) If, after the advance by the Company of an additional amount
necessary to obtain jurisdiction, there is a final determination made
by the taxing authority that the Executive is not entitled to any
refund of such amount, or any portion thereof, then such nonrefundable
amount shall be repaid to the Company by the Executive within thirty
(30) days after the Executive receives notice of such final
determination. A final determination shall occur when the period to
contest or otherwise appeal any decision by an administrative tribunal
or court of initial jurisdiction has been waived or the time for
contesting or appealing the same has expired.
(f) LEGAL FEES AND EXPENSES. The Company shall pay to the Executive
all legal fees and expenses as and when incurred by the Executive in connection
with this Agreement, including all such fees and expenses, if any, incurred in
contesting or disputing any Termination or in seeking to obtain or enforce any
right or benefit provided by this Agreement, regardless of the outcome, unless,
in the case of a legal action brought by or in the name of the Executive, a
decision is rendered pursuant to Section X that such action was not brought by
the Executive in good faith.
(g) NO MITIGATION. The Executive shall not be required to mitigate the
amount of any payment provided for in this Section IV by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Section IV be reduced by any compensation earned by the Executive as
the result of employment by another employer or by retirement or other benefits
received after the Termination Date or otherwise, except as specifically
provided in this Section IV. The Company's obligation to make payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company or Employer may have against the
Executive or other parties.
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V. DEATH AND DISABILITY BENEFITS
In the event of the death or Disability of the Executive after a
Change of Control of the Company, the Executive, or in the case of death, the
Executive's beneficiaries, shall receive the benefits to which they are entitled
under the retirement plans, disability policies and other applicable plans or
agreements of the Company.
VI. SUCCESSORS; BINDING AGREEMENT
(a) OBLIGATIONS OF SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company is required to perform it. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive had
terminated employment for Good Reason following a Change of Control of the
Company, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date. As used in this Agreement, the "Company" shall mean the Company as
hereinabove defined and any successor to its business and/or assets as aforesaid
which assumes and agrees to perform this Agreement by operation of law, or
otherwise.
(b) ENFORCEABLE BY BENEFICIARIES. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees (the "Beneficiaries"). In the event of the death of the
Executive while any amount would still be payable hereunder if such death had
not occurred, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Executive's
Beneficiaries.
(c) EMPLOYMENT. Except in the event of a Change of Control and,
thereafter, only as specifically set forth in this Agreement, nothing in this
Agreement shall be construed to (i) limit in any way the right of the Company or
a Subsidiary to terminate the Executive's employment at any time for any reason
or for no reason; or (ii) be evidence of any agreement or understanding,
expressed or implied, that the Company or a Subsidiary will employ the Executive
in any particular position, on any particular terms or at any particular rate of
remuneration.
VII. CONFIDENTIAL INFORMATION.
The Executive shall hold in fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company, the Subsidiaries and their respective businesses, which shall have
been obtained during the Executive's employment by the Employer and which shall
not be public knowledge (other than by acts by the Executive or his
representatives in violation of this Agreement). After termination of the
Executive's employment with the Company or any Employer within the Controlled
Group, the Executive shall not, without prior written consent of the Company or
the Employer, communicate or divulge any such information, knowledge or data to
anyone other than the Company, the Employer or those designated by them. In no
event shall an asserted violation of this Section VII constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement.
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VIII. NOTICE
All notices and communications hereunder shall be in writing and shall
be given by hand delivery to the other party, by registered or certified mail,
return receipt requested, postage prepaid, or by overnight mail, addressed as
follows:
If to the Executive:
[Name]
[Title]
[Company]
7800 East Orchard Road
Englewood, Colorado 80111
If to the Company:
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Attn.: Vice President - Law and Human Resources
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
IX. MISCELLANEOUS
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by the Executive and the Company's Chief Executive Officer. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any conditions or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado. All references to sections of the Code or the Exchange Act shall be
deemed also to refer to any successor provisions of such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Company under Sections
IV and V shall survive the expiration of the term of this Agreement.
X. VALIDITY
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
XI. ARBITRATION
The Executive may agree in writing with the Company (in which case
this Article XI shall have effect but not otherwise) that any dispute that may
arise directly or indirectly in connection with this Agreement, the Executive's
employment or the termination of the Executive's employment, whether arising in
contract, statute, tort, fraud, misrepresentation, or other legal theory, shall
be determined solely by
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arbitration in Denver, Colorado under the rules of the AAA. The only legal
claims between the Executive, on the one hand, and the Company or any
Subsidiary, on the other, that would not be included in this agreement to
arbitration are claims by the Executive for workers' compensation or
unemployment compensation benefits, claims for benefits under a Company or
Subsidiary benefit plan if the plan does not provide for arbitration of such
disputes, and claims by the Executive that seek judicial relief in the form of
specific performance of the right to be paid until the Termination Date during
the pendency of any dispute or controversy arising under or Subsection III(b).
If this Article XI is in effect, any claim with respect to this Agreement, the
Executive's employment or the termination of the Executive's employment must be
established by a preponderance of the evidence submitted to the impartial
arbitrator. A single arbitrator engaged in the practice of law shall conduct any
arbitration under the then current procedures of the American Arbitration
Association (the "AAA") and under the AAA's then current Model Employment
Arbitration Rules. The arbitrator shall have the authority to order a pre-
hearing exchange of information by the parties including, without limitation,
production of requested documents, and examination by deposition of parties and
their authorized agents. If this Article XI is in effect, the decision of the
arbitrator (i) shall be final and binding, (ii) shall be rendered within ninety
(90) days after the impanelment of the arbitrator, and (iii) shall be kept
confidential by the parties to such arbitration. The arbitration award may be
enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9
U.S.C. 1-15, not state law, shall govern the arbitrability of all claims.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign both originals of this letter and return to the Vice President - Law
and Human Resources of the Company one of the fully executed originals of this
letter which will then constitute our agreement on this subject.
Sincerely,
U S WEST, Inc.
By:___________________________________
[Name]
Chairman, President and
Chief Executive Officer
______________________________________
[Name]
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EXHIBIT 10Z
[FORM OF CHANGE OF CONTROL AGREEMENT FOR CHIEF EXECUTIVE OFFICER]
February 12, 1996
[Name]
Chairman, President and
Chief Executive Officer
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Dear [Name]:
U S WEST, Inc. (the "Company"), on behalf of itself, its subsidiaries
and its shareholders, wishes to encourage your continued service and dedication
in the performance of your duties, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined in Subsection I(h)) of the
Company. The Board of Directors of the Company (the "Board") believes that the
prospect of a pending or threatened Change of Control inevitably creates
distractions and personal risks and uncertainties for its executives, and that
it is in the best interests of the Company to minimize such distractions to
certain executives and the Company. The Board further believes that it is in
the best interests of the Company to encourage its executives' full attention
and dedication to their duties, both currently and in the event of any
threatened or pending Change of Control.
Accordingly, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued retention of certain members of
the Company's management, including yourself, and the attention and dedication
of management to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change of
Control of the Company.
In order to induce you (the "Executive") to remain in the employ of
the Company and in consideration of your continued service to the Company, the
Company agrees that you shall receive the benefits set forth in this letter
agreement (the "Agreement") in the event that your employment with the Company
is terminated for any reason subsequent to a Change of Control of the Company.
For purposes of this Agreement, references to employment with the Company shall
include employment with a Subsidiary of the Company (as defined in Subsection
I(w)).
<PAGE>
I. DEFINITIONS
The meaning of each defined term that is used in this Agreement is set
forth below.
(a) AAA. The American Arbitration Association.
(b) ADDITIONAL PAY. The meaning of this term is set forth in
Subsection IV(b).
(c) AGREEMENT. The meaning of this term is set forth in the third
paragraph of this Agreement.
(d) AGREEMENT PAYMENTS. The meaning of this term is set forth in
Subsection IV(e)(i).
(e) BENEFICIARIES. The meaning of this term is set forth in
Subsection VI(b).
(f) BOARD. The meaning of this term is set forth in the first
paragraph of this Agreement.
(g) CAUSE. For purposes of this Agreement, "Cause" shall mean the
Executive's willfully breaching or failing to perform his employment duties.
For purposes of this Subsection I(g), no act, or failure to act, on the part of
the Executive shall be deemed "willful" unless done, or omitted to be done, by
the Executive not in good faith and without reasonable belief that such action
or omission was in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Executive a certificate
of a resolution duly adopted by the affirmative vote of not less than seventy-
five percent (75%) of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to the Executive
and an opportunity for the Executive, together with the Executive's counsel, to
be heard before the Board), finding that in the good faith opinion of the Board,
the Executive has engaged in the conduct set forth in this Subsection I(g) and
specifying the particulars thereof in detail.
(h) CHANGE OF CONTROL. For purposes of this Agreement, a "Change of
Control" shall be deemed to have occurred if there is a change of control of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided that, without limitation, such a
Change of Control shall be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of 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;
(ii) 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;
(iii) 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
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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);
(iv) 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 Subsection I(h)(iv) 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;
(v) the Company: (A) redeems all of the outstanding shares of
the U S WEST Communications Group Common Stock or the U S WEST Media
Group Common Stock in exchange for shares of one or more wholly-owned
subsidiaries of the Company that hold all or substantially all of the
assets that are attributed to that Group; (B) distributes to the
shareholders of U S WEST Communications Group or U S WEST Media Group
the shares of one or more wholly-owned subsidiaries that hold all or
substantially all of the assets attributed to that Group; (C) converts
all of the outstanding shares of U S WEST Communications Group Common
Stock into the shares of U S WEST Media Group Common Stock, or vice
versa; or (D) distributes the stock of one or more wholly-owned
subsidiaries holding all or substantially all of the assets of the
Company, under applicable law, at a time when there are no classes of
Common Stock that separately track the performance of certain Company
businesses; or
(vi) any other event that a majority of the Board, in its sole
discretion, shall determine constitutes a Change of Control.
(i) CODE. The meaning of this term is set forth in Subsection
IV(e)(i).
(j) COMPANY. The meaning of this term is set forth in the first
paragraph of this Agreement and Subsection VI(a).
(k) CONTROLLED GROUP. For purposes of this Agreement, "Controlled
Group" shall mean the Company and all of the Company's Subsidiaries.
(l) DISABILITY. For purposes of this Agreement, "Disability" shall
mean an illness, injury or similar incapacity which 52 weeks after its
commencement continues to render the Executive unable to perform the material
and substantial duties of the Executive's position or any occupation or
employment for which the Executive is qualified or may reasonably become
qualified by training, education or experience. Any question as to the
existence of a Disability upon which the Executive and the Company cannot agree
shall be determined by a qualified independent physician selected by the
Executive (or, if the Executive is unable to make such selection, by any adult
member of the Executive's immediate family or the Executive's legal
representative), and approved by the Company, such approval not to be
unreasonably withheld. The
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determination of such physician made in writing to the Company, and to the
Executive, shall be final and conclusive for all purposes of this Agreement.
(m) EMPLOYER. For purposes of this Agreement, "Employer" shall mean
the Company or the Subsidiary, as the case may be, with which the Executive has
an employment relationship.
(n) EXCHANGE ACT. This term shall have the meaning set forth in
Subsection I(g).
(o) EXECUTIVE. This term shall have the meaning set forth in the
third paragraph of this Agreement.
(p) EXCISE TAX. This term shall have the meaning set forth in
Subsection IV(e)(i).
(q) GOOD REASON. For purposes of this Agreement, "Good Reason" shall
mean the occurrence, without the Executive's express written consent, of any of
the following circumstances:
(i) The assignment to the Executive of any duties inconsistent
with, or any substantial diminution in, such Executive's status or
responsibilities as in effect immediately prior to a Change of Control
of the Company, including imposition of travel obligations which
differ materially from required business travel immediately prior to
the Change of Control;
(ii) Any diminution in the status or responsibilities of the
Executive's position from that which existed immediately prior to the
Change of Control, whether by reason of the Company ceasing to be a
public company under the Exchange Act, becoming a subsidiary of a
successor public company, or otherwise;
(iii) (A) A reduction in the Executive's annual base salary as in
effect immediately before the Change of Control; or (B) the failure to
pay a bonus award to which the Executive is otherwise entitled under
any short-term incentive plan in which the Executive participates, the
U S WEST Executive Long-Term Incentive Plan, or any successor
incentive compensation plans at the time such awards are usually paid;
(iv) A change in the principal place of the Executive's
employment, as in effect immediately prior to the Change of Control of
the Company, to a location more than thirty-five (35) miles distant
from the location of such principal place at such time;
(v) The failure by the Company to continue in effect any
incentive compensation plan or stock option plan in which the
Executive participates immediately prior to the Change of Control,
unless an equivalent alternative compensation arrangement (embodied in
an ongoing substitute or alternative plan) has been provided to the
Executive, or the failure by the Company to continue the Executive's
participation in any such incentive or stock option plan on
substantially the same basis, both in terms of the amount of benefits
provided and the level of the Executive's participation relative to
other participants, as existed immediately prior to the time of the
Change of Control;
(vi) (A) Except as required by law, the failure by the Company to
continue to provide to the Executive benefits substantially
equivalent, in the aggregate, to those enjoyed by the Executive under
the qualified and non-qualified employee benefit and welfare plans of
the Company, including, without limitation, any pension, life
insurance, medical, dental, health and accident, disability,
retirement or savings plans in which the Executive was eligible to
participate immediately prior to the Change of Control; (B) the taking
of any action by the Company which
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would directly or indirectly materially reduce or deprive the
Executive of any other perquisite enjoyed by the Executive immediately
prior to the Change of Control (including Company-paid and/or
reimbursed club memberships, financial counseling fees and the like);
or (C) the failure by the Company or its successor to treat the
Executive under the Company's vacation policy, past practice or
special agreement in the same manner and to the same extent as was in
effect immediately prior to the Change of Control;
(vii) The failure of the Company or any successor to obtain a
satisfactory written agreement from any successor to assume and agree
to perform this Agreement, as contemplated in Subsection VI(a); or
(viii) Any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying
the requirements of Subsection III(b) or, if applicable, Subsection
I(h). For purposes of this Agreement, no such purported termination
shall be effective except as constituting Good Reason.
The Executive's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstances constituting Good Reason
hereunder.
(r) GROSS-UP PAYMENT. The meaning of this term is set forth in
Subsection IV(e)(i).
(s) NOTICE OF TERMINATION. The meaning of this term is set forth in
Subsection III(b).
(t) OTHER PAYMENTS. The meaning of this term is set forth in
Subsection IV(e)(i).
(u) PAYMENTS. The meaning of this term is set forth in Subsection
IV(e)(i).
(v) RETIREMENT. For purposes of this Agreement, "Retirement" shall
mean the Executive's voluntary termination of employment with the Company, other
than for Good Reason, and in accordance with the Company's retirement policy
generally applicable to its employees or in accordance with any prior or
contemporaneous retirement arrangement established with the Executive's consent
with respect to the Executive.
(w) SUBSIDIARY. For purposes of this Agreement, "Subsidiary" shall
mean any corporation of which more than fifty percent (50%) of the voting stock
is owned directly or indirectly by the Company.
(x) TAX COUNSEL. The meaning of this term is set forth in Subsection
IV(e)(ii).
(y) TERMINATION. The meaning of this term is set forth in Subsection
III(a).
(z) TERMINATION DATE. For purposes of this Agreement, "Termination
Date" shall mean the date that is thirty (30) days following the date that a
Notice of Termination is given by either party to this Agreement, provided,
however, that following a Change of Control within the meaning of Subsection
I(h)(v), "Termination Date" shall mean:
(i) If the Executive's employment is terminated for Disability,
thirty (30) days after Notice of Termination is given (provided that
the Executive shall not have returned to the full-time performance of
his duties during such thirty-day period); and
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(ii) If the Executive's employment is terminated for Cause or
Good Reason or for any reason other than death or Disability, the date
specified in the Notice of Termination (which in the case of a
termination for Cause shall not be less than thirty (30) days and in
the case of a termination for Good Reason shall not be less than
thirty (30) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
II. TERM OF AGREEMENT
(a) GENERAL. Upon execution by the Executive, this Agreement shall
commence as of February 12, 1996. This Agreement shall continue in effect
through December 31, 1999; provided, however, that commencing on January 1,
2000, and every third January 1 thereafter, the term of this Agreement shall
automatically be extended for three additional years unless, not later than
ninety days prior to the January 1 on which this Agreement would otherwise
automatically be extended, the Company shall have given notice that it does not
wish to extend this Agreement; provided further, however, that if a Change of
Control of the Company shall have occurred during the original or any extended
term of this Agreement, this Agreement shall continue in effect for a period of
thirty-six months beyond the month in which the Change of Control occurred.
(b) DISPOSITION OF EMPLOYER. In the event the Executive is employed
by a Subsidiary, the terms of this Agreement shall expire if such Subsidiary is
sold or otherwise disposed of prior to a Change of Control unless the Executive
continues in employment with the Controlled Group after such sale or other
disposition. If the Executive's Employer is sold or disposed of following a
Change of Control, this Agreement shall continue through its original term or
any extended term then in effect.
(c) DEEMED CHANGE OF CONTROL. If the Executive's employment with the
Employer is terminated prior to the date on which a Change of Control occurs,
and such termination was at the request of a third party who has taken steps to
effect a Change of Control or was otherwise caused by the Change of Control,
then for all purposes of this Agreement, a Change of Control shall be deemed to
have occurred prior to such termination.
(d) EXPIRATION OF AGREEMENT. No termination or expiration of this
Agreement shall affect any rights, obligations or liabilities of either party
that shall have accrued on or prior to the date of such termination or
expiration.
III. TERMINATION FOLLOWING CHANGE OF CONTROL
(a) ENTITLEMENT TO BENEFITS. If a Change of Control (other than a
Change of Control within the meaning of Subsection I(h)(v)) of the Company shall
have occurred, the Executive shall be entitled to the benefits provided in
Section IV hereof upon the subsequent termination of his employment with the
Company for any reason within three years after the date of the Change of
Control. If a Change of Control within the meaning of Subsection I(h)(v) shall
have occurred, the Executive shall be entitled to the benefits provided in
Section IV hereof upon the subsequent termination of his employment with the
Company within three years after the date of the Change of Control unless such
termination is (i) a result of the Executive's death or Retirement, (ii) for
Cause, (iii) a result of the Executive's Disability, or (iv) by the Executive
other than for Good Reason. A termination of the Executive's employment that
entitles the Executive to the payment of benefits under Section IV hereof shall
be referred to hereinafter as a "Termination."
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(b) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Company or by the Executive shall be communicated
by written Notice of Termination to the other party hereto in accordance with
Section VIII. For purposes of this Agreement, a "Notice of Termination" shall
mean a notice form a party to this Agreement that purports to terminate the
Executive's employment, unless such notice follows a Change of Control solely
within the meaning of Subsection I(h)(v), in which case a "Notice of
Termination" shall mean a notice that shall indicate the specific provision of
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
Once a Notice of Termination is given (other than following a Change
of Control solely within the meaning of Subsection I(h)(v)), the Company shall
pay the Executive his full base salary through the Termination Date at the rate
in effect at the time Notice of Termination is given and shall pay any amounts
to be paid to the Executive pursuant to any other compensation plans, programs
or employment agreements then in effect. If, following a Change of Control
solely within the meaning of Subsection I(h)(v), the Executive's employment
shall be terminated for Cause or by the Executive for other than Good Reason,
the Company shall pay the Executive his full base salary through the Termination
Date at the rate in effect at the time Notice of Termination is given and shall
pay any amounts to be paid to the Executive pursuant to any other compensation
plans, programs or employment agreements then in effect, and the Company shall
have no further obligations to the Executive under this Agreement.
If within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice notifies the other party that a dispute exists
concerning the grounds for termination, then, notwithstanding the meaning of
"Termination Date" set forth in Subsection I(z), the Termination Date shall be
the date on which the dispute is finally resolved, whether by mutual written
agreement of the parties or by a decision rendered pursuant to Section XI;
provided that the Termination Date shall be extended by a notice of dispute only
if such notice is given in good faith and the party giving such notice pursues
the resolution of such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, the Company will continue to pay the Executive his
full compensation in effect when the notice giving rise to the dispute was
given, and continue the Executive as a participant in all benefits plans or
perquisites in which the Executive was participating or which he was enjoying
when the Notice of Termination giving rise to the dispute was given, until the
dispute is finally resolved. Amounts paid under this Subsection III(b) are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
IV. COMPENSATION UPON A TERMINATION
Following a Change of Control of the Company, upon a Termination of
the Executive's employment, the Executive shall be entitled to the following
benefits, provided that the Termination occurs during the three-year period
immediately following the date of the Change of Control:
(a) STANDARD BENEFITS. The Company shall pay the Executive his full
base salary through the Termination Date at the rate in effect at the time the
Notice of Termination is given, no later than the second day following the
Termination Date, plus all other amounts to which the Executive is entitled
under any compensation plan of the Company applicable to the Executive at the
time such payments are due. Without limitation, amounts payable pursuant to
this Subsection IV(a) shall include, pursuant to the express terms of the
short-term incentive plan in which the Executive participates or otherwise, the
Executive's annual bonus under such short-term incentive plan, pro-rated to the
Termination Date.
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(b) ADDITIONAL BENEFITS. The Company shall pay to the Executive as
additional pay ("Additional Pay"), the product of (i) the lesser of (x) three
(3) or (y) the difference between sixty-five (65) and the Executive's age as of
the date of the Notice of Termination (calculated to the nearest twelfth of a
year), multiplied by (ii) the sum of (x) the Executive's annual base salary rate
in effect immediately prior to the Termination Date and (y) the Executive's
annual bonus amount under the short-term incentive plan in which the Executive
participates, such bonus amount to be calculated on the basis of the extent to
which the performance factors targeted by the Human Resources Committee of the
Board have been achieved (for this purpose, the Company's performance through
the Termination Date shall be annualized based upon the actual number of days
elapsed from the beginning of the fiscal year in which the Termination occurs
through the Termination Date over a year of 360 days), which shall be deemed to
be 100% unless the performance actually achieved is greater than 100%, in which
case the actual performance levels shall be utilized. The Company shall pay to
the Executive the Additional Pay in a lump sum, in cash, not later than the
fifteenth day following the Termination Date.
(c) RETIREMENT PLAN BENEFITS. If not already vested, the Executive
shall be deemed fully vested in all Company retirement plans and/or other
written agreements relating to pay upon retirement in which the Executive was a
participant, party or beneficiary immediately preceding a Change of Control, and
any additional plans and/or agreements in which such Executive became a
participant, party or beneficiary thereafter. In addition to the foregoing, for
purposes of determining the amounts to be paid to the Executive under such plans
and/or agreements, the years of service with the Company and the age of the
Executive under all such plans and agreements shall be deemed increased by the
lesser of thirty-six (36) months or such shorter period of time as would render
the Executive sixty-five (65) years of age. For purposes of this Subsection
IV(c), "plans" include, without limitation, the Company's qualified pension
plan, non-qualified and mid-career retirement plans, and "agreements" encompass
the terms of any offer letters leading to the Executive's employment with the
Company where the Executive was a signatory thereto and any written amendments
to the foregoing. In the event that the terms of the plans referenced in this
Subsection IV(c) do not for any reason (e.g., if plan amendments would cause
disqualification of qualified plans) coincide with the provisions of this
Subsection IV(c), the Executive shall be entitled to receive from the Company
under the terms of this Agreement an amount equivalent to all amounts he would
have received had all such plans continued in existence as in effect on the date
of this Agreement after being amended to coincide with the terms of this
Subsection IV(c).
(d) HEALTH BENEFITS. Following the Termination Date, the Company
shall continue to provide health, vision and dental benefits to the Executive
and the Executive's eligible dependents on terms substantially equivalent to
those on which the Company provides such benefits to retired employees who were
service pension-eligible at the time of the Change of Control and whose
retirement date most closely approximates the date of the Change of Control.
The eligibility of the Executive's dependents shall be determined by the terms
of the health, vision and dental benefit plans in effect immediately prior to
the Change of Control.
(e) GROSS-UP PAYMENTS.
(i) In the event that any payment or the value of any benefit
received or to be received by the Executive in connection with the
Executive's Termination or contingent upon a Change of Control of the
Company (whether received or to be received pursuant to the terms of
this Agreement (the "Agreement Payments") or of any other plan,
arrangement or agreement of the Company, its successors, any person
whose actions result in a Change of Control of the Company or any
person affiliated with any of them (or which, as a result of the
completion of the transactions causing a Change of Control, will
become affiliated with any of them) ("Other Payments" and,
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together with the Agreement Payments, the "Payments")) would be
subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code") or any comparable
federal, state or local excise tax (such excise tax, together with any
interest and penalties, are hereinafter collectively referred to as
the "Excise Tax"), as determined as provided below, the Company shall
pay to the Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of
the Excise Tax on Agreement Payments and Other Payments and any
federal, state and local income tax and Excise Tax upon the payment
provided for by this Subsection IV(e)(i), and any interest, penalties
or additions to tax payable by the Executive with respect thereto
shall be equal to the total present value of the Agreement Payments
and Other Payments at the time such Payments are to be made. The
intent of the parties is that the Company shall be solely responsible
for and shall pay, any Excise Tax on any Payments and Gross-Up Payment
and any income and employment taxes (including, without limitation,
penalties and interest) imposed on any Gross-Up Payments as well as
any loss of deduction caused by the Gross-Up Payment.
(ii) All determinations required to be made under this Subsection
IV(e), including, without limitation, whether and when a Gross-Up
Payment is required and the amount of such Gross-Up Payment and the
assumptions to be utilized in arriving at such determinations, shall
be made by tax counsel selected by the Company and reasonably
acceptable to the Executive ("Tax Counsel"). The Company shall cause
the Tax Counsel to provide detailed supporting calculations to the
Company and the Executive within fifteen (15) business days after
notice is given by the Executive to the Company that any or all of the
Payments have occurred, or such earlier time as is requested by the
Company. Within two (2) business days after such notice is given to
the Company, the Company shall instruct the Tax Counsel to timely
provide the data required by this Subsection IV(e) to the Executive.
All fees and expenses of the Tax Counsel shall be paid solely by the
Company. Any Excise Tax as determined pursuant to this Subsection
IV(e) shall be paid by the Company to the Internal Revenue Service
and/or other appropriate taxing authority on the Executive's behalf
within five (5) days after receipt of the Tax Counsel's determination.
If the Tax Counsel determines that there is substantial authority
(within the meaning of Section 6662 of the Code) that no Excise Tax is
payable by the Executive, the Tax Counsel shall furnish the Executive
with a written opinion that failure to disclose or report the Excise
Tax on the Executive's federal income tax return will not constitute a
substantial understatement of tax or be reasonably likely to result in
the imposition of a negligence or similar penalty. Any determination
by the Tax Counsel shall be binding upon the Company and the Executive
in the absence of material mathematical or legal error. As a result
of the uncertainty in the application of Section 4999 of the Code at
the time the initial determination by the Tax Counsel hereunder, it is
possible that Gross-Up Payments will not have been made by the
Corporation that should have been made or that Gross-Up Payments have
been made that should not have been made, in each case, consistent
with the calculations required to be made hereunder. In the event the
Company exhausts its remedies pursuant to Subsection IV(e)(iii) below
and the Executive is thereafter required to make a payment of any
Excise Tax, the Tax Counsel shall determine the amount of underpayment
of Excise Taxes that has occurred and any such underpayment shall be
promptly paid by the Company to the Internal Revenue Service or other
appropriate taxing authority on the Executive's behalf or, if such
underpayment has been previously paid by the Executive, to the
Executive. In the event that the Tax Counsel determines that an
overpayment of Gross-Up Payments has occurred, any such overpayment
shall be treated for all purposes as a loan to the Executive with
interest at the applicable federal rate provided for in Section
7872(f)(2) of the Code, due and payable within ninety (90) days after
written demand to the Executive by the Company; provided, however,
that the Executive shall have no duty or obligation whatsoever to
repay such loan unless the Executive's receipt of the overpayment, or
any portion
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thereof, is includible in the Executive's income and the Executive's
repayment of the same is not deductible by the Executive for federal
and state income tax purposes.
(iii) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service or state or local taxing
authority, that, if successful, would result in any Excise Tax or an
underpayment of Gross-Up Payments. Such notice shall be given as soon
as practicable but no later than fifteen (15) business days after the
Executive is informed in writing of the claim and shall inform the
Company of the nature of the claim, the administrative or judicial
appeal period, and the date on which any payment of the claim must be
paid. The Executive shall not pay any portion of the claim prior to
the expiration of the thirty (30) day period following the date on
which the Executive gives such notice to the Company (or such shorter
period ending on the date that any amount under the claim is due). If
the Company notifies the Executive in writing prior to the expiration
of such thirty (30) day period that it desires to contest the claim,
the Executive shall:
(A) give the Company any information reasonably requested by
the Company relating to the claim;
(B) take such action in connection with contesting the claim
as the Company shall reasonably request in writing from time to
time, including, without limitation, accepting legal
representation concerning the claim by an attorney selected by
the Company who is reasonably acceptable to the Executive; and
(C) cooperate with the Company in good faith in order to
effectively contest the claim; provided, however, that the
Company shall bear and pay directly all costs and expenses
(including, without limitation, additional interest and penalties
and attorneys' fees) incurred in such contests and shall
indemnify and hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including, without limitation,
interest and penalties thereon) imposed as a result of such
representation. Without limitation upon the foregoing provisions
of this Subsection IV(e) (iii), except as provided below, the
Company shall control all proceedings concerning such contest
and, in its sole opinion, may pursue or forego any and all
administrative appeal, proceedings, hearings and conferences with
the taxing authority pertaining to the claim. At the written
request of the Company and upon payment to the Executive of an
amount at least equal to the claim plus any additional amount
necessary to obtain the jurisdiction of the appropriate tribunal
and/or court, the Executive shall pay the same and sue for a
refund. The Executive agrees to prosecute any contest of a claim
to a determination before any administrative tribunal, in a court
of initial jurisdiction and in one or more appellate courts, as
the Company shall determine; provided, however, that if the
Company requests the Executive to pay the claim and sue for a
refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis, and shall indemnify and
hold the Executive harmless on an after-tax basis, from any
Excise Tax or income tax (including, without limitation, interest
and penalties thereon) imposed on such advance or for any imputed
income on such advance. Any extension of the statute of
limitations relating to assessment of any Excise Tax for the
taxable year of the Executive which is the subject of the claim
is to be limited solely to the claim. Furthermore, the Company's
control of the contest shall be limited to issues for which a
Gross-Up Payment would be payable hereunder. The Executive shall
be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing
authority.
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(iv) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Subsection IV(e)(iii) above, the Executive
receives any refund of a claim and/or any additional amount that was
necessary to obtain jurisdiction, the Executive shall promptly pay to
the Company the amount of such refund (together with any interest paid
or credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company pursuant
to Subsection IV(e)(iii) above, a determination is made that the
Executive shall not be entitled to any refund of the claim and the
Company does not notify the Executive in writing of its intent to
contest such denial of refund of a claim prior to the expiration of
thirty (30) days after such determination, then the portion of such
advance attributable to a claim shall be forgiven and shall not be
required to be repaid. The amount of such advance attributable to a
claim shall offset, to the extent thereof, the amount of the
underpayment required to be paid by the Company to the Executive.
(v) If, after the advance by the Company of an additional amount
necessary to obtain jurisdiction, there is a final determination made
by the taxing authority that the Executive is not entitled to any
refund of such amount, or any portion thereof, then such nonrefundable
amount shall be repaid to the Company by the Executive within thirty
(30) days after the Executive receives notice of such final
determination. A final determination shall occur when the period to
contest or otherwise appeal any decision by an administrative tribunal
or court of initial jurisdiction has been waived or the time for
contesting or appealing the same has expired.
(f) LEGAL FEES AND EXPENSES. The Company shall pay to the Executive
all legal fees and expenses as and when incurred by the Executive in connection
with this Agreement, including all such fees and expenses, if any, incurred in
contesting or disputing any Termination or in seeking to obtain or enforce any
right or benefit provided by this Agreement, regardless of the outcome, unless,
in the case of a legal action brought by or in the name of the Executive, a
decision is rendered pursuant to Section X that such action was not brought by
the Executive in good faith.
(g) NO MITIGATION. The Executive shall not be required to mitigate
the amount of any payment provided for in this Section IV by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Section IV be reduced by any compensation earned by the Executive as
the result of employment by another employer or by retirement or other benefits
received after the Termination Date or otherwise, except as specifically
provided in this Section IV. The Company's obligation to make payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company or Employer may have against the
Executive or other parties.
V. DEATH AND DISABILITY BENEFITS
In the event of the death or Disability of the Executive after a
Change of Control of the Company, the Executive, or in the case of death, the
Executive's beneficiaries, shall receive the benefits to which they are entitled
under the retirement plans, disability policies and other applicable plans or
agreements of the Company.
VI. SUCCESSORS; BINDING AGREEMENT
(a) OBLIGATIONS OF SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company is required to perform it. Failure of the
Company to obtain such assumption and
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agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to compensation from the Company
in the same amount and on the same terms as the Executive would be entitled
hereunder if the Executive had terminated his employment following a Change of
Control of the Company, except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed the
Termination Date. As used in this Agreement, the "Company" shall mean the
Company as hereinabove defined and any successor to its business and/or assets
as aforesaid which assumes and agrees to perform this Agreement by operation of
law, or otherwise.
(b) ENFORCEABLE BY BENEFICIARIES. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees (the "Beneficiaries"). In the event of the death of the
Executive while any amount would still be payable hereunder if such death had
not occurred, all such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to the Executive's Beneficiaries.
(c) EMPLOYMENT. Except in the event of a Change of Control and,
thereafter, only as specifically set forth in this Agreement, nothing in this
Agreement shall be construed to (i) limit in any way the right of the Company or
a Subsidiary to terminate the Executive's employment at any time for any reason
or for no reason; or (ii) be evidence of any agreement or understanding,
expressed or implied, that the Company or a Subsidiary will employ the Executive
in any particular position, on any particular terms or at any particular rate of
remuneration.
VII. CONFIDENTIAL INFORMATION.
The Executive shall hold in fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company, the Subsidiaries and their respective businesses, which shall have
been obtained during the Executive's employment by the Employer and which shall
not be public knowledge (other than by acts by the Executive or his
representatives in violation of this Agreement). After termination of the
Executive's employment with the Company or any Employer within the Controlled
Group, the Executive shall not, without prior written consent of the Company or
the Employer, communicate or divulge any such information, knowledge or data to
anyone other than the Company, the Employer or those designated by them. In no
event shall an asserted violation of this Section VII constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement.
VIII. NOTICE
All notices and communications hereunder shall be in writing and shall
be given by hand delivery to the other party, by registered or certified mail,
return receipt requested, postage prepaid, or by overnight mail, addressed as
follows:
If to the Executive:
[Name]
Chairman, President and Chief Executive Officer
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
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If to the Company:
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Attn.: Vice President - Law and Human Resources
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
IX. MISCELLANEOUS
No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing and signed
by the Executive and the Chairman of the Human Resources Committee of the Board
of Directors. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any conditions or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Colorado. All references to sections of the Code or
the Exchange Act shall be deemed also to refer to any successor provisions of
such sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law. The
obligations of the Company under Sections IV and V shall survive the expiration
of the term of this Agreement.
X. VALIDITY
The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
XI. ARBITRATION
The Executive may agree in writing with the Company (in which case
this Article XI shall have effect but not otherwise) that any dispute that may
arise directly or indirectly in connection with this Agreement, the Executive's
employment or the termination of the Executive's employment, whether arising in
contract, statute, tort, fraud, misrepresentation, or other legal theory, shall
be determined solely by arbitration in Denver, Colorado under the rules of the
AAA. The only legal claims between the Executive, on the one hand, and the
Company or any Subsidiary, on the other, that would not be included in this
agreement to arbitration are claims by the Executive for workers' compensation
or unemployment compensation benefits, claims for benefits under a Company or
Subsidiary benefit plan if the plan does not provide for arbitration of such
disputes, and claims by the Executive that seek judicial relief in the form of
specific performance of the right to be paid until the Termination Date during
the pendency of any dispute or controversy arising under or Subsection III(b).
If this Article XI is in effect, any claim with respect to this Agreement, the
Executive's employment or the termination of the Executive's employment must be
established by a preponderance of the evidence submitted to the impartial
arbitrator. A single arbitrator engaged in the practice of law shall conduct
any arbitration under the then current procedures of the American Arbitration
Association (the "AAA") and under the AAA's then current Model Employment
Arbitration Rules. The arbitrator shall have the authority to order a
pre-hearing exchange of information by
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the parties including, without limitation, production of requested documents,
and examination by deposition of parties and their authorized agents. If this
Article XI is in effect, the decision of the arbitrator (i) shall be final and
binding, (ii) shall be rendered within ninety (90) days after the impanelment of
the arbitrator, and (iii) shall be kept confidential by the parties to such
arbitration. The arbitration award may be enforced in any court of competent
jurisdiction. The Federal Arbitration Act, 9 U.S.C. 1-15, not state law, shall
govern the arbitrability of all claims.
If this letter sets forth our agreement on the subject matter hereof,
kindly sign both originals of this letter and return to the Vice President - Law
and Human Resources of the Company one of the fully executed originals of this
letter which will then constitute our agreement on this subject.
Sincerely,
U S WEST, Inc.
By:___________________________________
Chairman, Human Resources Committee of
the Board of Directors
______________________________________
[Name of Chief Executive Officer]
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EXHIBIT 10AA
[FORM OF GROUP EXECUTIVE CHANGE OF CONTROL AGREEMENT]
February 12, 1996
[Name]
[Title]
[Company]
7800 East Orchard Road
Englewood, Colorado 80111
Dear [Name]:
U S WEST, Inc. (the "Company"), on behalf of itself, its subsidiaries and
its shareholders, wishes to encourage your continued service and dedication in
the performance of your duties, notwithstanding the possibility, threat or
occurrence of a Change of Control (as defined in Subsection I(h)) of the
Company. The Board of Directors of the Company (the "Board") believes that the
prospect of a pending or threatened Change of Control inevitably creates
distractions and personal risks and uncertainties for its executives, and that
it is in the best interests of the Company to minimize such distractions to
certain executives and the Company. The Board further believes that it is in
the best interests of the Company to encourage its executives' full attention
and dedication to their duties, both currently and in the event of any
threatened or pending Change of Control.
Accordingly, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued retention of certain members of
the Company's management, including yourself, and the attention and dedication
of management to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change of
Control of the Company.
In order to induce you (the "Executive") to remain in the employ of the
Company and in consideration of your continued service to the Company, the
Company agrees that you shall receive the benefits set forth in this letter
agreement (the "Agreement") in the event that your employment with the Company
is terminated subsequent to a Change of Control of the Company in the
circumstances hereinafter described. For purposes of this Agreement, references
to employment with the Company shall include employment with a Subsidiary of the
Company (as defined in Subsection I(w)).
I. DEFINITIONS
The meaning of each defined term that is used in this Agreement is set
forth below.
(a) AAA. The American Arbitration Association.
(b) ADDITIONAL PAY. The meaning of this term is set forth in Subsection
IV(b).
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(c) AGREEMENT. The meaning of this term is set forth in the third
paragraph of this Agreement.
(d) AGREEMENT PAYMENTS. The meaning of this term is set forth in
Subsection IV(e)(i).
(e) BENEFICIARIES. The meaning of this term is set forth in Subsection
VI(b).
(f) BOARD. The meaning of this term is set forth in the first paragraph of
this Agreement.
(g) CAUSE. For purposes of this Agreement, "Cause" shall mean the
Executive's willfully breaching or failing to perform his employment duties.
For purposes of this Subsection I(g), no act, or failure to act, on the part of
the Executive shall be deemed "willful" unless done, or omitted to be done, by
the Executive not in good faith and without reasonable belief that such action
or omission was in the best interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Executive a certificate
of a resolution duly adopted by the affirmative vote of not less than seventy-
five percent (75%) of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to the Executive
and an opportunity for the Executive, together with the Executive's counsel, to
be heard before the Board), finding that in the good faith opinion of the Board,
the Executive has engaged in the conduct set forth in this Subsection I(g) and
specifying the particulars thereof in detail.
(h) CHANGE OF CONTROL. For purposes of this Agreement, a "Change of
Control" shall be deemed to have occurred if there is a change of control of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided that, without limitation, such a
Change of Control shall be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of 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;
(ii) 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;
(iii) 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);
(iv) 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
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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 Subsection I(h)(iv) 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;
(v) the Company: (A) redeems all of the outstanding shares of the U
S WEST Communications Group Common Stock or the U S WEST Media Group Common
Stock in exchange for shares of one or more wholly-owned subsidiaries of
the Company that hold all or substantially all of the assets that are
attributed to that Group; (B) distributes to the shareholders of U S WEST
Communications Group or U S WEST Media Group the shares of one or more
wholly-owned subsidiaries that hold all or substantially all of the assets
attributed to that Group; (C) converts all of the outstanding shares of U S
WEST Communications Group Common Stock into the shares of U S WEST Media
Group Common Stock, or vice versa; or (D) distributes the stock of one or
more wholly-owned subsidiaries holding all or substantially all of the
assets of the Company, under applicable law, at a time when there are no
classes of Common Stock that separately track the performance of certain
Company businesses; or
(vi) any other event that a majority of the Board, in its sole
discretion, shall determine constitutes a Change of Control.
(i) CODE. The meaning of this term is set forth in Subsection IV(e)(i).
(j) COMPANY. The meaning of this term is set forth in the first paragraph
of this Agreement and Subsection VI(a).
(k) CONTROLLED GROUP. For purposes of this Agreement, "Controlled Group"
shall mean the Company and all of the Company's Subsidiaries.
(l) DISABILITY. For purposes of this Agreement, "Disability" shall mean an
illness, injury or similar incapacity which 52 weeks after its commencement
continues to render the Executive unable to perform the material and substantial
duties of the Executive's position or any occupation or employment for which the
Executive is qualified or may reasonably become qualified by training, education
or experience. Any question as to the existence of a Disability upon which the
Executive and the Company cannot agree shall be determined by a qualified
independent physician selected by the Executive (or, if the Executive is unable
to make such selection, by any adult member of the Executive's immediate family
or the Executive's legal representative), and approved by the Company, such
approval not to be unreasonably withheld. The determination of such physician
made in writing to the Company, and to the Executive, shall be final and
conclusive for all purposes of this Agreement.
(m) EMPLOYER. For purposes of this Agreement, "Employer" shall mean the
Company or the Subsidiary, as the case may be, with which the Executive has an
employment relationship.
(n) EXCHANGE ACT. This term shall have the meaning set forth in Subsection
I(h).
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(o) EXECUTIVE. This term shall have the meaning set forth in the third
paragraph of this Agreement.
(p) EXCISE TAX. This term shall have the meaning set forth in Subsection
IV(e)(i).
(q) GOOD REASON. For purposes of this Agreement, "Good Reason" shall mean
the occurrence, without the Executive's express written consent, of any of the
following circumstances:
(i) The assignment to the Executive of any duties inconsistent with,
or any substantial diminution in, such Executive's status or
responsibilities as in effect immediately prior to a Change of Control of
the Company, including imposition of travel obligations which differ
materially from required business travel immediately prior to the Change of
Control;
(ii) Any diminution in the status or responsibilities of the
Executive's position from that which existed immediately prior to the
Change of Control, whether by reason of the Company ceasing to be a public
company under the Exchange Act, becoming a subsidiary of a successor public
company, or otherwise;
(iii) (A) A reduction in the Executive's annual base salary as in
effect immediately before the Change of Control; or (B) the failure to pay
a bonus award to which the Executive is otherwise entitled under any of the
short-term incentive plan in which the Executive participates, the U S WEST
Executive Long-Term Incentive Plan, or any successor incentive compensation
plans at the time such awards are usually paid;
(iv) A change in the principal place of the Executive's employment, as
in effect immediately prior to the Change of Control of the Company, to a
location more than thirty-five (35) miles distant from the location of such
principal place at such time;
(v) The failure by the Company to continue in effect any incentive
compensation plan or stock option plan in which the Executive participates
immediately prior to the Change of Control, unless an equivalent
alternative compensation arrangement (embodied in an ongoing substitute or
alternative plan) has been provided to the Executive, or the failure by the
Company to continue the Executive's participation in any such incentive or
stock option plan on substantially the same basis, both in terms of the
amount of benefits provided and the level of the Executive's participation
relative to other participants, as existed immediately prior to the time of
the Change of Control;
(vi) (A) Except as required by law, the failure by the Company to
continue to provide to the Executive benefits substantially equivalent, in
the aggregate, to those enjoyed by the Executive under the qualified and
non-qualified employee benefit and welfare plans of the Company, including,
without limitation, any pension, life insurance, medical, dental, health
and accident, disability, retirement or savings plans in which the
Executive was eligible to participate immediately prior to the Change of
Control; (B) the taking of any action by the Company which would directly
or indirectly materially reduce or deprive the Executive of any other
perquisite enjoyed by the Executive immediately prior to the Change of
Control (including Company-paid and/or reimbursed club memberships,
financial counseling fees and the like); or (C) the failure by the Company
or its successor to treat the Executive under the Company's vacation
policy, past practice or special agreement in the same manner and to the
same extent as was in effect immediately prior to the Change of Control;
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(vii) The failure of the Company or any successor to obtain a
satisfactory written agreement from any successor to assume and agree to
perform this Agreement, as contemplated in Subsection VI(a); or
(viii) Any purported termination of the Executive's employment that is
not effected pursuant to a Notice of Termination satisfying the
requirements of Subsection III(b) or, if applicable, Subsection I(g). For
purposes of this Agreement, no such purported termination shall be
effective except as constituting Good Reason.
The Executive's continued employment shall not constitute consent to, or a
waiver of rights with respect to, any circumstances constituting Good Reason
hereunder.
(r) GROSS-UP PAYMENT. The meaning of this term is set forth in Subsection
IV(e)(i).
(s) NOTICE OF TERMINATION. The meaning of this term is set forth in
Subsection III(b).
(t) OTHER PAYMENTS. The meaning of this term is set forth in Subsection
IV(e)(i).
(u) PAYMENTS. The meaning of this term is set forth in Subsection
IV(e)(i).
(v) RETIREMENT. For purposes of this Agreement, "Retirement" shall mean
the Executive's voluntary termination of employment with the Company, other than
for Good Reason, and in accordance with the Company's retirement policy
generally applicable to its employees or in accordance with any prior or
contemporaneous retirement arrangement established with the Executive's consent
with respect to the Executive.
(w) SUBSIDIARY. For purposes of this Agreement, "Subsidiary" shall mean
any corporation of which more than fifty percent (50%) of the voting stock is
owned directly or indirectly by the Company.
(x) TAX COUNSEL. The meaning of this term is set forth in Subsection
IV(e)(ii).
(y) TERMINATION. The meaning of this term is set forth in Subsection
III(a).
(z) TERMINATION DATE. For purposes of this Agreement, "Termination Date"
shall mean:
(i) If the Executive's employment is terminated for Disability, thirty
(30) days after Notice of Termination is given (provided that the Executive
shall not have returned to the full-time performance of his duties during
such thirty-day period); and
(ii) If the Executive's employment is terminated for Cause or Good
Reason or for any reason other than death or Disability, the date specified
in the Notice of Termination (which in the case of a termination for Cause
shall not be less than thirty (30) days and in the case of a termination
for Good Reason shall not be less than thirty (30) days nor more than sixty
(60) days, respectively, from the date such Notice of Termination is
given).
II. TERM OF AGREEMENT
(a) GENERAL. Upon execution by the Executive, this Agreement shall
commence as of February 12, 1996. This Agreement shall continue in effect
through December 31, 1999; provided, however, that
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commencing on January 1, 2000, and every third January 1 thereafter, the term of
this Agreement shall automatically be extended for three additional years
unless, not later than ninety days prior to the January 1 on which this
Agreement would otherwise automatically be extended, the Company shall have
given notice that it does not wish to extend this Agreement; provided further,
however, that if a Change of Control of the Company shall have occurred during
the original or any extended term of this Agreement, this Agreement shall
continue in effect for a period of thirty-six months beyond the month in which
the Change of Control occurred.
(b) DISPOSITION OF EMPLOYER. In the event the Executive is employed by a
Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold
or otherwise disposed of prior to a Change of Control unless the Executive
continues in employment with the Controlled Group after such sale or other
disposition. If the Executive's Employer is sold or disposed of following a
Change of Control, this Agreement shall continue through its original term or
any extended term then in effect.
(c) DEEMED CHANGE OF CONTROL. If the Executive's employment with the
Employer is terminated prior to the date on which a Change of Control occurs,
and such termination was at the request of a third party who has taken steps to
effect a Change of Control or was otherwise caused by the Change of Control,
then for all purposes of this Agreement, a Change of Control shall be deemed to
have occurred prior to such termination.
(d) EXPIRATION OF AGREEMENT. No termination or expiration of this
Agreement shall affect any rights, obligations or liabilities of either party
that shall have accrued on or prior to the date of such termination or
expiration.
III. TERMINATION FOLLOWING CHANGE OF CONTROL
(a) ENTITLEMENT TO BENEFITS. If a Change of Control of the Company shall
have occurred, the Executive shall be entitled to the benefits provided in
Section IV hereof upon the subsequent termination of his employment with the
Company, except as otherwise set forth below in this Subsection III(a), within
three years after the date of the Change of Control unless such termination is
(i) a result of the Executive's death or Retirement, (ii) for Cause, (iii) a
result of the Executive's Disability, or (iv) by the Executive other than for
Good Reason. A termination of the Executive's employment which is not as a
result of the Executive's death, Retirement or Disability and (x) if by the
Company, is not for Cause, or (y) if by the Executive, is for Good Reason, shall
be referred to hereinafter as a "Termination." The Executive shall not be
entitled to the benefits provided in Section IV hereof in the event of a Change
of Control as defined in Subsection I(h)(v)(A), I(h)(v)(B) or I(h)(v)(D), unless
that Change of Control also results in the termination of the Executive's
employment with the corporation that is created as a result of the events
leading to that Change of Control. For purposes of the foregoing sentence only,
"termination" shall have the same definition as Termination, defined above,
except that the reference to the "Company" in subclause (x) shall mean the
corporation created by the events leading to the Change of Control. If, in the
event of a Change of Control under Subsection I(h)(v)(A), I(h)(v)(B) or
I(h)(v)(D), the Executive's employment continues with the Company, his
entitlement to benefits shall be determined in accordance with the first
sentence of this Subsection III(a).
(b) NOTICE OF TERMINATION. Any purported termination of the Executive's
employment by the Company or by the Executive shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section VIII.
For purposes of this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific provision of this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's
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employment under the provision so indicated. If the Executive's employment
shall be terminated for Cause or by the Executive for other than Good Reason,
the Company shall pay the Executive his full base salary through the Termination
Date at the rate in effect at the time Notice of Termination is given and shall
pay any amounts to be paid to the Executive pursuant to any other compensation
plans, programs or employment agreements then in effect, and the Company shall
have no further obligations to the Executive under this Agreement.
If within thirty (30) days after any Notice of Termination is given, the
party receiving such Notice notifies the other party that a dispute exists
concerning the grounds for termination, then, notwithstanding the meaning of
"Termination Date" set forth in Subsection I(z), the Termination Date shall be
the date on which the dispute is finally resolved, whether by mutual written
agreement of the parties or by a decision rendered pursuant to Section XI;
provided that the Termination Date shall be extended by a notice of dispute only
if such notice is given in good faith and the party giving such notice pursues
the resolution of such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, the Company will continue to pay the Executive his
full compensation in effect when the notice giving rise to the dispute was
given, and continue the Executive as a participant in all benefits plans or
perquisites in which the Executive was participating or which he was enjoying
when the Notice of Termination giving rise to the dispute was given, until the
dispute is finally resolved. Amounts paid under this Subsection III(b) are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
IV. COMPENSATION UPON A TERMINATION
Following a Change of Control of the Company, upon a Termination of the
Executive's employment, the Executive shall be entitled to the following
benefits, provided that the Termination occurs during the three-year period
immediately following the date of the Change of Control:
(a) STANDARD BENEFITS. The Company shall pay the Executive his full base
salary through the Termination Date at the rate in effect at the time the Notice
of Termination is given, no later than the second day following the Termination
Date, plus all other amounts to which the Executive is entitled under any
compensation plan of the Company applicable to the Executive at the time such
payments are due. Without limitation, amounts payable pursuant to this
Subsection IV(a) shall include, pursuant to the express terms of the short-term
incentive plan in which the Executive participates or otherwise, the Executive's
annual bonus under such short-term incentive plan, pro-rated to the Termination
Date.
(b) ADDITIONAL BENEFITS. The Company shall pay to the Executive as
additional pay ("Additional Pay"), the product of (i) the lesser of (x) three
(3) or (y) the difference between sixty-five (65) and the Executive's age as of
the date of the Notice of Termination (calculated to the nearest twelfth of a
year), multiplied by (ii) the sum of (x) the Executive's annual base salary rate
in effect immediately prior to the Termination Date and (y) the Executive's
annual bonus amount under the short-term incentive plan in which the Executive
participates, such bonus amount to be calculated on the basis of the extent to
which the performance factors targeted by the Human Resources Committee of the
Board have been achieved (for this purpose, the Company's performance through
the Termination Date shall be annualized based upon the actual number of days
elapsed from the beginning of the fiscal year in which the Termination occurs
through the Termination Date over a year of 360 days), which shall be deemed to
be 100% unless the performance actually achieved is greater than 100%, in which
case the actual performance levels shall be utilized. The Company shall pay to
the Executive the Additional Pay in a lump sum, in cash, not later than the
fifteenth day following the Termination Date.
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(c) RETIREMENT PLAN BENEFITS. If not already vested, the Executive shall
be deemed fully vested in all Company retirement plans and/or other written
agreements relating to pay upon retirement in which the Executive was a
participant, party or beneficiary immediately preceding a Change of Control, and
any additional plans and/or agreements in which such Executive became a
participant, party or beneficiary thereafter. In addition to the foregoing, for
purposes of determining the amounts to be paid to the Executive under such plans
and/or agreements, the years of service with the Company and the age of the
Executive under all such plans and agreements shall be deemed increased by the
lesser of thirty-six (36) months or such shorter period of time as would render
the Executive sixty-five (65) years of age. For purposes of this Subsection
IV(c), "plans" include, without limitation, the Company's qualified pension
plan, non-qualified and mid-career retirement plans, and "agreements" encompass
the terms of any offer letters leading to the Executive's employment with the
Company where the Executive was a signatory thereto and any written amendments
to the foregoing. In the event that the terms of the plans referenced in this
Subsection IV(c) do not for any reason (e.g., if plan amendments would cause
disqualification of qualified plans) coincide with the provisions of this
Subsection IV(c), the Executive shall be entitled to receive from the Company
under the terms of this Agreement an amount equivalent to all amounts he would
have received had all such plans continued in existence as in effect on the date
of this Agreement after being amended to coincide with the terms of this
Subsection IV(c).
(d) HEALTH BENEFITS. Following the Termination Date, the Company shall
continue to provide health, vision and dental benefits to the Executive and the
Executive's eligible dependents on terms substantially equivalent to those on
which the Company provides such benefits to retired employees who were service
pension-eligible at the time of the Change of Control and whose retirement date
most closely approximates the date of the Change of Control. The eligibility of
the Executive's dependents shall be determined by the terms of the health,
vision and dental benefit plans in effect prior to the Change of
Control.
(e) GROSS-UP PAYMENTS.
(i) In the event that any payment or the value of any benefit received
or to be received by the Executive in connection with the Executive's
Termination or contingent upon a Change of Control of the Company (whether
received or to be received pursuant to the terms of this Agreement (the
"Agreement Payments") or of any other plan, arrangement or agreement of the
Company, its successors, any person whose actions result in a Change of
Control of the Company or any person affiliated with any of them (or which,
as a result of the completion of the transactions causing a Change of
Control, will become affiliated with any of them) ("Other Payments" and,
together with the Agreement Payments, the "Payments")) would be subject to
the excise tax imposed by Section 4999 of the Internal Revenue Code of
1986, as amended (the "Code") or any comparable federal, state or local
excise tax (such excise tax, together with any interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), as determined as
provided below, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the
Executive, after deduction of the Excise Tax on Agreement Payments and
Other Payments and any federal, state and local income tax and Excise Tax
upon the payment provided for by this Subsection IV(e)(i), and any
interest, penalties or additions to tax payable by the Executive with
respect thereto shall be equal to the total present value of the Agreement
Payments and Other Payments at the time such Payments are to be made. The
intent of the parties is that the Company shall be solely responsible for
and shall pay, any Excise Tax on any Payments and Gross-Up Payment and any
income and employment taxes (including, without limitation, penalties and
interest) imposed on any Gross-Up Payments as well as any loss of deduction
caused by the Gross-Up Payment.
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(ii) All determinations required to be made under this Subsection
IV(e), including, without limitation, whether and when a Gross-Up Payment
is required and the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determinations, shall be made by tax
counsel selected by the Company and reasonably acceptable to the Executive
("Tax Counsel"). The Company shall cause the Tax Counsel to provide
detailed supporting calculations to the Company and the Executive within
fifteen (15) business days after notice is given by the Executive to the
Company that any or all of the Payments have occurred, or such earlier time
as is requested by the Company. Within two (2) business days after such
notice is given to the Company, the Company shall instruct the Tax Counsel
to timely provide the data required by this Subsection IV(e) to the
Executive. All fees and expenses of the Tax Counsel shall be paid solely
by the Company. Any Excise Tax as determined pursuant to this Subsection
IV(e) shall be paid by the Company to the Internal Revenue Service and/or
other appropriate taxing authority on the Executive's behalf within five
(5) days after receipt of the Tax Counsel's determination. If the Tax
Counsel determines that there is substantial authority (within the meaning
of Section 6662 of the Code) that no Excise Tax is payable by the
Executive, the Tax Counsel shall furnish the Executive with a written
opinion that failure to disclose or report the Excise Tax on the
Executive's federal income tax return will not constitute a substantial
understatement of tax or be reasonably likely to result in the imposition
of a negligence or similar penalty. Any determination by the Tax Counsel
shall be binding upon the Company and the Executive in the absence of
material mathematical or legal error. As a result of the uncertainty in
the application of Section 4999 of the Code at the time the initial
determination by the Tax Counsel hereunder, it is possible that Gross-Up
Payments will not have been made by the Corporation that should have been
made or that Gross-Up Payments have been made that should not have been
made, in each case, consistent with the calculations required to be made
hereunder. In the event the Company exhausts its remedies pursuant to
Subsection IV(e)(iii) below and the Executive is thereafter required to
make a payment of any Excise Tax, the Tax Counsel shall determine the
amount of underpayment of Excise Taxes that has occurred and any such
underpayment shall be promptly paid by the Company to the Internal Revenue
Service or other appropriate taxing authority on the Executive's behalf or,
if such underpayment has been previously paid by the Executive, to the
Executive. In the event that the Tax Counsel determines that an
overpayment of Gross-Up Payments has occurred, any such overpayment shall
be treated for all purposes as a loan to the Executive with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code, due
and payable within ninety (90) days after written demand to the Executive
by the Company; provided, however, that the Executive shall have no duty or
obligation whatsoever to repay such loan unless the Executive's receipt of
the overpayment, or any portion thereof, is includible in the Executive's
income and the Executive's repayment of the same is not deductible by the
Executive for federal and state income tax purposes.
(iii) The Executive shall notify the Company in writing of any claim
by the Internal Revenue Service or state or local taxing authority, that,
if successful, would result in any Excise Tax or an underpayment of Gross-
Up Payments. Such notice shall be given as soon as practicable but no
later than fifteen (15) business days after the Executive is informed in
writing of the claim and shall inform the Company of the nature of the
claim, the administrative or judicial appeal period, and the date on which
any payment of the claim must be paid. The Executive shall not pay any
portion of the claim prior to the expiration of the thirty (30) day period
following the date on which the Executive gives such notice to the Company
(or such shorter period ending on the date that any amount under the claim
is due). If the Company notifies the Executive in writing prior to the
expiration of such thirty (30) day period that it desires to contest the
claim, the Executive shall:
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(A) give the Company any information reasonably requested by the
Company relating to the claim;
(B) take such action in connection with contesting the claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
concerning the claim by an attorney selected by the Company who is
reasonably acceptable to the Executive; and
(C) cooperate with the Company in good faith in order to
effectively contest the claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including, without limitation, additional interest and
penalties and attorneys' fees) incurred in such contests and shall
indemnify and hold the Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including, without limitation, interest and
penalties thereon) imposed as a result of such representation. Without
limitation upon the foregoing provisions of this Subsection IV(e) (iii),
except as provided below, the Company shall control all proceedings
concerning such contest and, in its sole opinion, may pursue or forego any
and all administrative appeal, proceedings, hearings and conferences with
the taxing authority pertaining to the claim. At the written request of the
Company and upon payment to the Executive of an amount at least equal to
the claim plus any additional amount necessary to obtain the jurisdiction
of the appropriate tribunal and/or court, the Executive shall pay the same
and sue for a refund. The Executive agrees to prosecute any contest of a
claim to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company
shall determine; provided, however, that if the Company requests the
Executive to pay the claim and sue for a refund, the Company shall advance
the amount of such payment to the Executive, on an interest-free basis, and
shall indemnify and hold the Executive harmless on an after-tax basis, from
any Excise Tax or income tax (including, without limitation, interest and
penalties thereon) imposed on such advance or for any imputed income on
such advance. Any extension of the statute of limitations relating to
assessment of any Excise Tax for the taxable year of the Executive which is
the subject of the claim is to be limited solely to the claim.
Furthermore, the Company's control of the contest shall be limited to
issues for which a Gross-Up Payment would be payable hereunder. The
Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.
(iv) If, after the receipt by the Executive of an amount advanced by
the Company pursuant to Subsection IV(e)(iii) above, the Executive receives
any refund of a claim and/or any additional amount that was necessary to
obtain jurisdiction, the Executive shall promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by the Executive of
an amount advanced by the Company pursuant to Subsection IV(e)(iii) above,
a determination is made that the Executive shall not be entitled to any
refund of the claim and the Company does not notify the Executive in
writing of its intent to contest such denial of refund of a claim prior to
the expiration of thirty (30) days after such determination, then the
portion of such advance attributable to a claim shall be forgiven and shall
not be required to be repaid. The amount of such advance attributable to a
claim shall offset, to the extent thereof, the amount of the underpayment
required to be paid by the Company to the Executive.
(v) If, after the advance by the Company of an additional amount
necessary to obtain jurisdiction, there is a final determination made by
the taxing authority that the Executive is not
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entitled to any refund of such amount, or any portion thereof, then such
nonrefundable amount shall be repaid to the Company by the Executive within
thirty (30) days after the Executive receives notice of such final
determination. A final determination shall occur when the period to
contest or otherwise appeal any decision by an administrative tribunal or
court of initial jurisdiction has been waived or the time for contesting or
appealing the same has expired.
(f) LEGAL FEES AND EXPENSES. The Company shall pay to the Executive all
legal fees and expenses as and when incurred by the Executive in connection with
this Agreement, including all such fees and expenses, if any, incurred in
contesting or disputing any Termination or in seeking to obtain or enforce any
right or benefit provided by this Agreement, regardless of the outcome, unless,
in the case of a legal action brought by or in the name of the Executive, a
decision is rendered pursuant to Section X that such action was not brought by
the Executive in good faith.
(g) NO MITIGATION. The Executive shall not be required to mitigate the
amount of any payment provided for in this Section IV by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Section IV be reduced by any compensation earned by the Executive as
the result of employment by another employer or by retirement or other benefits
received after the Termination Date or otherwise, except as specifically
provided in this Section IV. The Company's obligation to make payments provided
for in this Agreement and otherwise to perform its obligations hereunder shall
not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company or Employer may have against the
Executive or other parties.
V. DEATH AND DISABILITY BENEFITS
In the event of the death or Disability of the Executive after a Change of
Control of the Company, the Executive, or in the case of death, the Executive's
beneficiaries, shall receive the benefits to which they are entitled under the
retirement plans, disability policies and other applicable plans or agreements
of the Company.
VI. SUCCESSORS; BINDING AGREEMENT
(a) OBLIGATIONS OF SUCCESSORS. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company is required to perform it. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled hereunder if the Executive had
terminated employment for Good Reason following a Change of Control of the
Company, except that for purposes of implementing the foregoing, the date on
which any such succession becomes effective shall be deemed the Termination
Date. As used in this Agreement, the "Company" shall mean the Company as
hereinabove defined and any successor to its business and/or assets as aforesaid
which assumes and agrees to perform this Agreement by operation of law, or
otherwise.
(b) ENFORCEABLE BY BENEFICIARIES. This Agreement shall inure to the
benefit of and be enforceable by the Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees (the "Beneficiaries"). In the event of the death of the
Executive while any amount would still be payable hereunder if such death had
not occurred, all such amounts, unless
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otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the Executive's Beneficiaries.
(c) EMPLOYMENT. Except in the event of a Change of Control and,
thereafter, only as specifically set forth in this Agreement, nothing in this
Agreement shall be construed to (i) limit in any way the right of the Company or
a Subsidiary to terminate the Executive's employment at any time for any reason
or for no reason; or (ii) be evidence of any agreement or understanding,
expressed or implied, that the Company or a Subsidiary will employ the Executive
in any particular position, on any particular terms or at any particular rate of
remuneration.
VII. CONFIDENTIAL INFORMATION.
The Executive shall hold in fiduciary capacity for the benefit of the
Company all secret or confidential information, knowledge or data relating to
the Company, the Subsidiaries and their respective businesses, which shall have
been obtained during the Executive's employment by the Employer and which shall
not be public knowledge (other than by acts by the Executive or his
representatives in violation of this Agreement). After termination of the
Executive's employment with the Company or any Employer within the Controlled
Group, the Executive shall not, without prior written consent of the Company or
the Employer, communicate or divulge any such information, knowledge or data to
anyone other than the Company, the Employer or those designated by them. In no
event shall an asserted violation of this Section VII constitute a basis for
deferring or withholding any amounts otherwise payable to the Executive under
this Agreement.
VIII. NOTICE
All notices and communications hereunder shall be in writing and shall be
given by hand delivery to the other party, by registered or certified mail,
return receipt requested, postage prepaid, or by overnight mail, addressed as
follows:
If to the Executive:
[Name]
[Title]
[Company]
7800 East Orchard Road
Englewood, Colorado 80111
If to the Company:
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Attn.: Vice President - Law and Human Resources
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
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IX. MISCELLANEOUS
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed by the
Executive and the Company's Chief Executive Officer. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any conditions or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Colorado. All references to sections of the Code or the Exchange Act shall be
deemed also to refer to any successor provisions of such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Company under
Sections IV and V shall survive the expiration of the term of this Agreement.
X. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
XI. ARBITRATION
The Executive may agree in writing with the Company (in which case this
Article XI shall have effect but not otherwise) that any dispute that may arise
directly or indirectly in connection with this Agreement, the Executive's
employment or the termination of the Executive's employment, whether arising in
contract, statute, tort, fraud, misrepresentation, or other legal theory, shall
be determined solely by arbitration in Denver, Colorado under the rules of the
AAA. The only legal claims between the Executive, on the one hand, and the
Company or any Subsidiary, on the other, that would not be included in this
agreement to arbitration are claims by the Executive for workers' compensation
or unemployment compensation benefits, claims for benefits under a Company or
Subsidiary benefit plan if the plan does not provide for arbitration of such
disputes, and claims by the Executive that seek judicial relief in the form of
specific performance of the right to be paid until the Termination Date during
the pendency of any dispute or controversy arising under or Subsection III(b).
If this Article XI is in effect, any claim with respect to this Agreement, the
Executive's employment or the termination of the Executive's employment must be
established by a preponderance of the evidence submitted to the impartial
arbitrator. A single arbitrator engaged in the practice of law shall conduct
any arbitration under the then current procedures of the American Arbitration
Association (the "AAA") and under the AAA's then current Model Employment
Arbitration Rules. The arbitrator shall have the authority to order a pre-
hearing exchange of information by the parties including, without limitation,
production of requested documents, and examination by deposition of parties and
their authorized agents. If this Article XI is in effect, the decision of the
arbitrator (i) shall be final and binding, (ii) shall be rendered within ninety
(90) days after the impanelment of the arbitrator, and (iii) shall be kept
confidential by the parties to such arbitration. The arbitration award may be
enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9
U.S.C. 1-15, not state law, shall govern the arbitrability of all claims.
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If this letter sets forth our agreement on the subject matter hereof,
kindly sign both originals of this letter and return to the Vice President - Law
and Human Resources one of the fully executed originals of this letter which
will then constitute our agreement on this subject.
Sincerely,
U S WEST, Inc.
By:___________________________________
[Name]
Chairman, President and
Chief Executive Officer
______________________________________
[Name]
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EXHIBIT 10ab
[FORM OF EXECUTIVE SEVERANCE AGREEMENT]
AGREEMENT
I. RECITALS
A. The parties to this Agreement are U S WEST, Inc. and its subsidiaries
and affiliated companies collectively ("U S WEST") at 7800 East Orchard Road,
Englewood, Colorado 80111 and ________________________ (hereinafter "Executive")
whose address is _____________________________________, Executive is currently
employed by U S WEST ________________________________ as
________________________________________.
B. This Agreement sets forth the understanding between U S WEST and
Executive concerning the circumstances under which Executive will be entitled
to receive severance benefits in the event his employment with U S WEST is
terminated under circumstances identified in this Agreement and describes the
nature and amount of the severance benefits.
C. 1. IT IS UNDERSTOOD AND AGREED BY U S WEST AND EXECUTIVE THAT THIS
AGREEMENT DOES NOT CONTAIN ANY PROMISE OR REPRESENTATION CONCERNING THE TERMS,
CONDITIONS, OR DURATION OF EXECUTIVE'S EMPLOYMENT WITH U S WEST OR ANY
SUBSIDIARY OR AFFILIATED COMPANY OR THE CIRCUMSTANCES UNDER OR THE PROCEDURES BY
WHICH THE EMPLOYMENT RELATIONSHIP MAY BE TERMINATED. EXECUTIVE SPECIFICALLY
ACKNOWLEDGES THAT HIS EMPLOYMENT WITH U S WEST, INC. OR ANY SUBSIDIARY OR
AFFILIATED COMPANY IS AT-WILL AND MAY BE ALTERED OR TERMINATED BY EITHER
EXECUTIVE OR U S WEST AT ANY TIME, WITH OR WITHOUT CAUSE AND/OR WITH OR WITHOUT
NOTICE. THIS AT-WILL EMPLOYMENT RELATIONSHIP MAY NOT BE MODIFIED UNLESS IN A
WRITTEN AGREEMENT SIGNED BY THE EXECUTIVE AND AN AUTHORIZED OFFICER OF U S WEST.
2. EXECUTIVE FURTHER ACKNOWLEDGES THAT THE WRITTEN POLICIES AND
PROCEDURES OF U S WEST, INC. AND ITS SUBSIDIARIES AND AFFILIATED COMPANIES DO
NOT CONSTITUTE CONTRACTS BETWEEN U S WEST AND EXECUTIVE, AND THAT THE POLICIES
AND PROCEDURES ARE SUBJECT TO CHANGE BY U S WEST AT ANY TIME IN U S WEST'S SOLE
DISCRETION. EXECUTIVE ACKNOWLEDGES THAT, AS OF THE DATE OF EXECUTION OF THIS
AGREEMENT, THERE IS NO CONTRACT, EITHER EXPRESSED OR IMPLIED, IN EFFECT BETWEEN
EXECUTIVE AND U S WEST THAT ALTERS THE AT-WILL EMPLOYMENT RELATIONSHIP OR
CREATES OR IMPLIES THE EXISTENCE OF AN EMPLOYMENT CONTRACT OR TERM OF EMPLOYMENT
BETWEEN THE PARTIES. EXECUTIVE ACKNOWLEDGES THAT, WITH THE EXCEPTION OF
EXECUTIVE'S STOCK OPTION AGREEMENTS AND
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EXECUTIVE'S RESTRICTED STOCK AGREEMENTS AND ANY NEGOTIATED AND DULY EXECUTED:
PENSION, MEDICAL, DEFERRED COMPENSATION, LIFE INSURANCE, LONG TERM INCENTIVE
PROGRAM (LTIP), SHORT TERM INCENTIVE PROGRAM (STIP), AND/OR CHANGE OF CONTROL
AGREEMENTS,THERE ARE NO OTHER CONTRACTS IN EFFECT BETWEEN EXECUTIVE AND
U S WEST, INC. OR ANY SUBSIDIARY OR AFFILIATED COMPANY AS OF THE DATE OF
EXECUTION OF THIS AGREEMENT PROVIDING FOR SEVERANCE BENEFITS.
D. In consideration of the mutual covenants contained herein and other
valuable consideration, receipt of which is hereby acknowledged, the parties
contract and agree as follows.
II. DEFINITIONS
The following definitions apply for the purposes of only this Agreement:
A. "COMPANY INFORMATION" means any confidential, legal, financial,
marketing, business, technical, or other information, including specifically but
not exclusively, information that Executive prepared, caused to be prepared, or
received in connection Executive's employment with U S WEST , such as,
management and business plans, business strategies, software, software
evaluations, trade secrets, personnel information, marketing methods and
techniques, and any of the above-recited information as it relates to U S WEST
which shall have been obtained and/or learned during his employment and which
shall not be public knowledge. This definition does not apply to (a)
information or knowledge that already is or subsequently may come into the
public domain after the termination of employment other than by way of
unauthorized disclosure by Executive, or (b) information or knowledge that
Executive is required to disclose by order of a court or governmental agency
after timely notice is provided to U S WEST to allow the U S WEST to take legal
action with respect to the matter.
B. "COMPANY PROPERTY" means, reports, files, memoranda, records, credit
cards, keys, passes, computer access codes, software, cellular phones, computer
equipment, facsimile equipment and other property which Executive has requested
or received, prepared or helped to prepare in connection with his employment.
COMPANY PROPERTY includes any copies, duplicates, reproductions or excerpts of
the materials outlined in this paragraph.
C. "CONDITIONS" means that: (1) Executive has been DISCHARGED FROM
EMPLOYMENT; (2) within fifty (50) days after the date of Executive's DISCHARGE
FROM EMPLOYMENT, Executive has executed and delivered to the office of the
Executive Vice President Law and Human Resources and General Counsel for
U S WEST, Inc. a WAIVER & RELEASE; (3) the period for revocation of the WAIVER &
RELEASE has expired; (4) and Executive has complied with the requirements
regarding return of all CONFIDENTIAL PROPERTY defined in this Agreement.
D. "DISCHARGE FOR CAUSE" means Executive's discharge from employment due
to Executive's intentional breach of or failure to perform his employment
duties, intentional engaging in conduct that is demonstrably and materially
injurious to U S WEST, monetarily or otherwise, or
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failure to comply with the U S WEST Code of Business Ethics and Conduct,
Corporate Policies or Compliance Plans. The parties acknowledge that this
definition of DISCHARGE FOR CAUSE is not intended and does not apply to any
aspect of the relationship between U S WEST and any of its employees, including
Executive, beyond determining Executive's entitlement to SEVERANCE BENEFITS
under this Agreement.
E. "DISCHARGE(D) FROM EMPLOYMENT" means Executive's involuntary and
permanent separation from employment with U S WEST by virtue of discharge
without cause, layoff as a part of a reduction in force, or RESIGNATION OR
RETIREMENT UNDER CERTAIN CIRCUMSTANCES. DISCHARGE(D) FROM EMPLOYMENT shall not
include any other circumstances, including, but not limited to, Executive's
DISCHARGE FOR CAUSE, Executive's resignation or retirement, any leave of
absence, the termination of Executive's employment due to death or disability,
or the transfer of Executive to a new location or the reassignment of Executive
to U S WEST, Inc. or a wholly or partially owned subsidiary (except as otherwise
provided for herein) of U S WEST, Inc.
F. "LTIP" means the U S WEST, Inc. Executive Long Term Incentive Plan and
the U S WEST Communications Executive Long Term Incentive Plan.
G. "RESIGN(ATION) OR RETIRE(MENT) UNDER CERTAIN CIRCUMSTANCES" means that
Executive has elected to resign or retire under the following circumstances:
1. that Executive has been offered, and has resigned or retired
rather than accept, a transfer or assignment to another position within the
United States, the United Kingdom or Continental Europe (this provision relating
to the United Kingdom and Continental Europe shall apply only until
_____________) with U S WEST, Inc., a subsidiary of U S WEST, Inc., or an
affiliated entity in which U S WEST, Inc. owns, directly or indirectly, 50% or
more of the entity, if the new position is not comparable or superior (in terms
of responsibility and remuneration) to the position held by Executive
immediately prior to the transfer or reassignment; or
2. that Executive has been offered, and has resigned or retired
rather than accept, a transfer or assignment to another position within the
United States with a company affiliated with U S WEST, Inc. in which U S WEST,
Inc. owns, directly or indirectly, less than 50% of the outstanding stock; or
3. that Executive has been offered, and has resigned or retired
rather than accept, a transfer or reassignment to another position that is not
located within the United States.
H. "SEVERANCE BENEFITS" means:
Cash Payments
1. Within thirty (30) days after the date Executive has complied
with the CONDITIONS, the U S WEST company that Executive is employed by
immediately prior to his DISCHARGE FROM EMPLOYMENT shall pay Executive in United
States dollars in the United States the SEVERANCE PAYMENT, as applicable, in
appreciation for his many years of service to U S WEST, substantially all of
which service was rendered by Executive over many years in the United States.
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Applicable state and federal withholding taxes will be deducted from the gross
amount of this severance. None of the payments pursuant to this paragraph shall
be included in the calculation of Executive's pension or savings benefits with U
S WEST.
2. Within thirty (30) days after the CONDITIONS have been satisfied,
the U S WEST company that Executive is employed by immediately prior to his
DISCHARGE FROM EMPLOYMENT shall pay to Executive a sum equal to (a) a pro rata
portion of the amount that would have been payable to Executive, if any, under
the STIP at target and (b) a pro rata portion of the cash value, if any, of the
amount that would have been payable to Executive under the LTIP at target. In
the event any of such plans have been modified or amended prior to the date of
DISCHARGE FROM EMPLOYMENT, the terms of the modified or amended plans shall
control. In determining the "target" for the 1996 LTIP, it will be assumed
that the 1996 LTIP Total Shareowners' Return ("TSR") is 13.5 %. The amount of
the STIP payments payable hereunder may be determined by U S WEST in accordance
with any criteria then in place. The amount of any STIP payments made to
Executive pursuant to this Agreement will be included in the calculation of
Executive's nonqualified pension benefits.
3. Within thirty (30) days after the CONDITIONS are satisfied, the
U S WEST company that Executive is employed by immediately prior to his
DISCHARGE FROM EMPLOYMENT shall pay to the Executive (less applicable taxes), an
amount equal to the balance available to Executive for financial counseling
services for the remainder of the year of the Executive's termination and will
pay to Executive (less applicable taxes), the amount available for financial
counseling services for the following year. In the alternative, if U S WEST is
providing financial counseling services to the Executive at a group rate, U S
WEST will maintain in place the level of financial counseling services paid for
by U S WEST for the remainder of the year of Executive's termination and for the
following year.
Stock and Stock Options
4. All restrictions applicable to any stock granted by U S WEST to
Executive under the LTIP shall lapse sixteen (16) days after execution of the
WAIVER & RELEASE and the CONDITIONS are satisfied. All restrictions applicable
to any stock granted by U S WEST to executive under the STOCK PLAN after
February 15, 1996, shall lapse in accordance with the terms of such grants and,
if applicable, sixteen (16) days after execution of the WAIVER & RELEASE and the
CONDITIONS are satisfied.
5. (a) Pursuant to the terms of the STOCK PLAN, the Human Resources
Committee of the U S WEST, Inc. Board of Directors has the sole discretion to
alter or amend the vesting schedule of any stock options or stock appreciation
rights granted under the STOCK PLAN prior to October 31, 1995. A pro rata
portion of stock options and stock appreciation rights (rounded up to the
nearest whole option) issued to Executive on or after October 31, 1995 under the
STOCK PLAN that are not exercisable on the date of DISCHARGE FROM EMPLOYMENT
shall become fully exercisable sixteen (16) days after execution of the WAIVER
& RELEASE by Executive and after the CONDITIONS are satisfied. Such pro rata
portion shall be determined on a monthly basis by multiplying the number of
options in any grant by a fraction, the numerator of which is the number
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of full months from grant date to the date of termination and the denominator of
which is the original vesting schedule of the grant.
(b) If Executive's DISCHARGE FROM EMPLOYMENT is concurrent with
Executive's retirement from employment as defined in the STOCK PLAN, Executive
shall have the right to elect to have Executive's stock options governed by the
provisions of II. H. 5. (a) above or by the terms of the agreement under which
the options were granted. If Executive fails to make such an election within
thirty (30) days after the notice of Executive's DISCHARGE FROM EMPLOYMENT, the
stock options will be governed by II. H. 5 (a) above.
6. Provided Executive does not go into business in competition with
U S WEST or become employed by a firm engaged in such competition, as determined
in the sole discretion of the Human Resources Committee of the Board of
Directors of U S WEST, Inc. or its designee, Executive shall have the right, at
any time up to three (3) years after the date of his DISCHARGE FROM
EMPLOYMENT (but in no event after the expiration date of the applicable stock
options and stock appreciation rights), to exercise stock options and stock
appreciation rights held as of the date of DISCHARGE FROM EMPLOYMENT. In the
event Executive does go into business in competition with U S WEST or becomes
employed by a firm that is engaged in such competition within the three (3) year
period, Executive shall have ninety (90) days after the date that he becomes
employed in the competitive position to exercise any stock options and stock
appreciation rights that have not previously expired to the extent that such
stock options and stock appreciation rights are then otherwise exercisable.
Medical, Dental and Vision Benefits
7. The U S WEST company that Executive is an employee of immediately
prior to his DISCHARGE FROM EMPLOYMENT shall take such steps as are necessary to
permit the Executive to continue, in full force and effect and "AT U S WEST'S
EXPENSE" for the "APPLICABLE PERIOD," medical, dental and vision benefits for
Executive and the Executive's dependents on the same basis as if Executive had
remained an active employee during such applicable period; provided, however,
that all rights to such benefits (except the right to continue health plan
coverage at the Executive's own expense under COBRA) shall terminate if the
CONDITIONS are not satisfied within ninety (90) days after the date of
Executive's DISCHARGE FROM EMPLOYMENT with U S WEST.
Career Guidance Services
8. The U S WEST company that Executive is an employee of immediately
prior to his DISCHARGE FROM EMPLOYMENT shall take such steps as are necessary to
provide career guidance services to Executive through an outside consulting firm
selected by U S WEST; provided, however, that U S WEST may terminate such
services if the CONDITIONS are not satisfied within ninety (90) days of the date
of his DISCHARGE FROM EMPLOYMENT. U S WEST will have sole discretion to
determine the exact amounts of career guidance services that will be provided,
and Executive does not have any right to receive a cash payment in lieu of
career guidance services.
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I. "SEVERANCE PAYMENT" means a payment amount equal to:
1. If Executive is a Band 1 Officer (or successor designation) on
the date that Executive is notified of his DISCHARGE FROM EMPLOYMENT, a lump
sum severance amount equal to two (2) times Executive's annual base salary in
effect on the date of such notification; or
2. If Executive is either a Band 2 or Band 3 Officer (or successor
designation) on the date that Executive is notified of his DISCHARGE FROM
EMPLOYMENT, a lump sum severance amount equal to one and one-half (1.5) times
Executive's base salary in effect on the date of notification.
J. "STOCK PLAN" means the U S WEST, Inc. 1994 Stock Plan and its
predecessor and successor plans.
K. "STIP" means the U S WEST Inc. Short Term Incentive Plan, the
Executive Short Term Incentive Plan or the short term incentive plan for the
Executive's business unit as applicable.
L. "U S WEST" means U S WEST, Inc. and any subsidiary, division or
affiliated company unless otherwise specifically stated herein.
M. "WAIVER & RELEASE" means the waiver and release of claims against
U S WEST and their representatives, in the form attached hereto as Appendix "A."
N. Solely for purposes of section II.H.7. of this Agreement relating to
medical, dental and vision benefits: (i) the phrase "AT U S WEST'S EXPENSE"
means that, if Executive makes a timely election of COBRA coverage, the U S WEST
company Executive is employed by immediately prior to his DISCHARGE FROM
EMPLOYMENT will waive the first six (6) months of COBRA premiums and, if the
Executive is not eligible at the expiration of the initial six (6) month period
for coverage under another employer's health plan, the U S WEST company
Executive is employed by immediately prior to his DISCHARGE FROM EMPLOYMENT will
provide the Executive with a lump sum payment equivalent to twelve (12) months
of COBRA premiums (less applicable taxes); and (ii) the term "APPLICABLE PERIOD"
means the eighteen (18) months following the date of the Executive's DISCHARGE
FROM EMPLOYMENT or, if less than eighteen (18) months, the period for which the
U S WEST Health Care Plan is required to extend continuation coverage under
COBRA.
III. COVENANTS
A. CONSIDERATION. U S WEST agrees to provide the following to Executive
as consideration for the execution of this Agreement:
1. Employment at U S WEST;
2. Eligibility for SEVERANCE BENEFITS described in the Agreement;
and
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3. The sum of One Thousand Dollars ($1,000.00) which will be paid
within thirty (30) days after the execution of this Agreement. This sum will
not be included in the calculation of any qualified or non-qualified retirement
or welfare benefits to which Executive may otherwise be entitled.
B. RECEIPT OF SEVERANCE BENEFITS.
1. In the event Executive is employed as a Band 1, Band 2 or Band 3
officer, or any successor designation, on the date Executive is notified of his
DISCHARGE FROM EMPLOYMENT, Executive will receive SEVERANCE BENEFITS only if he
has complied fully with the CONDITIONS including, but not limited to, execution
of the WAIVER & RELEASE. Executive agrees that if provided, the SEVERANCE
BENEFITS are provided, in part, in exchange for the elimination of any
obligation of U S WEST to compensate Executive for the remainder of the term of
any Expatriate Agreement and that if Executive is not entitled to any
compensation in addition to the SEVERANCE BENEFITS upon satisfaction of the
CONDITIONS. U S WEST will have no responsibility for any taxes on the SEVERANCE
BENEFITS, including no responsibility to follow the Taxation Methodology
approach outlined in any Expatriate agreement. Executive agrees to indemnify U S
WEST and hold U S WEST harmless for any liability for any taxes due on the
SEVERANCE BENEFITS. Executive agrees that if provided, the SEVERANCE BENEFITS
are provided, in part, in exchange for the elimination of any obligation of U S
WEST to compensate Executive for the remainder of the term of any Expatriate
Agreement and that Executive is not entitled to any compensation in addition to
the SEVERANCE BENEFITS upon satisfaction of the CONDITIONS. U S WEST will have
no responsibility for any taxes on the SEVERANCE BENEFITS, including no
responsibility to follow the Taxation Methodology approach outlined in any
Expatriate agreement. Executive agrees to indemnify U S WEST and hold U S WEST
harmless for any liability for any taxes due from Executive on the SEVERANCE
BENEFITS. Executive will not be entitled to receive SEVERANCE BENEFITS pursuant
to this Agreement if Executive is not DISCHARGED FROM EMPLOYMENT.
2. In the event Executive accepts a transfer or reassignment to a
position with a company affiliated with U S WEST, Inc. in which U S WEST, Inc.
owns, directly or indirectly, less than 50% of the outstanding stock, this
Agreement shall terminate on the date Executive begins employment with the
affiliated company, with the exception that the arbitration provisions shall
remain in full force and effect with respect to any disputes arising from or
related to Executive's employment and/or termination from employment with
U S WEST.
3. In the event Executive was covered by this Agreement, but is not
a Band 1, 2 or 3 officer (or successor designation) for a period of less than 12
months on the date he is notified of his DISCHARGE FROM EMPLOYMENT or the date
of Executive's notice of intent to RESIGN OR RETIRE UNDER CERTAIN CIRCUMSTANCES
as the case may be, Executive will be eligible for SEVERANCE BENEFITS under this
Agreement. In all other circumstances, if Executive is not a Band 1, 2 or 3
officer (or successor designation) on the date he is notified of his DISCHARGE
FROM EMPLOYMENT or the date of Executive's notice to RESIGN OR RETIRE UNDER
CERTAIN CIRCUMSTANCES, Executive will only be entitled to severance benefits
under the terms and conditions set forth in the U S WEST Management Separation
Program or any successor plan, if any, if otherwise eligible under the terms and
conditions of that program or plan.
C. DEATH, RETIREMENT, DISABILITY.
1. In the event of the death, retirement or disability of Executive,
nothing in this Agreement shall be construed to limit or curtail the right of
Executive or, in the case of death, Executive's beneficiaries, to receive the
benefits to which they are entitled under the retirement plans, disability
policies and other applicable plans maintained by U S WEST.
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2. In the event Executive is notified of his DISCHARGE FROM
EMPLOYMENT under circumstances that would qualify Executive to receive
SEVERANCE BENEFITS, but Executive dies before he has fulfilled the CONDITIONS,
the SEVERANCE BENEFITS will be paid to Executive's estate provided that the
CONDITIONS are satisfied by the estate within ninety (90) days of Executive's
death.
D. RETURN AND PROTECTION OF PROPERTY AND COMPANY INFORMATION.
1. Within five (5) days after the date Executive's employment
terminates, for whatever reason, Executive agrees to return to U S WEST all
COMPANY PROPERTY.
2. Executive agrees to hold in a fiduciary capacity for the benefit
of U S WEST all secret or CONFIDENTIAL INFORMATION COMPANY INFORMATION,
including, without limitation, secret or other non-public knowledge or data
relating to U S WEST and its respective businesses, which shall have been
obtained and/or learned during his employment and which shall not be public
knowledge (other than by acts by Executive or his representatives in violation
of this Agreement). After termination of Executive's employment with U S WEST,
Executive will not, without prior written consent of U S WEST, communicate or
divulge any such information, knowledge or data to anyone other than U S WEST or
its designated representative.
3. Executive agrees that any inventions, discoveries, creations
(including without limitation software, writings, drawings and other works),
improvements, confidential information or other intellectual property that he
may develop or create, or assist in developing or any creating, during his
employment with U S WEST, whether or not patentable or eligible for copyright,
which relate to the actual, planned, or foreseeable business or other activities
of U S WEST, or which result from his work for U S WEST, are the exclusive
property of U S WEST and at no time later than his termination of employment
with U S WEST Executive agrees to disclose promptly such intellectual property
to U S WEST and will, both during and after his employment, and without
additional compensation, execute all assignments and other documents and do all
things reasonably necessary to secure and enforce U.S. and foreign intellectual
property rights for U S WEST , including patents and copyrights.
4. Executive shall comply with the provisions relating to the return
and protection of COMPANY PROPERTY and COMPANY INFORMATION following the
termination of his employment, regardless of whether he is eligible to receive
SEVERANCE BENEFITS pursuant to this Agreement.
E. NONSOLICITATION OF EMPLOYEES. Executive agrees that he will not for
a period of one (1) year immediately following the termination of his employment
with U S WEST for any reason, either Executive's own account or in conjunction
with or on behalf of any other person or entity whatsoever, directly or
indirectly induce, solicit, or entice away any person who is a managerial level
employee of U S WEST (including, but not limited to an Officer, Executive
Director or director-level employee (or any equivalent or successor term for
such employees)) at the time of or
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any time during the three (3) months immediately preceding Executive's
termination of employment.
F. ARBITRATION OF DISPUTES.
1. Any claim, controversy or dispute between Executive and U S WEST,
whether sounding in contract, statute, tort, fraud, misrepresentation,
discrimination or any other legal theory, including, but not limited to,
disputes relating to the interpretation of this Agreement; claims under Title
VII of the Civil Rights Act of 1964, as amended; claims under the Civil Rights
Act of 1991; claims under the Age Discrimination in Employment Act of 1967, as
amended; claims under 42 U.S.C. Section 1981, Section 1981a, Section 1983,
Section 1985, or Section 1988; claims under the Family and Medical Leave Act of
1993; claims under the Americans with Disabilities Act of 1990, as amended;
claims under the Fair Labor Standards Act of 1938, as amended; claims under the
Employee Retirement Income Security Act of 1974, as amended; claims under the
Colorado Anti-Discrimination Act; or claims under any other similar federal,
state or local law or regulation, whenever brought, shall be resolved by
arbitration. The only legal claims between Executive and U S WEST that are not
included for arbitration within this Agreement are claims by Executive for
workers' compensation or unemployment compensation benefits and/or claims for
benefits under any U S WEST benefit plan, if the plan does not provide for
arbitration of such disputes. BY SIGNING THIS AGREEMENT, EXECUTIVE VOLUNTARILY,
KNOWINGLY AND INTELLIGENTLY WAIVES ANY RIGHT HE MAY OTHERWISE HAVE TO SEEK
REMEDIES IN COURT OR OTHER FORUMS, INCLUDING THE RIGHT TO A JURY TRIAL AND THE
RIGHT TO RECOVER PUNITIVE DAMAGES ON ANY COMMON LAW AND/OR CONTRACT CLAIMS. The
Federal Arbitration Act, 9 U.S.C. Sections 1-16 ("FAA") shall govern the
arbitrability of all claims, provided that they are enforceable under the FAA,
as it may be amended from time to time. In the event the FAA does not govern,
the Colorado Uniform Arbitration Act shall apply. Additionally, the substantive
law of Colorado, to the extent it is consistent with the terms stated in this
Agreement for arbitration, shall apply to any common law claims. This Agreement
for arbitration supersedes any other arbitration agreement Executive and U S
WEST to the extent they are inconsistent.
2. A single arbitrator engaged in the practice of law shall conduct
the arbitration under the applicable rules and procedures of the American
Arbitration Association ("AAA"). Any dispute, that relates directly or
indirectly Executive's employment with U S WEST or to the termination of
Executive's employment will be conducted under the AAA Employment Dispute
Resolution Rules, effective November 1993. The arbitrator shall be chosen from
a state other than Executive's state of residence and other than Colorado.
Other than as set forth herein, the arbitrator shall have no authority to add
to, detract from, change, amend, or modify existing law. All arbitration
proceedings, including without limitation, settlements and awards, under this
Agreement will be confidential. The parties shall share equally the hourly fees
of the arbitrator. U S WEST shall pay the expenses (such as travel and lodging)
of the arbitrator. The prevailing party in any arbitration may be entitled to
receive reasonable attorneys' fees. The arbitrator's decision and award shall be
final and binding, as to all claims that were, or could have been, raised in the
arbitration, and judgment upon the award rendered by the arbitrator may be
entered to any court having jurisdiction thereof. If any party hereto files a
judicial or administrative action asserting claims subject to this arbitration
provision, and another
9
<PAGE>
party successfully stays such action and/or compels arbitration of such claims,
the party filing said action shall pay the other party's costs and expenses
incurred in seeking such stay and/or compelling arbitration, including
reasonable attorneys' fees.
IV. ADDITIONAL PROVISIONS
A. BINDING EFFECT. This Agreement shall bind and benefit the heirs,
personal representatives, administrators, successors, subsidiaries,
affiliates and assigns of U S WEST and Executive.
B. CHANGE OF CONTROL. If Executive and U S WEST, Inc. have entered into
a Change of Control Agreement that is in force on the date that a "change of
control" (as defined in the Change of Control Agreement) of U S WEST, Inc.
occurs and Executive is entitled to and elects to receive benefits under the
Change of Control Agreement, the terms of the Change of Control Agreement shall
supersede this Agreement, whether the Change of Control Agreement was signed
prior to or subsequent to the execution of this Agreement, and Executive will
not be entitled to SEVERANCE BENEFITS under this Agreement.
C. ENTIRE UNDERSTANDING. This Agreement contains the entire
understanding of the parties with respect to the matters addressed herein and
supersedes all prior representations, understandings and agreements of the
parties with respect thereto, with the following exception. In the event a
court declares the arbitration provisions of this Agreement to be unenforceable
for any reason, any prior agreement by Executive to submit employment disputes
to arbitration shall remain enforceable. This Agreement may be modified only by
a written agreement executed by both Executive and an authorized officer of U S
WEST.
D. GOVERNING LAW. Except as otherwise specifically stated for any
provision of this Agreement, the substantive law of Colorado, only to the extent
it is consistent with the terms stated herein, shall apply to any claims between
the parties to the extent not preempted by ERISA or other applicable federal
law.
E. NOTICES. All notices and communications required by this Agreement
shall be in writing and delivered by hand delivery, by registered or certified
mail, return receipt requested, postage prepaid, or by overnight mail, addressed
as follows:
To Executive:
_______________________________
_______________________________
_______________________________
To U S WEST:
U S WEST, Inc.
Executive Vice President Law and Human Resources and General Counsel
10
<PAGE>
7800 East Orchard Road, Room 200
Englewood, CO 80111
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
F. AVAILABILITY OF INJUNCTIVE RELIEF. The parties agree that U S WEST
would suffer irreparable injury if Executive breaches his responsibilities
relating to the return and protection of COMPANY INFORMATION or COMPANY PROPERTY
and that the injury would not be compensable fully in monetary damages.
Accordingly, in the event Executive breaches or threatens to breach that
condition, the arbitration provisions of this Agreement shall not prevent
U S WEST or Executive from obtaining injunctive relief from a court of competent
jurisdiction to enforce the obligations relating to the return and protection of
COMPANY INFORMATION or COMPANY PROPERTY, pending decision on the merits by the
arbitrator.
G. WAIVER OF BREACH. The waiver by either U S WEST or Executive of a
breach of any provision of this Agreement shall not operate or be construed as a
waiver of any prior or subsequent breach by either party.
H. SEVERABILITY.
1. In case any one or more of the provisions of this Agreement
shall be found to be invalid, illegal or unenforceable for any reason, the
validity, legality and enforceability of the remaining provisions and/or clauses
contained herein shall not in any way be affected or impaired thereby. Any
clause and/or provision that is found to be invalid, illegal or unenforceable
shall be deemed, without further action on the part of the parties hereto, to be
modified, amended and/or limited to the minimum extent necessary to render such
clauses and/or provisions valid and enforceable. A claim by either party that
any provision of this Agreement is invalid, illegal or unenforceable shall be
determined by an arbitrator under the arbitration provisions of this Agreement.
In the event an arbitrator determines that any provision of this Agreement is
invalid, illegal or unenforceable for any reason, it is the mutual desire of the
parties that the arbitrator reform the Agreement to the minimum extent necessary
to render such provision valid and enforceable and direct the parties to comply
with the requirements of this Agreement as modified.
2. To the extent the arbitration provisions of any prior agreement
between the parties are inconsistent with the arbitration provisions in the
Agreement or incorporated herein, the arbitration provisions of this Agreement
shall supersede the conflicting terms, with the sole exception of the
arbitration provisions contained in any change of control Agreement between the
parties that is governed by section IV(B) of this Agreement. In the event a
court or arbitrator concludes that the arbitration provisions of this Agreement
are not enforceable, then any agreement executed by the parties prior to the
execution of this Agreement that provides for the arbitration of disputes shall
be fully enforceable.
I. EXPATRIATE AGREEMENTS. This Agreement shall control if there is any
conflict between the terms of the Expatriate Agreement and this Agreement with
the exception of any
11
<PAGE>
specially negotiated and duly executed short or long term incentive agreements.
Executive agrees that this Agreement provides the only severance benefits and
compensation for the Executive in the event of Executive's DISCHARGE FROM
EMPLOYMENT and supersedes and replaces the obligations of U S WEST in the
"Company initiated termination" or similar provisions under any Expatriate
Agreement.
J. ACKNOWLEDGMENTS. Executive confirms that:
1. U S WEST has advised Executive to consult legal counsel before
signing this Agreement or the WAIVER AND RELEASE provided for herein.
2. Executive has reviewed this Agreement in its entirety, fully
understands its meaning and effect and agrees to its terms.
K. WAIVER OF CERTAIN RIGHTS, INCLUDING REINSTATEMENT. Executive
understands that, by entering into this Agreement:
1. Executive is voluntarily waiving the following rights relating to
claims or complaints based in whole or in part on federal, state or local law,
whether statutory or common law, including, without limitation, discrimination
under the Age Discrimination in Employment Act, 29 U.S.C. Sec. 621 ET SEQ.
claims sounding in tort and contract:
(a) Executive's right to seek reinstatement to employment at
U S WEST in the event Executive's employment with
U S WEST is terminated;
(b) Executive's right to a jury trial on claims, including
claims against U S WEST relating to Executive's employment
and/or termination from employment with U S WEST, which will
be governed by arbitration; and
(c) Executive's right to seek punitive or exemplary damages
against U S WEST on any and all common law claims.
2. Executive is entitled only to the consideration identified in
this Agreement and no other consideration value, payment or other compensation
of any kind from U S WEST.
3. Executive has had a period of at least 45 days within which to
consider this Agreement prior to its execution.
L. RIGHT TO REVOKE. Executive has the right to revoke this Agreement for
a period of SEVEN (7) days following the date of execution set forth below. The
Agreement shall not become effective or enforceable until the revocation period
has expired.
12
<PAGE>
M. RIGHT TO WAIVE CERTAIN PROVISIONS. The parties acknowledge that
U S WEST retains the right, in its sole discretion, to waive enforcement of all
or any part of the provisions relating to Executive's Waiver of Certain Rights,
Including Reinstatement, as set forth in section IV(K) of this Agreement. Such
a decision not to enforce all or any provision must be in writing and signed by
the U S WEST Executive Vice President Law and Human Resources and General
Counsel or his successor or designee. In the event U S WEST chooses not to
enforce all or any part of these provisions, the waiver of rights set forth in
the applicable provision(s) therein shall be null and void.
Executed in duplicate this _____ day of ______________________, 1996.
U S WEST
____________________________________ By ______________________________
EXECUTIVE
Its _____________________________
13
<PAGE>
APPENDIX A
RELEASE
In consideration of the Severance Benefits identified in section II (H) of
the Agreement (form "Executive Agreement") between Executive and U S WEST, Inc.
or any of its subsidiaries or affiliated companies (hereinafter "Agreement"),
Executive, as a free and voluntary act, forever releases and discharges U S
WEST, Inc., its subsidiaries, divisions and affiliates, and the directors,
officers, employees, agents and representatives of all of them (hereinafter
"U S WEST"), of and from any and all debts, obligations, demands, claims,
judgments or causes of action of any kind whatsoever, whether now known or
unknown, in tort, in contract, by statute, or any other basis for compensatory,
punitive or other damages, expenses, reimbursements or costs of any kind,
including, but not limited to, any and all claims, demands, rights and/or causes
of action, arising up to the date of this Release, including those which might
arise out of allegations relating to claimed breach of an alleged oral or
written contract, or related purported employment discrimination or civil rights
violations including, but not limited to, alleged violations of Title VII of the
Civil Rights Act of 1964, as amended; claims under the Civil Rights Act of 1991;
claims under the Age Discrimination in Employment Act of 1967, as amended;
claims under 42 U.S.C. Section 1981, Section 1981a, Section 1983, Section 1985,
or Section 1988; claims under the Family and Medical Leave Act of 1993; claims
under the Americans with Disabilities Act of 1990, as amended; claims under the
Fair Labor Standards Act of 1938, as amended; the Employees Retirement Income
Security Act of 1974, as amended, claims under the Colorado Anti-Discrimination
Act; or claims under any other similar federal, state or local law or regulation
which Executive might have or assert against any of said entitles or persons by
(1) reason of active employment by U S WEST or any associated or affiliated
company or the termination of said employment relationship and all circumstances
related thereto, or (2) reason of any other matter, case or thing whatsoever
that may have occurred prior to the date of execution of this Release. U S WEST
specifically disclaims any liability to or for wrongful acts against Executive
or any other person on the part of itself, its shareholders, subsidiaries and
affiliates and the directors, officers, employees and agents of any of them.
NOTICE OF REVOCATION FOR ONLY MINNESOTA RESIDENTS
EXECUTIVE UNDERSTANDS THAT HE MAY RESCIND (THAT IS, CANCEL) THIS RELEASE
WITHIN FIFTEEN (15) CALENDAR DAYS OF SIGNING IT. TO BE EFFECTIVE EXECUTIVE'S
RESCISSION MUST BE IN WRITING AND DELIVERED TO GENERAL COUNSEL, U S WEST, INC.
7800 EAST ORCHARD ROAD, SUITE 200, ENGLEWOOD, CO 80111, EITHER BY MAIL OR BY
HAND DELIVERY WITHIN THE 15-DAY PERIOD. IF BY MAIL, THE RESCISSION MUST BE: (1)
POSTMARKED WITHIN THE 15-DAY PERIOD, (2) PROPERLY ADDRESSED, AND (3) SENT BY
CERTIFIED MAIL, RETURN RECEIPT REQUESTED.
14
<PAGE>
NOTICE TO EMPLOYEES (40 YEARS OF AGE OR OLDER)
OF PERIOD TO CONSIDER RELEASE AND OF RIGHTS TO REVOKE
THIS RELEASE MEANS, IN PART, THAT EXECUTIVE GIVES UP ALL RIGHTS TO DAMAGES
OR MONEY BASED ON CLAIMS OF AGE DISCRIMINATION AGAINST U S WEST, IF THE AGE
DISCRIMINATION CLAIMS AROSE BEFORE EXECUTIVE SIGNED THIS RELEASE. ANY CLAIMS FOR
DAMAGES OR MONEY BASED ON AGE DISCRIMINATION, WHICH MAY ARISE AFTER SIGNING THIS
RELEASE, ARE NOT AFFECTED BY THIS RELEASE.
EXECUTIVE HAS THE RIGHT WITHIN SEVEN (7) DAYS OF THE DATE OF THIS RELEASE
TO REVOKE (THAT IS, TO CANCEL) THE RELEASE. IF EXECUTIVE REVOKES THE RELEASE,
THEN THE RELEASE SHALL BECOME NULL AND VOID, MEANING EXECUTIVE WILL NOT RECEIVE
ANY OF THE PAYMENTS AND OTHER THINGS SET FORTH IN THE AGREEMENT. TO BE
EFFECTIVE, EXECUTIVE'S REVOCATION MUST BE IN WRITING AND RETURNED TO THE GENERAL
COUNSEL, U S WEST, INC. WITHIN SEVEN (7) DAYS OF THE DATE OF THIS RELEASE. IF
BY MAIL, REVOCATION MUST BE (1) POSTMARKED WITHIN THE SEVEN-DAY PERIOD, (2)
PROPERLY ADDRESSED TO GENERAL COUNSEL, U S WEST, INC. 7800 EAST ORCHARD ROAD,
SUITE 200, ENGLEWOOD, CO 80111, AND (3) SENT BY CERTIFIED MAIL, RETURN RECEIPT
REQUESTED. EXECUTIVE AGREES THAT THE MONIES AND OTHER THINGS SET FORTH IN THE
AGREEMENT ARE CONSIDERATION TO WHICH HE WOULD NOT OTHERWISE BE ENTITLED WITHOUT
SIGNING THIS RELEASE, AND THAT THESE CONSIDERATIONS CONSTITUTE PAYMENT IN
EXCHANGE FOR SIGNING THIS RELEASE.
EXECUTIVE ACKNOWLEDGES THAT HE HAS BEEN GIVEN AMPLE TIME, NOT LESS THAN 21
CALENDAR DAYS, TO CONSIDER THIS RELEASE WITH HIS ATTORNEY PRIOR TO SIGNING IT,
AND HIS SIGNING OF THIS RELEASE IS COMPLETELY VOLUNTARY.
Dated this______ day of _____________________________________, 19___.
U S WEST EXECUTIVE
By: _________________________________ By: ____________________________
Title: ______________________________
THIS IS A RELEASE -- READ CAREFULLY BEFORE SIGNING.
YOU SHOULD CONSULT WITH AN ATTORNEY
15
<PAGE>
AGREEMENT AND PLAN OF MERGER
between
U S WEST, INC.
and
CONTINENTAL CABLEVISION, INC.
Dated as of February 27, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS.......................................................... 2
1.1 Definitions.......................................... 2
1.2 Terms Defined Elsewhere in the Agreement............. 13
1.3 Other Definitional Provisions........................ 14
ARTICLE II
THE MERGER........................................................... 15
2.1 The Merger........................................... 15
2.2 Closing.............................................. 15
2.3 Effective Time....................................... 15
2.4 Effects of the Merger................................ 16
2.5 Directors; Certificate of Incorporation; Bylaws...... 16
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES................... 17
3.1 Effect on Capital Stock.............................. 17
3.2 Company Common Stock Elections; Exchange Fund........ 21
3.3 Proration............................................ 24
3.4 Dividends, Fractional Shares, Etc.................... 24
3.5 Restricted Stock..................................... 28
3.6 Dissenting Shares.................................... 28
3.7 Share Price Adjustment............................... 29
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ 29
4.1 Organization and Authority of
the Company........................................ 29
4.2 Capitalization....................................... 31
4.3 No Conflicts......................................... 32
4.4 Vote Required........................................ 33
4.5 Board Recommendation; Opinion
of Financial Advisor............................... 33
4.6 Consents............................................. 34
4.7 Compliance; No Defaults.............................. 35
4.8 SEC Documents; Undisclosed Liabilities............... 36
4.9 Litigation........................................... 37
4.10 Taxes................................................ 37
i
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Page
----
4.11 Employee Benefits.................................... 40
4.12 Cable Television Franchises.......................... 43
4.13 Environmental Matters................................ 47
4.14 Labor................................................ 48
4.15 Absence of Changes or Events......................... 50
4.16 Unlawful Payments and Contributions.................. 51
4.17 Brokers and Intermediaries........................... 51
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR........................... 52
5.1 Organization and Authority of Acquiror............... 52
5.2 Capitalization....................................... 53
5.3 No Conflicts......................................... 54
5.4 Stockholder Vote..................................... 55
5.5 Consents............................................. 55
5.6 Compliance; No Defaults.............................. 56
5.7 Acquiror SEC Documents; Undisclosed
Liabilities........................................ 56
5.8 Litigation........................................... 57
5.9 Absence of Changes or Events......................... 57
5.10 Brokers and Intermediaries........................... 58
5.11 Ownership of Company Capital Stock................... 58
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS............................ 58
6.1 Conduct of Business of the Company................... 58
6.2 Conduct of Business of Acquiror...................... 63
6.3 Access to Information................................ 65
ARTICLE VII
ADDITIONAL AGREEMENTS................................................ 66
7.1 Preparation of Form S-4 and the Proxy Statement;
Stockholders' Meeting; Charter Amendment........... 66
7.2 Letter of the Company's Accountants.................. 69
7.3 Letter of Acquiror's Accountants..................... 69
7.4 Reasonable Best Efforts.............................. 70
7.5 Franchise and License Consents....................... 70
7.6 Antitrust Notification............................... 72
7.7 Certain Actions...................................... 74
7.8 Supplemental Disclosure.............................. 75
7.9 Announcements........................................ 75
7.10 No Solicitation...................................... 75
7.11 Indemnification; Directors' and
Officers Insurance................................. 77
ii
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Page
----
7.12 NYSE Listing......................................... 78
7.13 Affiliates........................................... 78
7.14 Employee Benefits.................................... 79
7.15 Registration Rights Agreement........................ 80
7.16 Tax Treatment........................................ 80
7.17 Series D Preferred Stock............................. 80
7.18 Company Indebtedness................................. 81
7.19 Authorization of Issuance of Merger
Consideration...................................... 81
7.20 Attribution.......................................... 81
7.21 Further Assurances................................... 81
ARTICLE VIII
CONDITIONS PRECEDENT................................................. 82
8.1 Conditions to Each Party's Obligation
to Effect the Merger............................... 82
8.2 Conditions of Obligations of Acquiror................ 83
8.3 Conditions of Obligations of the Company............. 86
ARTICLE IX
TERMINATION AND AMENDMENT............................................ 87
9.1 Termination.......................................... 87
9.2 Effect of Termination................................ 90
9.3 Fees and Expenses.................................... 90
9.4 Certain Purchase Obligations......................... 91
9.5 Amendment............................................ 92
9.6 Extension; Waiver.................................... 93
ARTICLE X
GENERAL PROVISIONS................................................... 93
10.1 Frustration of the Closing Conditions................ 93
10.2 Effectiveness of Representations,
Warranties and Agreements.......................... 93
10.3 Expenses............................................. 94
10.4 Applicable Law....................................... 94
10.5 Notices.............................................. 94
10.6 Entire Agreement..................................... 95
10.7 Headings; References................................. 96
10.8 Counterparts......................................... 96
10.9 Parties in Interest; Assignment...................... 96
10.10 Severability; Enforcement............................ 96
10.11 Specific Performance................................. 96
10.12 Jurisdiction......................................... 97
iii
<PAGE>
EXHIBITS
Exhibit A Form of Charter Amendment
Exhibit B Form of Registration Rights Agreement for Media Stock and
Series D Preferred Stock
Exhibit C Form of Certificate of Designation for Series D Convertible
Preferred Stock
Exhibit D Form of Affiliate Letter
Exhibit E Form of Certificate of Designation for Put Shares
Exhibit F Form of Registration Rights Agreement for Put Shares
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of February 27, 1996, between
U S WEST, INC., a Delaware corporation ("Acquiror"), and CONTINENTAL
CABLEVISION, INC., a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions set forth in
this Agreement, the Company and Acquiror will enter into a business combination
transaction pursuant to which the Company will merge with and into Acquiror (the
"Merger"), with Acquiror continuing as the surviving corporation (the "Surviving
Corporation");
WHEREAS, the board of directors of the Company has determined that
the Merger would be fair to and in the best interests of its stockholders, and
such board of directors has approved this Agreement and the transactions
contemplated hereby and has recommended the adoption by the stockholders of the
Company of this Agreement and the amendment, substantially in the form of
Exhibit A hereto (the "Charter Amendment"), to the Company's Restated
Certificate of Incorporation to be effected immediately prior to the
consummation of the Merger;
WHEREAS, the board of directors of Acquiror has determined that the
Merger would be fair to and in the best interests of its stockholders, and such
board of directors has approved this Agreement and the transactions contemplated
hereby;
WHEREAS, concurrently with the execution of this Agreement and in
order to induce Acquiror to enter into this Agreement, certain stockholders of
the Company have executed and delivered an agreement (the "Stockholders'
Agreement") pursuant to which, among other things, such Stockholders have
granted to Acquiror their proxy to vote all of the votes entitled to be cast by
such stockholders in favor of the adoption of this Agreement and the Charter
Amendment;
WHEREAS, for Federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended, and the rules and regulations
promulgated thereunder (the "Code"); and
<PAGE>
WHEREAS, Acquiror and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the
representations, warranties, covenants and agreements herein contained, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For purposes of this Agreement, the following
terms shall have the meanings set forth below:
"ACQUIROR REGION" shall mean Arizona, Colorado, Idaho, Iowa,
Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota,
Utah, Washington and Wyoming.
"AFFILIATE" shall mean, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such other Person.
"APPRAISER" shall mean a nationally recognized investment banking
firm that is independent of the Company, Acquiror and their respective
Subsidiaries and has significant experience and expertise in the valuation of
entities with businesses comparable to those being appraised.
"BASIC CABLE SERVICE" shall mean as to each System the tier of
video programming service defined in 47 C.F.R. Section 76.901(a).
"BOARD OF DIRECTORS" shall mean the board of directors of the
Company.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday or
other day on which commercial banks in New York City are authorized or required
by law to close.
"CABLE ACT" shall mean the Cable Communications Policy Act of
1984, as amended by the Cable Television
2
<PAGE>
Consumer Protection and Competition Act of 1992 and the Telecommunications Act
of 1996.
"CABLE PROGRAMMING SERVICE" shall mean as to each System those
video programming services defined in 47 C.F.R. Section 76.901(b).
"CALCULATION PRICE" shall mean the Determination Price, Cap Price
or Floor Price, as applicable, based upon which the Class A Common Conversion
Number or Class B Common Conversion Number is determined in accordance with
Section 3.1(d).
"CAP PRICE" shall mean $28.175.
"CASH CONSIDERATION AMOUNT" shall equal $1 billion; PROVIDED,
HOWEVER, that the board of directors of Acquiror shall have the right, in its
sole discretion, to increase the Cash Consideration Amount to a maximum of $1.5
billion so long as notice of such change is given to the Company no later than
one Business Day prior to the Effective Time; PROVIDED, FURTHER, that the
board of directors of Acquiror shall have the right to increase the Cash
Consideration Amount above $1.5 billion in an amount equal to (x) the number of
shares of Company Common Stock issued or to be issued in connection with any
acquisition by the Company approved by Acquiror pursuant to Section 6.1 hereof
multiplied by (y) the Share Price; and PROVIDED, FURTHER, that the Cash
Consideration Amount may be reduced pursuant to Section 7.7(c).
"CATV" shall mean any method, presently existing, for the
transmission and/or exhibition (whether by microwave, fiber optics or coaxial
cable) of broadband video signals other than by means of DBS, MMDS, broadcast
television and in-home video players (and which is based on the expectation of
payment by the recipient), and shall include without limitation cable television
(basic and premium) and pay-per-view television.
"CHARTER AMENDMENT" shall have the meaning set forth in the second
recital to this Agreement.
"CLASS A COMMON PERCENTAGE" shall mean the quotient (rounded to
the nearest hundredth, or if there shall not be a nearest hundredth, to the next
lowest hundredth) of (x) the Common Consideration Amount divided by (y) the
Transaction Value.
3
<PAGE>
"CLASS A PREFERRED CONSIDERATION AMOUNT" shall mean the product of
(x) the Class A Preferred Percentage multiplied by (y) the Share Price
multiplied by (z) the number of shares of Class A Common Stock outstanding
immediately prior to the Effective Time on a fully diluted basis.
"CLASS A PREFERRED CONVERSION NUMBER" shall mean the quotient of
(x) the product of (A) the Class A Preferred Percentage multiplied by (B) the
Share Price divided by (y) the Liquidation Value (rounded to the nearest
hundredth, or if there shall not be a nearest hundredth, to the next lowest
hundredth).
"CLASS A PREFERRED PERCENTAGE" shall mean the difference between
(x) one and (y) the Class A Common Percentage.
"CLASS B COMMON CONSIDERATION AMOUNT" shall mean the product of
(x) the Class B Percentage multiplied by (y) the Common Consideration Amount.
"CLASS B COMMON PERCENTAGE" shall mean the quotient (rounded to
the nearest hundredth, or if there shall not be a nearest hundredth, to the next
lowest hundredth) of (x) the Class B Common Consideration Amount divided by (y)
the sum of the Class B Common Consideration Amount and the Class B Preferred
Consideration Amount.
"CLASS B PREFERRED PERCENTAGE" shall mean the quotient (rounded to
the nearest hundredth, or if there shall not be a nearest hundredth, to the next
highest hundredth) of (x) the Class B Preferred Consideration Amount divided by
(y) the sum of the Class B Common Consideration Amount and the Class B Preferred
Consideration Amount.
"CLASS B PERCENTAGE" shall mean the quotient (rounded to the
nearest hundredth, or if there shall not be a nearest hundredth, to the next
lowest hundredth) of (i) the number of shares of Class B Common Stock
outstanding immediately prior to the Effective Time on a fully diluted basis,
including giving effect to the conversion of all outstanding shares of Company
Preferred Stock divided by (ii) the number of shares of Company Common Stock
outstanding immediately prior to the Effective Time on a fully diluted basis,
including giving effect to the conversion of all outstanding shares of Company
Preferred Stock.
4
<PAGE>
"CLASS B PREFERRED CONSIDERATION AMOUNT" shall mean the difference
between (x) the Preferred Consideration Amount and (y) the Class A Preferred
Consideration Amount.
"CLASS B PREFERRED CONVERSION NUMBER" shall mean the quotient of
(x) the product of (A) the Class B Preferred Percentage multiplied by (Hb) the
Share Price divided by (y) the Liquidation Value (rounded to the nearest
hundredth, or if there shall not be a nearest hundredth, to the next lowest
hundredth).
"CODE" shall have the meaning set forth in the fifth recital of
this Agreement.
"COMMON CONSIDERATION AMOUNT" shall equal the excess of (x) the
Transaction Value over (y) the sum of the Preferred Consideration Amount and the
Cash Consideration Amount.
"COMMUNICATIONS ACT" shall mean the Communications Act of 1934, as
amended, 47 U.S.C. Sections 151, et seq., as amended by the Telecommunications
1996.
"COPYRIGHT OFFICE" shall mean the United States Copyright Office
of the Library of Congress or any successor agency that shall hold principal
responsibility for administering the cable television compulsory license for
retransmission of broadcast signals established pursuant to Section 111 of the
Copyright Act, 17 U.S.C. Section 111.
"DBS" shall mean a system providing direct-to-home in the
broadcast satellite services authorized by the FCC.
"DETERMINATION PRICE" shall mean the average of the Intra-Day
Closing Prices for the Random Trading Days.
"DGCL" shall mean the Delaware General Corporation Law.
"DOJ" shall mean the Department of Justice.
"ENCUMBRANCES" shall mean any and all mortgages, security
interests, liens, claims, pledges, restrictions, leases, title exceptions,
charges or other encumbrances.
"ENVIRONMENTAL CLAIM" means any notice of violation, action,
claim, Environmental Lien, demand, abatement or other Order or direction
(conditional or
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otherwise) by any Governmental Authority or any other Person for personal injury
(including sickness, disease or death), tangible or intangible property damage,
damage to the environment, pollution, contamination or other adverse effects on
the environment, or for fines, penalties or restrictions resulting from or based
upon (i) the existence of an Environmental Release (including, without
limitation, sudden or non-sudden accidental or non-accidental Environmental
Releases) of, or exposure to, any Hazardous Material, noxious odor or illegal
audible noise in, into or onto the environment (including, without limitation,
the air, soil, surface water or groundwater) at, in, by, from or related to any
property owned, operated or leased by the Company or its Subsidiaries or any
activities or operations thereof; (ii) the transportation, storage, treatment or
disposal of Hazardous Materials in connection with any property owned, operated
or leased by the Company or its Subsidiaries or their operations or facilities;
or (iii) the violation, or alleged violation, of any Environmental Law or
Environmental Permit of or from any Governmental Authority relating to
environmental matters connected with any property owned, leased or operated by
the Company or any of its Subsidiaries.
"ENVIRONMENTAL COSTS AND LIABILITIES" means any and all losses,
liabilities, obligations, damages, fines, penalties, judgments, actions, claims,
costs and expenses (including, without limitation, fees, disbursements and
expenses of legal counsel, experts, engineers and consultants and the costs of
investigation and feasibility studies and Remedial Action) arising from or under
any Environmental Law or contract, agreement or similar arrangement with any
Governmental Authority or other Person required under any Environmental Law.
"ENVIRONMENTAL LAW" means any Federal, state, local, or foreign
law (including common law), statute, code, ordinance, rule, regulation or other
legally enforceable requirement relating to the environment, natural resources,
or public or employee health and safety as it relates to exposure to Hazardous
Materials and includes, but is not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 ET SEQ., the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801 ET SEQ., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 ET SEQ., the
Clean Water Act, 33 U.S.C. Section 1251 ET SEQ., the Clean Air Act, 33
U.S.C. Section 2601 ET SEQ., the Toxic Substances Control Act, 15 U.S.C.
Section 2601 ET SEQ., the
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Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. Section 136 ET
SEQ., the Oil Pollution Act of 1990, 33 U.S.C Section 2701 ET SEQ. and the
relevant portions of the Occupational Safety and Health Act, 29 U.S.C. Section
651 ET SEQ., as such laws have been amended or supplemented as of the date
hereof, and the regulations promulgated pursuant thereto, and all analogous
state or local statutes as of the date hereof.
"ENVIRONMENTAL LIEN" means any lien arising under Environmental
Laws.
"ENVIRONMENTAL PERMIT" means any permit, approval, authorization,
license, variance, registration or permission required under any applicable
Environmental Law.
"ENVIRONMENTAL RELEASE" means any release, spill, emission,
leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal,
discharge, dispersal, leaching, or migration on or into the indoor or outdoor
environment or into or out of any property not authorized under any
Environmental Permit and requiring notification under any applicable
Environmental Law.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and the applicable regulations promulgated thereunder.
"ERISA AFFILIATE" shall mean any corporation or trade or business
(whether or not incorporated) which are or have ever been treated as a single
employer with or which are or have been under common control with the Company
within the meaning of Section 414(b), (c), (m) or (o) of the Code.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"FCC" shall mean the Federal Communications Commission.
"FINAL ORDER" shall mean an action or actions by any Governmental
Authority or the FCC which has not been reversed, stayed, enjoined, set aside,
annulled or suspended, and as to the FCC with respect to which the time for
filing any request, petition or appeal of such action has expired and the time
for the FCC to set aside its action
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on its own motion has passed, and as to any Franchise Consent, when the
Franchise Consent has been or is deemed to be approved as provided in Section
617 of the Cable Act.
"FLOOR PRICE" shall mean $20.825.
"FTC" shall mean the Federal Trade Commission.
"GAAP" shall mean generally accepted accounting principles in
effect in the United States of America as of the date of the applicable
determination.
"GOVERNMENTAL AUTHORITY" shall mean any foreign, Federal, state,
municipal or other governmental department, commission, board, bureau, agency or
instrumentality.
"HAZARDOUS MATERIAL" means any substance, material or waste which
is regulated by any Governmental Authority in jurisdictions in which the Company
operates, including, without limitation, any material, substance or waste which
is defined as a "hazardous waste," "hazardous material," "hazardous substance,"
"extremely hazardous waste," "restricted hazardous waste," "contaminant," "toxic
waste" or "toxic substance" under any provision of Environmental Law, which
includes, but is not limited to, petroleum, petroleum products, asbestos, and
polychlorinated biphenyls.
"HOMES PASSED" shall mean the number of homes to which CATV
service is currently available from the Company or the Subsidiaries, whether or
not a given household subscribes to such service.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"INDEBTEDNESS" shall mean, with respect to any Person, any
indebtedness, secured or unsecured, (i) in respect of borrowed money (whether or
not the recourse of the lender is to the whole of the assets of such Person or
only to a portion thereof), and evidenced by bonds, notes, debentures or similar
instruments or letters of credit, to the extent of the face value thereof (or,
in the case of evidence of indebtedness issued at a discount, the current
accredit value thereof) or (ii) representing the balance deferred and unpaid of
the purchase price of property or services (other than accounts payable in the
ordinary course of business) and shall also include, to the extent not otherwise
included, (A) any capitalized lease obligations
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and (B) the face value of guaranties of items of other Persons which would be
included within this definition for such other Persons (whether or not such
items would appear upon the balance sheet of the guarantor). No item
constituting Indebtedness under any of the definitions set forth above shall be
counted twice by virtue of the fact that it constitutes "Indebtedness" under
more than one of such definitions.
"INTRA-DAY CLOSING PRICES" shall mean the volume weighted average
sale price of the Media Stock (regular way) as shown on the Composite Tape of
the NYSE.
"IRS" means the United States Internal Revenue Service.
"KNOWLEDGE OF THE COMPANY" and "TO THE COMPANY'S KNOWLEDGE"
shall mean the actual knowledge of the executive officers (as identified in the
Company SEC Documents), the Senior Vice President-Corporate & Legal Affairs and
the regional Senior Vice Presidents, in each case of the Company after
reasonable investigation and due inquiry.
"LEGAL PROCEEDINGS" means any judicial, administrative or arbitral
actions, suits, proceedings (public or private) or governmental proceedings.
"MATERIAL ADVERSE EFFECT" shall mean, (i) with respect to the
Company, any change or effect that is or is reasonably likely to be materially
adverse to the business, results of operations, properties, assets, liabilities
or condition (financial or otherwise) of the Company and its Subsidiaries taken
as whole and (ii) with respect to Acquiror, any change or effect that is or is
reasonably likely to be materially adverse to the business, results of
operations, properties, assets, liabilities or condition (financial or
otherwise) of either (x) the Media Group or (y) Acquiror and its Subsidiaries
taken as a whole; PROVIDED, HOWEVER, that Material Adverse Effect shall in
each instance exclude any change or effect due to general economic or industry
wide conditions.
"MEDIA GROUP" shall have the meaning set forth in Section 2.6.15
of Article V of the Restated Certificate of Incorporation of Acquiror as in
effect as of the date hereof.
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"MERGER" shall have the meaning set forth in the first recital to
this Agreement.
"MMDS" shall mean a system operating in the Multichannel
Multipoint Distribution Services authorized by the FCC.
"NYSE" shall mean the New York Stock Exchange, Inc.
"PERSON" shall mean an individual, corporation, partnership, trust
or unincorporated organization or a government or any agency or political
subdivision thereof.
"PREFERRED CONSIDERATION AMOUNT" shall equal $1 billion.
"RANDOM TRADING DAYS" shall mean the 20 Trading Days selected by
Acquiror by lot (through a method reasonably satisfactory to the Company) from
the 30 Trading Days ending on the fourth Trading Day prior to the Closing Date.
"RECENTLY ACQUIRED SYSTEMS" shall mean the Systems acquired by the
Company or its Subsidiaries from Providence Journal Company, Cablevision of
Chicago, Columbia of Michigan, Consolidated Cablevision of California and N-COM
Limited Partnership II since August 1, 1995.
"REGISTRATION RIGHTS AGREEMENT" shall mean the registration rights
agreement, substantially in the form of Exhibit B hereto, to be entered into by
Acquiror, Amos B. Hostetter, Jr. and the Amos B. Hostetter, Jr. 1989 Trust.
"REMEDIAL ACTION" means all actions required under any applicable
Environmental Law or otherwise undertaken by any Governmental Authority,
including, without limitation, any capital expenditures, required or undertaken
to (i) clean up, remove, treat, or in any other way address any Hazardous
Material; (ii) prevent the Release or threat of Release, or minimize the further
Release of any Hazardous Material so it does not migrate or endanger or threaten
to endanger public health or welfare or the indoor or outdoor environment; (iii)
perform pre-remedial studies and investigations or post-remedial monitoring and
care; or (iv) bring facilities on any property owned, operated or leased by the
Company or its Subsidiaries and the facilities located and operations conducted
thereon into compliance
10
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with all applicable Environmental Laws and Environmental Permits.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
"SHARE PRICE" shall mean $30, decreased by the Per Share
Adjustment Amount, if any, plus the Additional Amount, if any, in accordance
with the terms of Section 3.7.
"STOCKHOLDERS' AGREEMENT" shall have the meaning set forth in the
first recital of this Agreement.
"SUBPART N OF THE FCC RULES" shall refer to the Subpart N of Part
76 of the FCC's rules (47 C.F.R. Sections 76.900 through 76.985), entitled
"Cable Rate Regulation," added by order
in Docket 92-266, adopted by the FCC on April 1, 1993, as such Subpart may be
amended from time to time thereafter, as such rules were in effect on any
particular date, and shall include successor provisions if recodified or
otherwise modified.
"SUBSCRIBER" shall mean a member of the general public who
receives video programming services distributed by a System and does not further
distribute it; PROVIDED, HOWEVER, that the number of Subscribers in a
multi-unit dwelling or commercial structure that obtains service on a "bulk
rate" basis shall be determined by dividing the bulk rate charge by the rate for
individual households subscribing to the same level of service as the multi-unit
structure (e.g., if the basic subscription rate for individual households is $10
and the multi-unit dwelling or commercial structure paid a bulk fee of $100 for
the same level of service, then that multi-unit dwelling or structure shall be
counted as having 10 Subscribers).
"SUBSIDIARY" shall mean, with respect to any Person, (i) each
corporation, partnership, joint venture or other legal entity of which such
Person owns, either directly or indirectly, more than 50% of the stock or other
equity interests the holders of which are generally entitled to vote for the
election of the board of directors or similar governing body of such
corporation, partnership, joint venture or other legal entity, (ii) each
partnership
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in which such Person or another Subsidiary of such Person is the sole general
partner or sole managing partner and (iii) each limited liability company in
which such Person or another Subsidiary of such Persons is the managing member
or otherwise controls.
"SURVIVING CORPORATION" shall have the meaning set forth in the
first recital of this Agreement.
"SYSTEMS" shall mean the cable television systems listed in
Section 4.12(a) of the Company Disclosure Letter.
"TAX" or "TAXES" shall mean all taxes, charges, fees, imposts,
levies or other assessments, including, without limitation, all net income,
gross receipts, capital, sales, use, ad valorem, value added, transfer,
franchise, profits, inventory, capital stock, license, withholding, payroll,
employment, social security, unemployment, excise, severance, stamp, occupation,
property and estimated taxes, customs duties, fees, assessments and charges of
any kind whatsoever, together with any interest and any penalties, fines,
additions to tax or additional amounts imposed by any taxing authority (domestic
or foreign) and shall include any transferee liability in respect of Taxes.
"THIRD PARTY" shall mean a party or parties unaffiliated with
either the Company or Acquiror.
"TRADING DAY" shall mean a day on which (i) the NYSE is open for
the transaction of business and (ii) there is no suspension of trading of the
Media Stock.
"TRANSACTION DOCUMENTS" shall mean the Stockholders' Agreement and
the Registration Rights Agreement.
"TRANSACTION VALUE" shall equal the product of (x) the Share Price
multiplied by (y) the number of shares of Company Common Stock outstanding
immediately prior to the Effective Time on a fully diluted basis, including
giving effect to the conversion of all outstanding shares of Company Preferred
Stock.
"WARN" shall mean the Worker Adjustment and Retraining
Notification Act and any similar state or local "plant closing" law.
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1.2 TERMS DEFINED ELSEWHERE IN THE AGREEMENT. For purposes of
this Agreement, the following terms have the meanings set forth in the sections
indicated:
Term Section
---- -------
Acceleration Event 7.14(c)
Acquiror Certificates 3.2(b)
Acquiror Consents 5.5
Acquiror Disclosure Letter 5.2(b)
Acquiror SEC Documents 5.7(a)
Acquiror Termination Notice 3.1(d)(ii)
Acquisition Proposal 7.10(d)
Additional Amount 3.7
Additional Payment 7.14(c)
Additional Stockholders' Meeting 7.1(d)
Allocation Determination 3.2(d)
Applicable Laws 4.7(a)
Articles 10.7
Benefit Plans 4.11(a)
Cap Top-Up Intent Notice 3.1(d)(ii)
Cash Cap 3.3(a)
Cash Election 3.1(c)(ii)
Certificate of Merger 2.3
Certificates 3.2(b)
Class A Common Conversion Number 3.1(d)
Class A Common Stock 3.1(c)(i)
Class A Merger Consideration 3.1(c)(i)
Class B Common Conversion Number 3.1(d)
Class B Common Stock 3.1(c)(ii)
Class B Cash Consideration 3.1(c)(ii)
Class B Merger Consideration 3.1(c)(ii)
Class B Stock Consideration 3.1(c)(ii)
Class B Stock Election 3.2(a)
Closing 2.2
Closing Date 2.2
Communications Stock 5.2(a)
Company Capital Stock 4.2(a)
Company Certificate 3.1(c)(iii)
Company Common Stock 3.1
Company Consents 4.6
Company Letter of Transmittal 3.2(c)
Company Disclosure Letter 4.1(c)
Company Preferred Stock 4.2(a)
Company Representatives 7.10(a)
Company SEC Documents 4.8(a)
Company Termination Notice 3.1(d)(ii)
Confidentiality Agreements 6.3(c)
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Copyright Act 4.12(e)
Designated Assets 7.7(b)
Designated Asset Fair Market Value 7.7(c)
Dissenting Shares 3.6
Effective Time 2.3
Election Deadline 3.2(d)
Election Form 3.2(c)
Equity Appreciation Rights Plans 4.11(i)
Excess Cash Amount 3.3(c)
Excise Tax 7.14(c)
Exchange Agent 3.2(b)
Exchange Fund 3.2(b)
Exhibits 10.7
Floor Top-Up Intent Notice 3.1(d)(ii)
Foreign Benefit Plans 4.11(b)
Form S-4 5.5
Fractional Shares 3.4(c)(i)
Franchise Consents 4.6
Franchises 4.12(a)
Gains Taxes 4.6
Incremental Excise Tax 7.14(c)
Indemnified Liabilities 7.11(b)
Indemnified Parties 7.11(b)
Initial Stockholders' Meeting 7.1(d)
Liquidation Value 3.1(c)(i)
License Consents 4.6
Material Franchises 4.12(c)
Media Stock 3.1(c)(i)
Merger Consideration 3.2(b)
Non-Required Franchises 7.5(b)
Non-Required Systems 7.5(b)
Permits 4.7(a)
Per Share Adjustment Amount 7.7(c)
Prorated Cash Amount 3.3(b)
Proxy Statement 4.6
Put Closing Date 9.4(c)
Put Exercise Notice 9.4(b)
Put Right 9.4(a)
Put Shares 9.4(a)
Requested Cash Amount 3.3(a)
Required Franchise Consents 8.2(j)
Restricted Company Common Stock 3.5
Rights Agreement 5.2(a)
RSPA 3.5
Sections 10.7
Series D Preferred Stock 3.1(c)(i)
Social Contract Amendment 4.6
Social Contract Consents 4.6
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Social Contract Order 4.6
Stock Election 3.2(a)
Stockholder Approvals 4.1(b)
Stockholders' Meeting 7.1(d)
Tax Returns 4.10(a)
Termination Date 9.1(d)
1.3 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof",
"herein", and "hereunder" and words of similar import, when used in this
Agreement, shall refer to this Agreement as a whole and not to any particular
provision of this Agreement.
(b) The terms defined in the singular shall have a comparable
meaning when used in the plural, and vice versa.
(c) The terms "dollars" and "$" shall mean United States dollars.
ARTICLE II
THE MERGER
2.1 THE MERGER. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the DGCL, the Company shall
be merged with and into Acquiror at the Effective Time (as defined in Section
2.3). At the Effective Time, the separate corporate existence of the Company
shall cease, and Acquiror shall continue as the Surviving Corporation and shall
succeed to and assume all of the rights, properties, liabilities and obligations
of the Company in accordance with the DGCL.
2.2 CLOSING. Unless this Agreement shall have been terminated
and the transactions herein contemplated shall have been abandoned pursuant to
Section 9.1, the closing of the Merger (the "Closing") shall take place at 10:00
a.m., New York City time, the later of (i) the fifth Business Day after the date
on which the last of the conditions set forth in Article VIII is fulfilled or
waived, other than conditions requiring deliveries at the Closing and (ii)
November 15, 1996 (the "Closing Date"), at the offices of Weil, Gotshal & Manges
LLP, 767 Fifth Avenue, New York, New York 10153, unless another date, time or
place is agreed to in writing by the parties hereto.
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2.3 EFFECTIVE TIME. Subject to the provisions of this
Agreement, the parties hereto shall cause the Merger to be consummated by filing
a certificate of merger (the "Certificate of Merger") with the Secretary of
State of the State of Delaware, as provided in the DGCL, as soon as practicable
on or after the Closing Date. The Merger shall become effective upon such
filing or at such time thereafter as is provided in the Certificate of Merger
(the "Effective Time").
2.4 EFFECTS OF THE MERGER. From and after the Effective Time,
the Surviving Corporation shall possess all the rights, privileges, powers and
franchises of a public as well as of a private nature, and be subject to all the
restrictions, disabilities and duties of each of Acquiror and the Company; and
all and singular rights, privileges, powers and franchises of each of Acquiror
and the Company, and all property, real, personal and mixed, and all debts due
to either of Acquiror or the Company on whatever account, as well as for stock
subscriptions and all other things in action or belonging to each of Acquiror
and the Company, shall be vested in the Surviving Corporation; and all property,
rights, privileges, powers and franchises, and all and every other interest
shall be thereafter as effectually the property of the Surviving Corporation as
they were of Acquiror and the Company; and the title to any real estate vested
by deed or otherwise, in either of Acquiror or the Company, shall not revert or
be in any way impaired; but all rights of creditors and all liens upon any
property of either of Acquiror or the Company shall be preserved unimpaired; and
all debts, liabilities and duties of Acquiror and the Company shall thenceforth
attach to the Surviving Corporation, and may be enforced against it to the same
extent as if said debts and liabilities had been incurred by it.
2.5 DIRECTORS; CERTIFICATE OF INCORPORATION; BYLAWS. (a) The
directors of Acquiror and the officers of Acquiror immediately prior to the
Effective Time shall be the directors and officers of the Surviving Corporation
until their successors have been duly elected or appointed and qualified, or
until their earlier death, resignation or removal in accordance with the
Surviving Corporation's certificate of incorporation and bylaws.
(b) The Restated Certificate of Incorporation of Acquiror as in
effect immediately prior to the Effective Time shall be the Restated Certificate
of Incorporation of
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the Surviving Corporation, until duly amended in accordance with the terms
thereof and the DGCL.
(c) The Bylaws of Acquiror as in effect immediately prior to the
Effective Time shall be the bylaws of the Surviving Corporation until thereafter
amended as provided by Applicable Law, the Restated Certificate of Incorporation
of the Surviving Corporation or such Bylaws.
ARTICLE III
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF
THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
3.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any shares of
Company Capital Stock (as defined in Section 4.2) or the holder of any shares of
capital stock of Acquiror:
(a) CAPITAL STOCK OF ACQUIROR. Each share of each class of
capital stock of Acquiror issued and outstanding immediately prior to the
Effective Time shall remain an issued and outstanding share of the same class of
capital stock of the Surviving Corporation.
(b) CANCELLATION OF TREASURY STOCK AND ACQUIROR-OWNED STOCK.
Each share of Company Capital Stock that is owned by the Company or any wholly
owned Subsidiary of the Company and each share of Company Capital Stock that is
owned by Acquiror or any wholly owned subsidiary of Acquiror shall be canceled
and retired and shall cease to exist and no consideration shall be delivered or
deliverable in exchange therefor.
(c) CONVERSION OF COMPANY COMMON STOCK.
(i) Subject to Sections 3.5 and 3.6, at the Effective Time, each
issued and outstanding share (excluding shares cancelled pursuant to Section
3.1(b)) of Class A Common Stock, par value $.01 per share, of the Company
("Class A Common Stock") shall be converted into the right to receive (x) a
number of shares of U S WEST Media Group Common Stock, par value $.01 per share,
of Acquiror (the "Media Stock") equal to the Class A Common Conversion Number
(as determined in accordance with Section 3.1(d)) and (y) a number of shares of
Series D Convertible Preferred Stock,
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par value $1.00 per share, of Acquiror (the "Series D Preferred Stock"), having
the rights, preferences and terms set forth in the Certificate of Designation
attached as Exhibit C hereto, with a liquidation value of $50 per share (the
"Liquidation Value"), equal to the Class A Preferred Conversion Number
(collectively, the "Class A Merger Consideration").
(ii) Except as otherwise provided in Section 3.3 and subject to
Sections 3.5 and 3.6, at the Effective Time each issued and outstanding share
(excluding shares cancelled pursuant to Section 3.1(b)) of Class B Common Stock,
par value $.01 per share, of the Company ("Class B Common Stock"), shall be
converted into, at the election of the holder thereof, one of the following (as
adjusted pursuant to Section 3.3, the "Class B Merger Consideration"):
(x) for each such share of Class B Common Stock with respect to
which an election to receive cash has been effectively made and not
revoked, pursuant to Sections 3.2(c), (d) and (e) (a "Cash Election"), the
right to receive an amount in cash from Acquiror, without interest, equal
to the Share Price (the "Class B Cash Consideration"); or
(y) for each such share of Class B Common Stock (other than shares
as to which a Cash Election was effectively made and not revoked), the
right to receive (1) a number of shares of Media Stock equal to the Class
B Common Conversion Number (as determined in accordance with Section
3.1(d)) and (2) a number of shares of Series D Preferred Stock equal to
the Class B Preferred Conversion Number (collectively, the "Class B Stock
Consideration").
(iii) As a result of the Merger and without any action on the part
of the holder thereof, at the Effective Time all shares of Company Common Stock
shall cease to be outstanding and shall be cancelled and retired and shall cease
to exist, and each holder of shares of Company Common Stock shall thereafter
cease to have any rights with respect to such shares of Company Common Stock,
except the right to receive, without interest, the Class A Merger Consideration
or Class B Merger Consideration, as applicable, and cash for fractional shares
of Media Stock or Series D Preferred Stock in accordance with Section 3.6(c)
upon the surrender of a certificate representing such shares of Company Common
Stock
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(a "Company Certificate"). The Media Stock and Series D Preferred Stock
comprising part of the Merger Consideration, when issued to the holders of
Company Common Stock, will be duly authorized, validly issued, fully paid,
non-assessable and not subject to preemptive rights created by statute,
Acquiror's Restated Certificate of Incorporation or Bylaws or any agreement to
which Acquiror is a party or by which Acquiror is bound.
(d) CERTAIN ADJUSTMENTS AND DETERMINATIONS. (i)If, between the
date of this Agreement and the Effective Time, the outstanding shares of Media
Stock, Series D Preferred Stock or Company Common Stock shall have been changed
into a different number of shares or a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange of shares, the Common Conversion Number and the Preferred Conversion
Number correspondingly shall be adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares.
(ii) The Class A Common Conversion Number and Class B Common
Conversion Number shall be determined in the following manner:
(A) If the Determination Price is greater than or equal to the
Floor Price and less than or equal to the Cap Price, (x) the Class A Common
Conversion Number shall be equal to the quotient of (1) the product of (i) the
Class A Common Percentage multiplied by (ii) the Share Price divided by (2) the
Determination Price (rounded to the nearest hundredth, or if there shall not be
a nearest hundredth, to the next lowest hundredth) and (y) the Class B Common
Conversion Number shall be equal to the quotient of (1) the product of (i) the
Class B Common Percentage multiplied by (ii) the Share Price divided by (2) the
Determination Price (rounded to the nearest hundredth, or if there shall not be
a nearest hundredth, to the next lowest hundredth).
(B) If the Determination Price is less than the Floor Price, (x)
the Class A Common Conversion Number shall be equal to the quotient of (1) the
product of (I) the Class A Common Percentage multiplied by (II) the Share Price
divided by (2) the Floor Price (rounded to the nearest hundredth, or if there
shall not be a nearest hundredth, to the next lowest hundredth) and (y) the
Class B Common Conversion Number shall be equal to the quotient of (1) the
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product of (I) the Class B Common Percentage multiplied by (II) the Share Price
divided by (2) the Floor Price (rounded to the nearest hundredth, or if there
shall not be a nearest hundredth, to the next lowest hundredth); PROVIDED,
HOWEVER, that in such event Acquiror shall have the right to give written
notice to the Company (the "Floor Top-Up Intent Notice") that the board of
directors of Acquiror elects to increase both (x) the Class A Common Conversion
Number to the quotient of (1) the product of (I) the Class A Common Percentage
multiplied by (II) the Share Price divided by (2) the Determination Price
(rounded to the nearest hundredth, or if there shall not be a nearest hundredth,
to the next lowest hundredth) and (y) the Class B Common Conversion Number to
the quotient of (1) the product of (I) the Class B Common Percentage multiplied
by (II) the Share Price divided by (2) the Determination Price (rounded to the
nearest hundredth, or if there shall not be a nearest hundredth, to the next
lowest hundredth). The Floor Top-Up Intent Notice shall be delivered to the
Company no later than 2:00 p.m. on the second Business Day prior to the Closing
Date. If, in such case, Acquiror does not deliver a Floor Top-Up Intent Notice,
the Company shall have the right to give written notice to Acquiror (the
"Company Termination Notice") that the Company elects to terminate this
Agreement. The Company Termination Notice shall be delivered to Acquiror no
later than 2:00 p.m. on the Business Day prior to the Closing Date.
(c) If the Determination Price is greater than the Cap Price, (x)
the Class A Common Conversion Number shall be equal to the quotient of (1) the
product of (I) the Class A Common Percentage multiplied by (II) the Share Price
divided by (2) the Cap Price (rounded to the nearest hundredth, or if there
shall not be a nearest hundredth, to the next lowest hundredth) and (y) the
Class B Common Conversion Number shall be equal to the quotient of (1) the
product of (I) the Class B Common Percentage multiplied by (II) the Share Price
divided by (2) the Cap Price (rounded to the nearest hundredth, or if there
shall not be a nearest hundredth, to the next lowest hundredth); PROVIDED,
HOWEVER, that in such event, the Company shall have the right to give written
notice to Acquiror (the "Cap Top-Up Intent Notice") that the Board of Directors
elects to decrease both (x) the Class A Common Conversion Number to the quotient
of (1) the product of (I) the Class A Common Percentage multiplied by (II) the
Share Price divided by (2) the Determination Price (rounded to the nearest
hundredth, or if there shall not be a nearest hundredth, to the next lowest
hundredth) and
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(y) the Class B Common Conversion Number to the quotient of (1) the product of
(I) the Class B Common Percentage multiplied by (II) the Share Price divided by
(2) the Determination Price (rounded to the nearest hundredth, or if there shall
not be a nearest hundredth, to the next lowest hundredth). The Cap Top-Up
Intent Notice shall be delivered to Acquiror no later than 2:00 p.m. on the
second Business Day prior to the Closing Date. If, in such case, the Company
does not deliver a Cap Top-Up Intent Notice, Acquiror shall have the right to
give written notice to the Company (the "Acquiror Termination Notice") that
Acquiror elects to terminate this Agreement. The Acquiror Termination Notice
shall be delivered to the Company no later than 2:00 p.m. on the Business Day
prior to the Closing Date.
3.2 COMPANY COMMON STOCK ELECTIONS; EXCHANGE FUND. (a) Each
Person who, at the Effective Time, is a record holder of shares of Class B
Common Stock (other than holders of shares of Class B Common Stock to be
cancelled as set forth in Section 3.1(b) or subject to Section 3.5 or 3.6) shall
have the right to submit an Election Form (as defined in Section 3.2(c))
specifying the number of shares of Class B Common Stock that such Person desires
to have converted into the right to receive the Class B Stock Consideration (the
"Stock Election") and the number of shares of Class B Common Stock that such
Person desires to have converted into the right to receive the Class B Cash
Consideration pursuant to the Class B Cash Election.
(b) Promptly after the Allocation Determination (as defined in
Section 3.2(d)), (i) Acquiror shall deposit (or cause to be deposited) with a
bank or trust company to be designated by Acquiror and reasonably acceptable to
the Company (the "Exchange Agent"), for the benefit of the holders of shares of
Class B Common Stock, for exchange in accordance with this Article III, cash in
the amount sufficient to pay the aggregate Class B Cash Consideration and (ii)
Acquiror shall deposit (or cause to be deposited) with the Exchange Agent, for
the benefit of holders of shares of Company Common Stock, certificates
representing the shares of Media Stock and Series D Preferred Stock ("Acquiror
Certificates") for exchange in accordance with this Article III (the cash and
shares deposited pursuant to clauses (i) and (ii) being hereinafter referred to
as the "Exchange Fund"). The Media Stock and Series D Preferred Stock into
which Company Common Stock shall be converted
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pursuant to the Merger shall be deemed to have been issued at the Effective
Time.
(c) As soon as reasonably practicable after the Effective Time, the
Exchange Agent shall mail to each holder of record of Company Common Stock
immediately prior to the Effective Time (excluding any shares of Company Common
Stock which will be cancelled pursuant to Section 3.1(b) or which are subject to
Section 3.5 or 3.6) (A) a letter of transmittal (the "Company Letter of
Transmittal") (which shall specify that delivery shall be effected, and risk of
loss and title to the Company Certificates shall pass, only upon delivery of
such Company Certificates to the Exchange Agent and shall be in such form and
have such other provisions as Acquiror shall specify) and (B) instructions for
use in effecting the surrender of the Company Certificates in exchange for the
Class A Merger Consideration or Class B Merger Consideration, as applicable,
with respect to the shares of Company Common Stock formerly represented thereby.
The Exchange Agent shall also mail to holders of Class B Common Stock, together
with the items specified in the preceding sentence, an election form (the
"Election Form") providing for such holders to make the Cash Election or the
Stock Election. The Election Form shall include information as to the Share
Price, the Class B Common Conversion Number, the Class B Preferred Conversion
Number and the Cash Consideration Amount and state the pricing terms of the
Series D Preferred Stock. As of the Election Deadline (as hereinafter defined)
all holders of Class B Common Stock immediately prior to the Effective Time that
shall not have submitted to the Exchange Agent or shall have properly revoked an
effective, properly completed Election Form shall be deemed to have made a Stock
Election.
(d) Any Cash Election or Stock Election (other than a deemed Stock
Election) shall have been validly made only if the Exchange Agent shall have
received by 5:00 p.m. New York, New York time on a date (the "Election
Deadline") to be mutually agreed upon by Acquiror and the Company (which date
shall not be later than the twentieth Business Day after the Effective Time), an
Election Form properly completed and executed (with the signature or signatures
thereof guaranteed to the extent required by the Election Form) by such holder
accompanied by such holder's Company Certificates, or by an appropriate
guarantee of delivery of such Company Certificates from a member of any
registered national securities exchange or of the National Association
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of Securities Dealers, Inc. or a commercial bank or trust company in the United
States as set forth in such Election Form. Any holder of Class B Common Stock
(other than a holder who has submitted an irrevocable election) who has made an
election by submitting an Election Form to the Exchange Agent may at any time
prior to the Election Deadline change such holder's election by submitting a
revised Election Form, properly completed and signed that is received by the
Exchange Agent prior to the Election Deadline. Any holder of Class B Common
Stock may at any time prior to the Election Deadline revoke such holder's
election by written notice to the Exchange Agent received by the Close of
business on the day prior to the Election Deadline. As soon as practicable
after the Election Deadline, the Exchange Agent shall determine the allocation
of the cash portion of the Class B Merger Consideration and the stock portion of
the Class B Merger Consideration and shall notify Acquiror of its determination
(the "Allocation Determination").
(e) Upon surrender of a Company Certificate for cancellation to the
Exchange Agent, together with the Company Letter of Transmittal, duly executed,
and such other documents as Acquiror or the Exchange Agent shall reasonably
request, the holder of such Company Certificate shall be entitled to receive
promptly after the Election Deadline in exchange therefor (A) a certified or
bank cashier's check in the amount equal to the cash, if any, which such holder
has the right to receive pursuant to the provisions of this Article III
(including any cash in lieu of fractional shares of Media Stock and Series D
Preferred Stock pursuant to Section 3.4(c)), and (B) Acquiror Certificates
representing that number of shares of Media Stock and Series D Preferred Stock,
if any, which such holder has the right to receive pursuant to this Article III
(in each case less the amount of any required withholding taxes, if any,
determined in accordance with Section 3.4(g)), and the Company Certificate so
surrendered shall forthwith be cancelled. Until surrendered as contemplated by
this Section 3.3, each Company Certificate shall be deemed at any time after the
Effective Time to represent only the right to receive the Class A Merger
Consideration or Class B Merger Consideration, as applicable, with respect to
the shares of Company Common Stock formerly represented thereby.
(f) Acquiror shall have the right to make reasonable rules, not
inconsistent with the terms of this Agreement, governing the validity of the
Election Forms, the
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manner and extent to which Cash Elections or Stock Elections are to be taken
into account in making the determinations prescribed by Section 3.3, the
issuance and delivery of certificates for Media Stock and Series D Preferred
Stock into which shares of Class B Common Stock are converted in the Merger, and
the payment of cash for shares of Class B Common Stock converted into the right
to receive cash in the Merger.
3.3 PRORATION. (a) The aggregate amount of cash to be paid to
holders of Class B Common Stock (the "Cash Cap") shall not exceed the Cash
Consideration Amount.
(b) In the event that the aggregate amount of cash represented by
the Cash Elections received by the Exchange Agent (the "Requested Cash Amount")
exceeds the Cash Cap, each holder making a Cash Election shall receive, for each
share of Class B Common Stock for which a Cash Election has been made, (x) cash
in an amount equal to the product of the Class B Cash Consideration and a
fraction, the numerator of which is the Cash Cap and the denominator of which is
the Requested Cash Amount (such product, the "Prorated Cash Amount"), (y) a
number of shares of Media Stock equal to the product of the Class B Common
Percentage and a fraction, the numerator of which is equal to the Share Price
minus the Prorated Cash Amount and the denominator of which is the Calculation
Price and (z) a number of shares of Series D Preferred Stock equal to the
product of the Class B Preferred Percentage and a fraction, the numerator of
which is equal to the Share Price minus the Prorated Cash Amount and the
denominator of which is equal to the Liquidation Value.
(c) In the event the Requested Cash Amount is less than the Cash
Cap, each holder making a Stock Election (other than as set forth in Section
3.5) shall receive for each share of Class B Common Stock for which a Stock
Election has been made, (x) cash in an amount equal to the quotient of (1) the
excess of the Cash Cap over the Requested Cash Amount divided by (2) the number
of shares of Class B Common Stock for which such Stock Elections have been made
or have been deemed to have been made (such quotient, the "Excess Cash Amount"),
(y) a number of shares of Media Stock equal to the product of the Class B Common
Percentage and a fraction, the numerator of which is equal to the difference
between the Share Price and the Excess Cash Amount and the denominator of which
is equal to the Calculation Price and (z) a number of shares of Series D
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Preferred Stock equal to the product of the Class B Preferred Percentage and a
fraction, the numerator of which is equal to the difference between the Share
Price and the Excess Cash Amount and the denominator of which is equal to the
Liquidation Value.
3.4 DIVIDENDS, FRACTIONAL SHARES, ETC. (a) Notwithstanding any
other provisions of this Agreement, no dividends or other distributions declared
after the Effective Time on Media Stock or Series D Preferred Stock shall be
paid with respect to any whole shares of Media Stock or Series D Preferred Stock
represented by a Company Certificate until such Company Certificate is
surrendered for exchange as provided herein. Subject to the effect of
Applicable Laws, following surrender of any such Company Certificate, there
shall be paid to the holder of the Acquiror Certificates issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Media Stock and Series
D Preferred Stock and not paid, less the amount of any withholding taxes which
may be required thereon, and (ii) at the appropriate payment date, the amount of
dividends or other distributions with a record date after the Effective Time but
prior to surrender and a payment date subsequent to surrender payable with
respect to such whole shares of Media Stock and Series D Preferred Stock, less
the amount of any withholding taxes which may be required thereon.
(b) At or after the Effective Time, there shall be no transfers on
the stock transfer books of the Company of the shares of Company Common Stock
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, certificates representing any such shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged for certificates
for the consideration, if any, deliverable in respect thereof pursuant to this
Agreement in accordance with the procedures set forth in this Article III.
Company Certificates surrendered for exchange by any Person constituting an
"affiliate" of the Company for purposes of Rule 145(c) under the Securities Act
shall not be exchanged until Acquiror has received a written agreement from such
Person as provided in Section 7.13.
(c) (i) No certificates or scrip evidencing fractional shares of
Media Stock or Series D Preferred Stock
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shall be issued upon the surrender for exchange of Company Certificates, and
such fractional share interests will not entitle the owner thereof to vote or to
any rights of a stockholder of Acquiror. In lieu of any such fractional shares,
the Exchange Agent shall, on behalf of all holders of fractional shares of Media
Stock and Series D Preferred Stock, as soon as practicable after the Effective
Time, aggregate all such fractional interests (collectively, the "Fractional
Shares") and, at Acquiror's option, such Fractional Shares shall be purchased by
Acquiror or otherwise sold by the Exchange Agent as agent for the holders of
such Fractional Shares, in either case at the then prevailing price on the NYSE,
all in the manner provided hereinafter. Until the net proceeds of such sale or
sales have been distributed to the holders of Fractional Shares, the Exchange
Agent shall retain such proceeds in trust for the benefit of such holders.
Acquiror shall pay all commissions, transfer taxes and other out-of-pocket
transaction costs, including expenses and compensation of the Exchange Agent,
incurred in connection with such sale of the Fractional Shares.
(ii) To the extent not purchased by Acquiror, the sale of the
Fractional Shares by the Exchange Agent shall be executed on the NYSE or through
one or more member firms of the NYSE and will be executed in round lots to the
extent practicable. In either case, the Exchange Agent will determine the
portion, if any, of the net proceeds of such sale to which each holder of
Fractional Shares is entitled, by multiplying the amount of the aggregate net
proceeds of the sale of the Fractional Shares, by a fraction, the numerator of
which is the amount of Fractional Shares to which such holder is entitled and
the denominator of which is the aggregate amount of Fractional Shares to which
all holders of Fractional Shares are entitled.
(iii) As soon as practicable after the determination of the amount
of cash, if any, to be paid to holders of Fractional Shares in lieu of such
Fractional Shares, the Exchange Agent shall mail such amounts, without interest,
to such holders; PROVIDED, HOWEVER, that no such amount will be paid to any
holder of such Fractional Shares prior to the surrender by such holder of the
Company Certificates formerly representing such holder's shares of Company
Common Stock.
(d) Any portion of the Exchange Fund that remains undistributed to
the holders of Company Common Stock for six
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months after the Effective Time shall be delivered to Acquiror, upon demand, and
any holders of Company Common Stock who have not theretofore complied with this
Article III shall thereafter look only to Acquiror for the Class A Merger
Consideration or Class B Merger Consideration, as applicable, net cash proceeds
from the sale of Fractional Shares and unpaid dividends and distributions on the
Media Stock and Series D Preferred Stock to which they are entitled. All
interest accrued in respect of the Exchange Fund shall inure to the benefit of
and be paid to Acquiror.
(e) None of Acquiror, the Company or the Exchange Agent shall be
liable to any holder of shares of Company Common Stock for any cash, shares of
Media Stock or Series D Preferred Stock, net cash proceeds from the sale of
Fractional Shares or unpaid dividends or distributions with respect to Media
Stock or Series D Preferred Stock from the Exchange Fund delivered to a public
official pursuant to any applicable abandoned property, escheat or similar law.
If any Company Certificates shall not have been surrendered prior to seven years
after the Effective Time (or immediately prior to such earlier date on which any
cash, shares of Media Stock or Series D Preferred Stock, net cash proceeds from
the sale of Fractional Shares or unpaid dividends or distributions with respect
to Media Stock or Series D Preferred Stock in respect of such Company
Certificates would otherwise escheat to or become the property of any
Governmental Authority), any such cash, shares or unpaid dividends or
distributions in respect of such Company Certificates shall, to the extent
permitted by Applicable Laws, become the property of the Surviving Corporation;
PROVIDED, HOWEVER, that any holder of Company Common Stock shall thereafter
have the right to demand from Acquiror any such cash, shares or unpaid dividends
or distributions.
(f) In the event that any Company Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Company Certificate to be lost, stolen or destroyed and, if
required by Acquiror, the posting by such Person of a bond in such reasonable
amount as Acquiror may direct as indemnity against any claim that may be made
against it with respect to such Company Certificate, the Exchange Agent (or
Acquiror, as the case may be) will issue in exchange for such lost, stolen or
destroyed Company Certificate the Class A Merger Consideration or Class B Merger
Consideration, as applicable, cash in lieu of fractional
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shares, and unpaid dividends and distributions on shares of Media Stock and
Series D Preferred Stock deliverable in respect thereof pursuant to this
Agreement.
(g) Acquiror shall be entitled to, or shall be entitled to cause
the Exchange Agent to, deduct and withhold from the consideration otherwise
payable pursuant to this Agreement to any holder of shares of Company Common
Stock such amounts as are required to be deducted and withheld with respect to
the making of such payment under the Code, or any provision of state, local or
foreign tax law. To the extent that amounts are so withheld by Acquiror or the
Exchange Agent, as the case may be, such withheld amounts shall be treated for
all purposes of this Agreement as having been paid to the holder of the shares
of Company Common Stock in respect of which such deduction and withholding was
made by Acquiror.
3.5 RESTRICTED STOCK. To the extent any Company Common Stock
that is unvested and outstanding immediately prior to the Effective Time is
subject to the terms and conditions of a Restricted Stock Purchase Agreement
("RSPA") between the Company and any current or former employee of the Company
("Restricted Company Common Stock"), (i) the holder of such Restricted Company
Common Stock shall not be entitled to make a Cash Election in respect of such
Restricted Company Common Stock nor shall it receive cash pursuant to Section
3.3 and (ii) any Media Stock or Series D Preferred Stock received with respect
to such Restricted Company Common Stock shall be subject to the terms of such
RSPA, as amended by an Amendment to Restricted Stock Purchase Agreement
substantially in the form set forth in Section 3.5 of the Company Disclosure
Letter.
3.6 DISSENTING SHARES. Notwithstanding any other provisions of
this Agreement to the contrary, shares of Company Common Stock that are
outstanding immediately prior to the Effective Time and that are held by
stockholders who shall have not voted in favor of the Merger or consented
thereto in writing and who shall have demanded properly in writing appraisal for
such shares in accordance with Section 262 of the DGCL (collectively, the
"Dissenting Shares") shall not be converted into or represent the right to
receive the Class A Merger Consideration or Class B Merger Consideration, as
applicable. Such stockholders shall be entitled to receive payment of the
appraised value of such shares of Company Common Stock held by them in
accordance with the provisions of such Section 262, except that all
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Dissenting Shares held by stockholders who shall have failed to perfect or who
effectively shall have withdrawn or lost their rights to appraisal of such
shares of Company Common Stock under such Section 262 shall thereupon be deemed
to have been converted into and to have become exchangeable, as of the Effective
Time, for the right to receive, without any interest thereon, the Class A Merger
Consideration or Class B Merger Consideration, as applicable, upon surrender in
the manner provided in this Article III, of the Company Certificate or Company
Certificates that formerly evidenced such shares of Class B Common Stock.
3.7 SHARE PRICE ADJUSTMENT. If the Closing shall not have
occurred on or prior to January 3, 1997, the Share Price shall be increased at a
rate equal to 8% per annum from and including January 1, 1997 to and excluding
the Closing Date calculated on the basis of the actual number of days in the
period (such amount being the "Additional Amount"); PROVIDED, HOWEVER, that
no such amount shall be added to the Share Price if (i) the Closing has not
occurred on or prior to January 3, 1997 and the last of the conditions set forth
in Article VIII to be fulfilled is the condition set forth in Section 8.2(h) or
the condition set forth in Section 8.1(a), other than, in each case as a result
of any action taken or not taken by Acquiror or (ii) the Company has taken any
action that would result in any of the conditions to the consummation of the
Merger set forth herein not being satisfied at such time; PROVIDED, FURTHER,
that upon satisfaction of the conditions described in clause (i) above if either
such condition is the last condition to be fulfilled, the Additional Amount
shall be added to the Share Price and shall be calculated commencing five
Business Days after the date of such satisfaction.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Acquiror as follows:
4.1 ORGANIZATION AND AUTHORITY OF THE COMPANY. (a)Each of the
Company and its Subsidiaries is a corporation or partnership duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization with all requisite power to enable it to own,
lease and operate its assets and
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properties and to conduct its business as currently being conducted and is
qualified and in good standing to do business in each jurisdiction in which the
nature of the business conducted by it or the character or location of the
properties owned or leased by it requires such qualification, except to the
extent the failure so to qualify would not have a Material Adverse Effect with
respect to the Company. Complete and correct copies of the Restated Certificate
of Incorporation and Bylaws, each as amended to date, of the Company have been
delivered to Acquiror. Such Restated Certificate of Incorporation and Bylaws
are in full force and effect.
(b) The Company has all requisite corporate power and authority to
execute and deliver this Agreement and the Transaction Documents to which it is
a party and to perform its obligations hereunder and thereunder and, subject to
(i) the adoption of this Agreement by the holders of a majority of the voting
power of the outstanding shares of Company Capital Stock, voting as a single
class and (ii) the adoption of the Charter Amendment by 66-2/3% of the voting
power of the outstanding shares of Company Capital Stock voting as a single
class and a majority of the voting power of each of the outstanding shares of
the Class A Common Stock and the Class B Common Stock voting as separate classes
(collectively, the "Stockholder Approvals"), to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and such Transaction Documents and the consummation of the transactions
contemplated hereby and thereby have been duly authorized by all requisite
corporate action on the part of the Company, subject, in the case of this
Agreement, the Merger and the Charter Amendment, to the Stockholder Approvals.
This Agreement and each Transaction Document to which the Company is a party has
been duly executed and delivered by the Company and constitutes the legal, valid
and binding obligation of the Company, enforceable against it in accordance with
its terms, except (i) as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally and (ii) as the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to equitable defenses and to
the discretion of the court before which any proceeding therefor may be brought.
(c) Section 4.1 of the letter from the Company, dated the date
hereof, addressed to Acquiror (the "Company
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Disclosure Letter") sets forth, as of the date hereof, a true and complete list
of all of the Company's Subsidiaries, including the jurisdiction of
incorporation or organization of each Subsidiary and the percentage of each
Subsidiary's outstanding capital stock or other ownership interest owned by the
Company or another Subsidiary of the Company or by any other Person. All of the
outstanding shares of capital stock of each Subsidiary have been validly issued
and are fully paid and nonassessable and, except as set forth in Section 4.1 of
the Company Disclosure Letter, are owned by the Company or a Subsidiary, free
and clear of all Encumbrances. Except as set forth in Section 4.1 of the
Company Disclosure Letter, the Company does not, directly or indirectly, own any
capital stock of or other equity interests in any corporation, partnership or
other Person and neither the Company nor any of its Subsidiaries is a member of
or participant in a partnership, joint venture or similar Person.
4.2 CAPITALIZATION. (a) As of the date hereof, the authorized
capital stock of the Company consists of: (i) 425,000,000 shares of Class A
Common Stock, of which (A) 38,885,385 shares are issued and outstanding, all of
which are duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights created by statute, the Company's Restated
Certificate of Incorporation or Bylaws or any agreement to which the Company is
a party or by which the Company is bound and (B) no shares are held in the
treasury of the Company; (ii) 200,000,000 shares of Class B Common Stock, of
which (A) 109,349,496 shares are issued and outstanding, all of which are duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights created by statute, the Company's Restated Certificate of
Incorporation or Bylaws or any agreement to which the Company is a party or by
which the Company is bound, (B) no shares are held in the treasury of the
Company and (C) 28,571,450 shares are issuable upon conversion of Company
Preferred Stock; and (iii) 200,000,000 shares of Preferred Stock, par value $.01
per share, of the Company, of which 1,142,858 shares have been designated Series
A Participating Convertible Preferred Stock (the "Company Preferred Stock" and,
together with the Company Common Stock, the "Company Capital Stock") and are
issued and outstanding, all of which are duly authorized, validly issued, fully
paid and nonassessable and not subject to preemptive rights created by statute,
the Company's Certificate of Incorporation or Bylaws or any agreement to
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which the Company is a party or by which the Company is bound.
(b) Other than as described in this Section 4.2, or as listed in
Section 4.2(b) of the Company Disclosure Letter, no shares of the capital stock
of the Company are authorized, issued or outstanding, or reserved for any other
purpose, and there are no options, warrants or other rights (including
tag-along, right of first refusal, buy-sell, registration or similar rights),
agreements, arrangements or commitments of any character to which the Company,
any of its Subsidiaries or any Person in which the Company or its Subsidiaries
own any interest is a party relating to the issued or unissued capital stock of
the Company, any of its Subsidiaries or any such Person or obligating or which
could obligate the Company or any of its Subsidiaries to grant, issue or sell
any shares of capital stock of the Company, any of its Subsidiaries or any
Person in which the Company or its Subsidiaries own any interest, by sale,
lease, license or otherwise. Except as described in Section 4.2(b) of the
Company Disclosure Letter, the Company has no outstanding bonds, debentures,
notes or other obligations the holders of which have the right to vote or that
are convertible into or exercisable for securities having the right to vote with
the stockholders of the Company on any matter. Except as set forth in Section
4.2(b) of the Company Disclosure Letter, there are, to the Knowledge of the
Company, no voting trusts or other agreements or understandings with respect to
the voting of Company Capital Stock. Except as set forth on Section 4.2 of the
Company Disclosure Letter, none of the Company, its Subsidiaries or any Person
in which the Company or its Subsidiaries own any interest is a party to any
non-competition agreement or other agreement or arrangement which restrains,
limits or impedes the current or contemplated business or operations of the
Company or any of its Subsidiaries or would apply to Acquiror or any of its
Affiliates following the Effective Time.
4.3 NO CONFLICTS. Except as set forth in Section 4.3 of the
Company Disclosure Letter, subject to obtaining the Company Consents (as defined
in Section 4.6), the execution and delivery of this Agreement and each of the
Transaction Documents to which the Company is a party by the Company do not, and
the consummation of the transactions contemplated hereby and thereby and
compliance with the terms hereof and thereof will not, conflict with, or result
in any violation of or default (with or without notice or
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lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or to loss of a material benefit
under, or to increased, additional, accelerated or guaranteed rights or
entitlements of any Person under, or result in the creation of any Encumbrances
upon any of the properties or assets of the Company or its Subsidiaries under
any provision of (i) the Certificate of Incorporation, Bylaws or other
organizational document of the Company or any Subsidiary, (ii) any note, bond,
mortgage, indenture or deed of trust, deed to secure debt or any license, lease,
contract, commitment, permit, concession, franchise, agreement or other binding
arrangement to which the Company or any of its Subsidiaries is a party or by
which any of them or their respective properties or assets are bound, including
any Franchise, (iii) any judgment, order, writ, injunction or decree of any
court, governmental body, administrative agency or arbitrator applicable to the
Company or any Subsidiary or their respective properties or assets as of the
date hereof or (iv) any law, statute, rule, regulation or judicial or
administrative decision applicable to the Company or any Subsidiary, except in
the case of clauses (ii) and (iv), such conflicts, violations and defaults,
termination, cancellation and acceleration rights and entitlements and
Encumbrances that in the aggregate would not hinder or impair the consummation
of the transactions contemplated hereby or have a Material Adverse Effect with
respect to the Company.
4.4 VOTE REQUIRED. The Stockholder Approvals are the only votes
of the holders of any class or series of Company Capital Stock necessary or
required (under Applicable Law or otherwise) to approve this Agreement and the
transactions contemplated hereby.
4.5 BOARD RECOMMENDATION; OPINION OF FINANCIAL ADVISOR. (a)
The Board of Directors at a meeting duly called and held, has by unanimous vote
of those directors present (who constituted 100% of the directors then in
office) (i) determined that this Agreement and the transactions contemplated
hereby, including the Merger, are fair to and in the best interests of the
stockholders of the Company and has approved the same, and (ii) resolved to
recommend that the holders of the shares of Company Capital Stock adopt this
Agreement and the transactions contemplated hereby, including the Merger.
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(b) The Company has received the opinions of (i) Lazard Freres &
Co. LLC, dated February 27, 1996, to the effect that, as of the date hereof, the
consideration to be received by the holders of shares of Company Capital Stock
in the Merger is fair from a financial point of view to such holders and (ii)
Allen & Company Incorporated, dated February 27, 1996, to the effect that, as of
the date hereof, the consideration to be received by the holders of the Class A
Common Stock in the Merger is fair from a financial point of view to such
holders. A signed, true and complete copy of such opinions has been delivered
to Acquiror.
4.6 CONSENTS. Not later than 30 days after the date of this
Agreement, the Company shall furnish to Acquiror a list of each Franchise as to
which notice to, or the consent of, a Governmental Authority is required as a
condition to the transfer of control or the right to control the Franchise in
connection with the transactions contemplated hereby (all such notices and
consents being "Franchise Consents"). Section 4.6 of the Company Disclosure
Letter lists each FCC license held by the Company or any Subsidiary, other than
private mobile radio service licenses, as to which FCC consent is required prior
to the assignment or transfer of control of such license in connection with the
transactions contemplated hereby (all such notices and consents being "License
Consents"). Except for (i) the Franchise Consents and License Consents, (ii) as
set forth in Section 4.6 of the Company Disclosure Letter, (iii) compliance with
and filings under the HSR Act, (iv) the filing with the SEC of (A) a proxy
statement under the Exchange Act relating to the meeting (or meetings) of the
Company's stockholders to be held in connection with the Merger, the Charter
Amendment and the other transactions contemplated by this Agreement (the "Proxy
Statement"), (B) any registration statement required to be filed in connection
with any action taken by the Company pursuant to Section 7.7 and (C) such
reports under the Exchange Act as may be required in connection with this
Agreement and the transactions contemplated hereby, (v) the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware and
appropriate documents with the relevant authorities of other states in which the
Company is qualified to do business, (vi) such filings and approvals as may be
required by any applicable state securities, "blue sky" or takeover laws, (vii)
such filings in connection with any state or local tax which is attributable to
the beneficial ownership of the Company's or its Subsidiaries'
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real property, if any (collectively, "Gains Taxes"), and (viii) such filings as
may be required with the FCC or any Governmental Authority to obtain their
consent to the assumption by the Acquiror of the Social Contract (including all
Systems and communities encompassed thereby) between the Company and the FCC, as
approved by Memorandum Opinion and Order released August 3, 1995 (FCC 95-335)
(the "Social Contract Order") and as may be modified thereafter by a proposed
Social Contract Amendment that is substantially similar to that which the
Company has provided to Acquiror (the "Social Contract Amendment") (such notice
and consent being the "Social Contract Consents") (the items in clauses (i)
through (vi) being collectively referred to herein as "Company Consents"), no
consents, approvals, licenses, permits, orders or authorizations of, or
registrations, declarations, notices or filings with, any Governmental Authority
or any Third Party are required to be obtained or made by or with respect to the
Company or any of its Subsidiaries on or prior to the Closing Date in connection
with (A) the execution, delivery and performance of this Agreement or any of the
Transaction Documents to which the Company is a party, the consummation of the
transactions contemplated hereby and thereby or the taking by the Company of any
other action contemplated hereby or thereby, (B) the continuing validity and
effectiveness of (and prevention of any material default under or violation of
the terms of) any Franchise or any other material, license, permit or
authorization or any material contract, agreement or lease to which the Company
or any Subsidiary is a party or (C) the conduct by the Company or any of its
Subsidiaries of their respective businesses following the Closing as conducted
on the date hereof, which, if not obtained or made in connection with clauses
(A), (B) and (C), would have a Material Adverse Effect with respect to the
Company.
4.7 COMPLIANCE; NO DEFAULTS. (a) Except as set forth in
Section 4.7 of the Company Disclosure Letter, neither the Company nor any of its
Subsidiaries is in violation of, is, to the Knowledge of the Company, under
investigation with respect to any violation of, has been given notice or been
charged with violation of, or failed to comply with any statute, law, ordinance,
rule, order or regulation of any Governmental Authority (including but not
limited to the Social Contract Order, as amended) applicable to its business or
operations ("Applicable Laws"), except for violations and failures to comply
that would not have a Material Adverse Effect with respect to the Company.
Except as set forth in Section 4.7 of the Company Disclosure
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Letter, the Company and its Subsidiaries have all permits, licenses, variances,
exemptions, orders and approvals of all Governmental Authorities ("Permits")
which are material to the operation of the businesses of the Company and its
Subsidiaries, taken as a whole.
(b) Neither the Company nor any of its Subsidiaries is in default
or violation (and no event has occurred which, with notice or the lapse of time
or both, would constitute a default or violation) of any term, condition or
provision of (i) its Certificate of Incorporation, as amended, or Bylaws or
other comparable organizational document or (ii) any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which the
Company or any of its Subsidiaries is now a party or by which the Company or any
of its Subsidiaries or any of their respective properties or assets may be
bound, except in the case of clause (ii), for defaults or violations which in
the aggregate would not have a Material Adverse Effect with respect to the
Company.
4.8 SEC DOCUMENTS; UNDISCLOSED LIABILITIES. (a) The Company has
made available to Acquiror a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by the Company with
the SEC since January 1, 1993 (as such documents have since the time of their
filing been amended, the "Company SEC Documents"), which are all the documents
(other than preliminary proxy materials) that the Company was required to file
with the SEC since such date. As of their respective dates, the Company SEC
Documents (including any financial statements filed, to be filed or required to
have been filed as a part thereof) complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as applicable, and the
rules and regulations of the SEC thereunder applicable to such Company SEC
Documents, and none of the Company SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Company SEC Documents comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with GAAP applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto) and fairly
present
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(subject, in the case of the unaudited financial statements, to normal,
recurring audit adjustments, which were not individually or in the aggregate
material) the consolidated financial position of the Company and its
consolidated Subsidiaries as at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.
(b) Except as disclosed in the Company SEC Documents or in Section
4.8 or 4.9 of the Company Disclosure Letter, as of the date hereof the Company
and its Subsidiaries do not have any material indebtedness, obligations or
liabilities of any kind (whether accrued, absolute, contingent or otherwise, and
whether due or to become due or asserted or unasserted) required by GAAP to be
reflected on a consolidated balance sheet of the Company and its consolidated
Subsidiaries or in the notes, exhibits or schedules thereto.
4.9 LITIGATION. Except as set forth in the Company SEC
Documents or in Section 4.9 of the Company Disclosure Letter, there are no Legal
Proceedings against or affecting the Company or any of its Subsidiaries or their
respective properties or assets pending or, to the Knowledge of the Company,
threatened against the Company or any of its Subsidiaries, that individually or
in the aggregate could (i) have a Material Adverse Effect with respect to the
Company or (ii) as of the date hereof, prevent, materially hinder or delay the
consummation of the transactions contemplated by this Agreement or the
Transaction Documents or seek to limit the ownership or operation of the Company
by Acquiror. Except as set forth in Section 4.9 of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries is a party or subject to
or in default under any judgment, order, injunction or decree of any
Governmental Authority applicable to it or to its respective properties or
assets, which judgment, order, injunction, decree or default thereunder
constitutes a Material Adverse Effect with respect to the Company.
4.10 TAXES. (a) Except as set forth in Section 4.10(a) of the
Company Disclosure Letter, (i) all Federal, state, local and foreign Tax
returns, declarations and reports ("Tax Returns") required to be filed by or on
behalf of the Company or any of its Subsidiaries have been filed on a timely
basis with the appropriate Governmental Authorities in all jurisdictions in
which such Tax Returns are required to be filed (after giving effect to any
valid extensions of
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time in which to make such filings), except for Tax Returns as to which the
failure to file would not individually or in the aggregate have a Material
Adverse Effect with respect to the Company, and all such Tax Returns were true,
correct and complete in all material respects; (ii) all amounts due and payable
in respect of such Tax Returns (including interest and penalties) have been
fully and timely paid or are or will be adequately provided for in the
appropriate financial statements of the Company and its Subsidiaries, except for
amounts the failure to pay would not have a Material Adverse Effect with respect
to the Company; (iii) no waivers of statutes of limitations have been given or
requested with respect to the Company or any of its Subsidiaries in connection
with any Tax Returns covering the Company or any of its Subsidiaries with
respect to any income or franchise Taxes or other material Taxes payable by any
of them; and (iv) each of the Company and its Subsidiaries has duly and timely
withheld from salaries, wages and other compensation of its employees and paid
over to the appropriate taxing authorities all amounts required to be so
withheld and paid over for all periods not barred by applicable statutes of
limitations under all Applicable Laws, except for amounts as to which the
failure to withhold or pay would not have a Material Adverse Effect with respect
to the Company.
(b) Except as set forth in Section 4.10(b) of the Company
Disclosure Letter, all deficiencies asserted or assessments made in an amount in
excess of $300,000 by the IRS or any other taxing authority of the Tax Returns
of or covering the Company or any of its Subsidiaries have been fully paid or
are or will be adequately provided for in the appropriate financial statements
of the Company and its Subsidiaries.
(c) Except as set forth in Section 4.10(c) of the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries nor any other
Person on behalf of the Company or any of its Subsidiaries: (i) has filed a
consent pursuant to Section 341(f) of the Code or agreed to have Section
341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as
such term is defined in Section 341(f)(4) of the Code) owned by the Company or
any of its Subsidiaries; (ii) has executed or entered into a closing agreement
pursuant to Section 7121 of the Code or any predecessor provision thereof or any
similar provision of state, local or foreign law; or (iii) has agreed to or is
required to make any adjustments pursuant to Section 481(a) of the Code or any
similar provision of state, local or
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foreign law by reason of a change in accounting method initiated by the Company
or any of its Subsidiaries nor to the Knowledge of the Company (which for
purposes of this Section 4.10 shall include the tax director) has the IRS
proposed any such adjustment or change in accounting method, or has any
application pending with any taxing authority requesting permission for any
changes in accounting methods that relate to the business or operations of the
Company or any of its Subsidiaries.
(d) Except as set forth in Section 4.10(d) of the Company
Disclosure Letter, none of the assets of the Company and its Subsidiaries is
property required to be treated as being owned by another Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately prior to the enactment of the Tax Reform Act of 1986
or is "tax-exempt use property" within the meaning of Section 168(h)(l) of the
Code.
(e) The Federal income Tax Returns of the Company and its
Subsidiaries, any of their predecessors or any affiliated group of which the
Company or any of its Subsidiaries is or was a member have been examined by the
IRS, or the periods covered by such Tax Returns have been closed by applicable
statute of limitations, for all periods through December 31, 1991, except to the
extent such Tax Returns may be examined for the purpose of determining loss or
credit carryforwards to a year not so closed. The state income or franchise Tax
Returns of the Company and its Subsidiaries, any of their predecessors or any
affiliated, combined or unitary group of which the Company or any of its
Subsidiaries is or was a member have been examined by the relevant taxing
authorities, or the periods covered by such Tax Returns have been closed by
applicable statute of limitations, in each case through at least December 31,
1991, except to the extent such Tax Returns may be examined for the purpose of
determining loss or credit carryforwards to a year not so closed.
(f) Except as set forth in Section 4.10(f) of the Company
Disclosure Letter, (i) no Tax audits or other administrative proceedings are
pending with regard to any Taxes for which the Company or any of its
Subsidiaries may be liable and (ii) no written notice of any such audit has been
received by the Company or any of its Subsidiaries.
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(g) As of December 31, 1995, the Company had net operating loss
carryforwards for Federal income tax purposes of no less than $900 million.
(h) Except as set forth in Section 4.10(h) of the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries is a party to
or bound by any agreement providing for the allocation or sharing of Taxes.
(i) Except as set forth in Section 4.10(i) of the Company
Disclosure Letter, since January 1, 1989 neither the Company nor any of its
Subsidiaries has been a member of, or was acquired from, any "affiliated group"
(as defined in Section 1504 of the Code) other than (i) in a transaction in
which the common parent of such affiliated group was acquired or (ii) the
affiliated group in which the Company is the common parent.
(j) Except as set forth in Section 4.10(j) of the Company
Disclosure Letter, the performance of the transactions contemplated by this
Agreement will not (either alone or upon the occurrence of any additional or
subsequent event) result in any payment that would constitute an "excess
parachute payment" within the meaning of Section 280G of the Code.
(k) The Company and each of its Subsidiaries is not currently, has
not been within the last five years and does not anticipate becoming a "United
States real property holding corporation" within the meaning of Section 897(c)
of the Code.
4.11 EMPLOYEE BENEFITS. (a) Section 4.11(a) of the Company
Disclosure Letter lists all "employee benefit plans," as defined in Section 3(3)
of ERISA, and all other deferred compensation, bonus or other incentive
compensation, stock purchase or other Equity Appreciation Rights Plans,
severance pay, salary continuation for disability or other leave of absence,
supplemental unemployment benefits, lay-off or reduction in force, change in
control or educational assistance arrangements or policies for which the Company
or any of its Subsidiaries has any material obligation or liability (each a
"Benefit Plan" and collectively, the "Benefit Plans"), including, but not
limited to, any individual benefit arrangement, policy or practice with respect
to any current or former officer, employee or director of the Company or any of
its Subsidiaries.
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(b) Section 4.11(b) of the Company Disclosure Letter lists,
separately for each foreign country, all Benefit Plans covering employees of the
Company and its Subsidiaries who are employed outside of the United States
("Foreign Benefit Plans").
(c) The Company and its Subsidiaries have delivered to Acquiror
correct and complete copies of all Benefit Plans, and, where applicable, each of
the following documents with respect to such plans: (i) any amendments, (ii)
any related trust documents, (iii) the two most recently filed IRS Forms 5500
with all attachments thereto, (iv) the last IRS determination letter, (v) the
most recent summary plan descriptions and summaries of material modifications,
(vi) the last actuarial valuation report and (vii) written communications to
employees to the extent the substance of the Benefit Plans described therein
differs materially from the other documentation furnished under this Section.
(d) Except as disclosed in Section 4.11(d) of the Company
Disclosure Letter, none of the Benefit Plans is subject to Title IV of ERISA or
Section 412 of the Code, and the Company and its ERISA Affiliates from time to
time have not within the preceding six years had any obligation to make any
contribution to a retirement plan subject to Title IV of ERISA or incurred any
liability (contingent or otherwise) under Title IV of ERISA and neither the
Company, its Subsidiaries nor any of its ERISA Affiliates has any actual or
potential obligation or liability to any multiemployer plan (as defined in
Section 4001(a)(3) of ERISA).
(e) Each Benefit Plan, including any associated trust, intended to
qualify under Section 401 of the Code does so qualify.
(f) Except as disclosed on Section 4.11(f) of the Company
Disclosure Letter and except as would not have a Material Adverse Effect with
respect to the Company, the Benefit Plans have been maintained and administered
in accordance with their terms and with the provisions of ERISA, the Code and
other Applicable Laws.
(g) There are no pending or, to the Company's Knowledge, overtly
threatened actions, claims or lawsuits that have been asserted or instituted
against any of the Benefit Plans, the assets of any of the trusts under such
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plans or the plan sponsor, plan administrator or fiduciary of any of the Benefit
Plans with respect to the operation of such plans (other than routine benefit
claims) that individually or in the aggregate could have a Material Adverse
Effect with respect to the Company.
(h) The Company and its Subsidiaries do not provide, and are not
obligated to provide, retiree life insurance or retiree health benefits to any
current or former employee after his or her termination of employment with the
Company or any Subsidiary, except as may be required under Section 4980B of the
Code and Part 6 of Subtitle B of Title I of ERISA or as disclosed in Section
4.11(h) of the Company Disclosure Letter.
(i) Except as disclosed in Section 4.11(i) of the Company
Disclosure Letter and except with respect to payments under the Equity
Appreciation Rights Plans that will be paid or satisfied by the Company on or
prior to Closing of all estimated payments, neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby
will (i) result in any payment becoming due to any employee (current or former)
of the Company or any Subsidiary, (ii) increase any benefits otherwise payable
under any Benefit Plan or (iii) result in the acceleration of the time of
payment or the vesting of any benefits under any Benefit Plan. The Company has
also delivered to Acquiror a schedule of all estimated payments to be made under
each Equity Appreciation Rights Plan on or prior to the Closing. "Equity
Appreciation Rights Plans" are all plans or arrangements maintained by the
Company or any of its Subsidiaries that provide for a benefit based upon the
issuance of stock, restricted stock, stock options, phantom stock or other
equity appreciation rights or incentive awards, determined by the book, fair
market or formula value of a share of stock of the Company.
(j) Except as disclosed in Section 4.11(j) of the Company
Disclosure Letter, (i) no employee of the Company or any Subsidiary will be
entitled to any severance payments upon the sale of the Company or any
Subsidiary, or any divisions or business units thereof, absent an employee's
actual loss of employment and (ii) none of the executives of the Company or any
Subsidiary are eligible to receive any payment under any severance pay, stay
bonus or other retention plan, program or arrangement of the Company or any of
its Subsidiaries.
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(k) Except as disclosed in Schedule 4.11(k) of the Company
Disclosure Letter, the projected benefit obligation of the Company or any
Subsidiary (as calculated using actuarial assumptions used to calculate
liabilities under FAS 87 with respect to post-employment benefits accrued) under
each Benefit Plan that is a defined benefit pension plan is fully funded by
assets of such plan or by an adequate reserve on the applicable balance sheet of
the Company or any Subsidiary.
4.12 CABLE TELEVISION FRANCHISES. (a) Section 4.12 of the
Company Disclosure Letter sets forth a list of the Systems, and as to each such
System, (i) the geographic area and FCC community unit(s) served, (ii) the name
of the legal entity that owns such System and holds the applicable franchise, as
well as the identity, ownership interest and relationship to the Company, if
any, of each owner of any interest in such legal entity, (iii) as of December
31, 1995, the number of Homes Passed and Subscribers served by such System, and
(iv) the names and addresses of the Governmental Authorities issuing the
franchises and/or implementing such ordinances. By no later than 30 days after
the date of this Agreement, the Company shall furnish to Acquiror a complete and
accurate list and copy of all of the franchise agreements and similar governing
agreements, instruments, resolutions, statutes and/or CATV-franchise-related
ordinances that are used, necessary or required in order to operate, or to which
the Company or its Subsidiaries are subject by reason of their operation of, the
Systems (individually as to each System, its "Franchise" and collectively, the
"Franchises"), and, as of December 31, 1995, the number of Homes Passed and
Subscribers served by the Systems by Franchise. The Systems listed in Section
4.12 of the Company Disclosure Letter represent all of the "cable television
systems", as defined in Section 602(7) of the Cable Act, owned and operated by
the Company and its Subsidiaries in the United States. The Franchises and any
related regulatory ordinances contain all material commitments, obligations and
rights of the Company and its Subsidiaries with respect to each of the
Governmental Authorities granting such Franchises, in connection with the
construction, ownership and operation of the Systems. The Franchises enable the
Company and its Subsidiaries to operate, and, subject to obtaining the Franchise
Consents and License Consents, immediately following the Closing will enable the
Surviving Corporation and its Subsidiaries to continue to operate all of the
Systems as and where they are presently operated. To the Knowledge of the
Company, each
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Franchise is valid under all Federal, state and local laws and is validly held
by the Company or its Subsidiaries, as the case may be. The Company and its
Subsidiaries have complied with the material terms and conditions of the
Franchises and the same will not be subject to revocation or nonrenewal as a
result of the execution and delivery of this Agreement or the Transaction
Documents, or the consummation of the transactions contemplated hereby and
thereby, subject to obtaining the Franchise Consents and License Consents.
Except as set forth in Section 4.12 of the Company Disclosure Letter, there are
no lawsuits, revocation proceedings or disputes pending with respect to any of
the Franchises or Systems that would material affect the right of the Company or
any Subsidiary to operate a System, and no Governmental Authority or other
Person has notified the Company or any of its Subsidiaries in writing of its
intention to conduct or initiate the same. Neither the Company nor any of its
Subsidiaries has received any written notice that any such Franchise is under
consideration to be revoked nor, except for Franchises that are subject to
renewal negotiations, to be modified in any material respect.
(b) Except as set forth in Section 4.12 of the Company Disclosure
Letter, no Person other than certain municipalities (a list of which will be
provided no later than 30 days after the date of this Agreement) has any right
to acquire any interest in any of the Systems, or to designate any other person
or entity to acquire any interest in any of the Systems (including, without
limitation, any right of first refusal or similar right to purchase any interest
in the Systems), which right has not been validly, properly and irrevocably
(except for the right to revoke such waiver only if this Agreement is terminated
pursuant to Article IX hereof) waived by the party entitled to assert such
right.
(c) Section 4.12 of the Company Disclosure Letter lists the date on
which each Franchise will expire or has expired. Except as set forth in Section
4.12 of the Company Disclosure Letter, there are not now pending any proceedings
of any Governmental Authority with respect to any proposal for renewal of any
Franchise. There exists no fact or circumstance that makes it likely that any
Franchise will not be renewed or extended on commercially reasonable terms.
Except where the Company or its Subsidiaries are proceeding under informal
renewal procedures as provided for by the Cable Act, the Company and its
Subsidiaries have timely
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filed with the appropriate Governmental Authority all appropriate requests for
renewal within 30 to 36 months under the Cable Act. Section 4.12 of the Company
Disclosure Letter sets forth those Franchises serving 25,000 or more Subscribers
("Material Franchises") where the Company or a Subsidiary has not filed a
written renewal notice pursuant to Section 626(a)(1) of the Cable Act. Except
as set forth in Section 4.12 of the Company Disclosure Letter, as to any
Franchise that has expired prior to the date hereof, the Company is currently
operating such Franchise under duly authorized extensions, and the Company has
no reason to believe that such extensions will not be renewed until such time
as the Franchise itself has been renewed for an additional term.
(d) To the Company's Knowledge, the Systems and all related
businesses of the Company and its Subsidiaries are, and have been, operated in
compliance with the Communications Act and all regulations of the FCC
established pursuant thereto, and the Company and its Subsidiaries have
submitted to the FCC all filings that are required under the rules, orders and
regulations of the FCC or other Governmental Authorities with jurisdiction.
Except as set forth in Section 4.12 of the Company Disclosure Letter, the
operation of the Systems has been, and is, in compliance with the rules and
regulations of the FCC or other Governmental Authorities with jurisdiction and
the Company and its Subsidiaries have not received any written notice from the
FCC or other Governmental Authorities with jurisdiction with respect to any
material violation of its rules and regulations or from any other Governmental
Authorities with jurisdiction with respect to any material violation of any
Franchise.
(e) To the Company's Knowledge, for each relevant semi-annual
reporting period, the Company has timely filed with the United States Copyright
Office all required Statements of Account in true and correct form in all
material respects, and has paid when due all required copyright royalty fee
payments in the correct amount, relating to the Systems' carriage of television
broadcast signals and appropriately classifying the applicable tiers on which
the Systems carry television broadcast signals. To the Company's Knowledge,
carriage of all broadcast signals is in compliance with the Copyright Act of
1976, as amended (the "Copyright Act") and the rules and regulations of the
Copyright Office and is eligible for the compulsory license under Section 111 of
the Copyright Act. Except as set forth
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in Section 4.12 of the Company Disclosure Letter, neither the Company nor any of
its Subsidiaries has received any inquiry from the Copyright Office or any Third
Party challenging or questioning the information submitted in any Statement of
Account or the amount of any royalty payment, for which the Company has not
provided adequate reserves in its reasonable business judgment, nor are the
Company or its Subsidiaries aware of any basis for such inquiry. Except as set
forth in Section 4.12 of the Company Disclosure Letter, to the Company's
Knowledge, no claim or copyright infringement has been made against the Company
or any of its Subsidiaries that has not been settled, nor is any such claim
pending or threatened.
(f) Other than as set forth in Section 4.12 of the Company
Disclosure Letter, neither the Company nor any of its Subsidiaries is subject to
any FCC proceeding challenging the rights of the Company or its Subsidiaries to
carry or not carry any signal, nor has the Company or any of its Subsidiaries
received any written notice or demand to carry or not carry any signal, the
carriage or non-carriage of which could have a material adverse effect on any
System.
(g) The Systems (other than the Recently Acquired Systems) are, and
have been, operated in material compliance with the Social Contract Order and
the Company and its Subsidiaries have submitted to the FCC and any relevant
Governmental Authority all forms, notices and other written material required
thereunder for implementation of the Social Contract. Each such filing has been
prepared and filed in compliance with the Social Contract Order and is complete
and accurate in all material respects. Neither the Company nor any Subsidiary
has received written notice from the FCC as to any non-compliance with the
Social Contract Order. The Company shall use its reasonable best efforts to
seek amendment of the Social Contract Order to bring the Recently Acquired
Systems under terms substantially the same as those contained in the proposed
Social Contract Amendment.
(h) Section 4.12 of the Company Disclosure Letter lists each of
the Governmental Authorities that (i) has been certified by the FCC pursuant
to 47 C.F.R Section 76.910 to regulate Basic Cable Service and associated
equipment of a System or (ii) has petitioned the FCC to regulate the rates
for Basic Cable Basic Cable Service and associated equipment pursuant to 47
C.F.R Section 76.913; Section 4.12 of the Company Disclosure Letter also
lists each complaint filed against Cable
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Programming Service rates on FCC Form 329 that has not been settled by the
Social Contract Order. Of those listed, the Form 329 complaints pertaining to
the Recently Acquired Systems would be settled by the proposed Social Contract
Amendment.
(i) To the extent that the Company's and/or its Subsidiaries' rates
have not been settled pursuant to the Social Contract or would not be settled by
the proposed Social Contract Amendment, the Company and/or its Subsidiaries are
in compliance in all material respects with FCC rate requirements.
(j) Except as set forth in Section 4.12 of the Company Disclosure
Letter, neither the Company nor any of its Subsidiaries (x) is under any
investigation by the FCC or any Governmental Authority with respect to any of
its rates for Basic Cable Service or any Cable Programming Service (including
but not limited to rates for associated equipment) or (y) is a party to any
proceeding before the FCC or any other Governmental Authority the collective
outcome of which could result in the Company or any of its Subsidiaries being
ordered to make refunds to Subscribers in excess of $2,000,000 (exclusive of
potential Social Contract Amendment refunds) or reduce the rates currently
charged to Subscribers when netted against any increases to which the Company is
entitled.
(k) Section 4.12 of the Company Disclosure Letter lists each
System, and the Franchise(s) by which it is authorized, that is subject to
effective competition (as that term is defined in Section 623(l)(1) of the Cable
Act) and the basis for the Company's determination that the System operating
under that Franchise is subject to effective competition.
4.13 ENVIRONMENTAL MATTERS. Except as set forth in Section 4.13
of the Company Disclosure Letter:
(i) the operations of the Company and its Subsidiaries are in
material compliance with all applicable Environmental Laws;
(ii) to the Company's Knowledge, all real property owned, operated
or leased by the Company and its Subsidiaries are free from contamination by any
Hazardous Material that is reasonably likely to result in
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Environmental Costs and Liabilities to the Company in excess of $2,000,000;
(iii) to the Knowledge of the Company, the Company and its
Subsidiaries have obtained and currently maintain all material Environmental
Permits necessary for their operations and are in material compliance with such
Environmental Permits;
(iv) except to the extent such matters are the subject matter of
other representations and warranties of the Company contained herein, there are
no Legal Proceedings or Environmental Claims pending, or to the Knowledge of the
Company, threatened against the Company or its Subsidiaries alleging the
violation of any Environmental Law or asserting claims regarding Environmental
Costs and Liabilities under any Environmental Law;
(v) neither the Company nor its Subsidiaries nor to the Knowledge
of the Company, any predecessor of the Company or its Subsidiaries or any owner
of premises leased or operated by the Company or its Subsidiaries with respect
to such property, has filed any formal notice under Federal, state, local or
foreign law indicating past or present generation treatment, storage, or
disposal of or reporting a Release of Hazardous Material into the environment;
and
(vi) to the Knowledge of the Company, there is not now, nor has
there been in the past, on, in or under any real property owned, leased or
operated by the Company or its Subsidiaries (A) any underground storage tanks,
above-ground storage tanks, dikes or impoundments, (B) any friable
asbestos-containing materials or (C) any polychlorinated biphenyls which, in
each case, is material to the operation of its business at such real property.
4.14 LABOR. (a) Except as set forth in Section 4.14(a)(1) of
the Company Disclosure Letter, neither the Company nor any of its Subsidiaries
is a party to any labor or collective bargaining agreement and there are no
labor or collective bargaining agreements that govern the terms and conditions
of employment with the Company or its Subsidiaries with respect to employees of
the Company or its Subsidiaries. Section 4.14(a)(2) of the Company Disclosure
Letter lists all employment, management, consulting, management retention or
other personal service, or compensation agreements or arrangements covering one
or more non-employees (including severance, termination or change-
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of-control arrangements) and all material employment, management, consulting,
management retention or other personal service, or compensation agreements or
arrangements covering one or more employees (including severance, termination or
change-of-control arrangements) in each case, entered into by the Company or any
of its Subsidiaries and a copy of each such agreement has been delivered to
Acquiror.
(b) Except as set forth in Section 4.14(b) of the Company
Disclosure Letter, no employees of the Company or any of its Subsidiaries are
represented by any labor organization; no labor organization or group of
employees of the Company or any of its Subsidiaries has made a pending demand
against the Company or any Subsidiary for recognition, and there are no
representation proceedings or petitions seeking a representation proceeding
presently pending against or, to the knowledge of the Company, threatened to be
brought or filed against the Company or any Subsidiary, with the National Labor
Relations Board or other labor relations tribunal; there is no organizing
activity involving the Company or any of the Subsidiaries pending or, to the
Knowledge of the Company, threatened by any labor organization or group of
employees of the Company or any its Subsidiaries.
(c) There are no (i) strikes, work stoppages, slowdowns, lockouts
or arbitrations (in the case of arbitrations which if adversely decided would
reasonably be expected to involve the payment of damages of more than $500,000)
or (ii) material grievances or other material labor disputes pending or, to the
Knowledge of the Company, threatened against or involving the Company or any of
its Subsidiaries. There are no unfair labor practice charges, grievances or
complaints pending or, to the Knowledge of the Company, threatened by or on
behalf of any employee or group of employees of the Company or any of its
Subsidiaries that individually or in the aggregate involve more than $500,000.
(d) Except as set forth in Section 4.14(d) of the Company
Disclosure Letter, there are no material complaints, charges or claims against
the Company and its Subsidiaries pending or, to the Knowledge of the Company,
threatened to be brought or filed with any Governmental Authority or in which an
employee or former employee of the Company or any of its Subsidiaries is a party
or a complainant based on, arising out of, in connection with, or otherwise
relating to the employment or termination of employment by the Company or a
Subsidiary of any individual, including any claim for
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workers' compensation or under the Occupational Safety and Health Act of 1970,
as amended. In the aggregate, the complaints and charges set forth in Section
4.14(d) of the Company Disclosure Letter would not have, singly or in the
aggregate, a Material Adverse Effect with respect to the Company even if each
were resolved adversely to the Company and its Subsidiaries.
(e) Hours worked by and payments made to employees of the Company
and its Subsidiaries have not been in material violation of the Federal Fair
Labor Standards Act or any other Applicable Law dealing with such matters.
(f) The Company and its Subsidiaries are in material compliance
with all Applicable Laws relating to the FCC-Equal Employment Opportunity
Commission standards and employment or termination of employment of labor
(including, but not limited to, leased workers and independent contractors),
including all such Applicable Laws and WARN relating to wages, hours, collective
bargaining, employment discrimination, civil rights, safety and health, workers'
compensation, pay equity and the collection and payment of withholding and/or
social security taxes and similar Taxes.
4.15 ABSENCE OF CHANGES OR EVENTS. Except as set forth in
Section 4.15 of the Company Disclosure Letter or disclosed in the Company SEC
Documents, since the date of the most recent audited financial statements
included in the Company SEC Documents, the Company and its Subsidiaries have
operated their respective businesses only in the ordinary and usual course and
in substantially the same manner as previously conducted and there has not been:
(i) any damage, destruction or loss with respect to the properties
or assets of the Company or its Subsidiaries whether covered by insurance
or not, which has had or would have, individually or in the aggregate, a
Material Adverse Effect with respect to the Company;
(ii) any change, occurrence or circumstance that had a Material
Adverse Effect with respect to the Company;
(iii) any change in the accounting principles, methods, practices
or procedures followed by the Company in connection with the business of
the Company or any change in the depreciation or amortization
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policies or rates theretofore adopted by the Company in connection with
the business of the Company and its Subsidiaries;
(iv) any declaration or payment of any dividends, or other
distributions in respect of the outstanding shares of Capital Stock of the
Company or any of its Subsidiaries (other than dividends declared or paid
by wholly-owned Subsidiaries);
(v) any split, combination or reclassification of the Company's
capital stock or any issuance of shares of capital stock of the Company or
any Subsidiary or any other change in the authorized capitalization of the
Company or any Subsidiary, except as contemplated by this Agreement;
(vi) any repurchase or redemption by the Company of shares of its
capital stock or any issuance by the Company of any other securities in
exchange or in substitution for shares of its capital stock except
pursuant to employee benefit plans, programs or arrangements in existence
on the date hereof, in the ordinary course of business consistent with
past practice; or
(vii) any grant or award of any options, warrants, conversion rights
or other rights to acquire any shares of capital stock of the Company or
any Subsidiary, except as contemplated by this Agreement or except
pursuant to employee benefit plans, programs or arrangements in existence
on the date hereof, in the ordinary course of business consistent with
past practice.
4.16 UNLAWFUL PAYMENTS AND CONTRIBUTIONS. Neither the Company
nor, to the Knowledge of the Company, any of its directors, officers or any of
its other employees or agents has (a) used any Company funds for any unlawful
contribution, endorsement, gift, entertainment or other unlawful expense
relating to political activity; (b) made any direct or indirect unlawful payment
to any government official or employee from Company funds; (c) violated or is in
violation of any provision of the Foreign Corrupt Practices Act of 1977, as
amended, in connection with the Company's and its Subsidiaries' business; or (d)
made any bribe, rebate, payoff, influence payment, kickback or other
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unlawful payment to any Person or entity with respect to matters pertaining to
the Company.
4.17 BROKERS AND INTERMEDIARIES. Neither the Company nor any of
its officers, directors or employees has employed any broker or finder or
incurred any liability for any brokerage fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement and the
Transaction Documents, except that the Company has retained Lazard Freres & Co.
LLC and Allen & Company Incorporated as its financial advisors, whose respective
fees and expenses shall be paid by the Company. The Company has delivered to
Acquiror a copy of the retention agreement related thereto.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF ACQUIROR
Acquiror represents and warrants to the Company that:
5.1 ORGANIZATION AND AUTHORITY OF ACQUIROR. (a) Each of Acquiror
and its Subsidiaries is a corporation or partnership duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization with all requisite power to enable it to own,
lease and operate its assets and properties and to conduct its business as
currently being conducted and is qualified and in good standing to do business
in each jurisdiction in which the nature of the business conducted by it or the
character or location of the properties owned or leased by it requires such
qualification, except to the extent the failure so to qualify would not have a
Material Adverse Effect with respect to Acquiror. Complete and correct copies
of the Certificate of Incorporation and Bylaws, each as amended to date, of
Acquiror have been delivered to the Company. Such Restated Certificate of
Incorporation and Bylaws are in full force and effect.
(b) Acquiror has all requisite corporate power and authority to
execute and deliver this Agreement and the Transaction Documents to which it is
a party and to perform its obligations hereunder and thereunder and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement and such Transaction Documents and the consummation
of the
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transactions contemplated hereby and thereby have been duly authorized by all
requisite corporate action on the part of Acquiror. This Agreement and each
Transaction Document to which Acquiror is a party has been duly executed and
delivered by Acquiror and constitutes the legal, valid and binding obligation of
Acquiror, enforceable against it in accordance with its terms, except (i) as
such enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally and (ii) as the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
5.2 CAPITALIZATION. (a) As of the date hereof, the authorized
capital stock of Acquiror consists of (i) 2,000,000,000 shares of U S WEST
Communications Group Common Stock, par value $.01 per share ("Communications
Stock"), of which 475,604,443 shares were issued and outstanding as of February
23, 1996, all of which are duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights created by statute,
Acquiror's Restated Certificate of Incorporation or any agreement to which
Acquiror is a party or by which Acquiror is bound, (ii) 2,000,000,000 shares of
Media Stock, of which 473,225,728 shares were issued and outstanding as of
February 23, 1996, all of which are duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights created by statute,
Acquiror's Restated Certificate of Incorporation or any agreement to which
Acquiror is a party or by which Acquiror is bound, and (iii) 200,000,000 shares
of Preferred Stock, par value $1.00 per share, of which (A) 10,000,000 shares
have been designated as Series A Junior Participating Cumulative Preferred
Stock, none of which are issued and outstanding and all of which are reserved
for issuance in connection with rights to purchase Communications Stock pursuant
to the Amended and Restated Rights Agreement, dated as of October 31, 1995 (the
"Rights Agreement"), by and between Acquiror and State Street Bank and Trust
Company, as rights agent, (B) 10,000,000 shares have been designated as Series B
Junior Participating Cumulative Preferred Stock, none of which are issued and
outstanding and all of which are reserved for issuance in connection with rights
to purchase Media Stock pursuant to the Rights Agreement, and (C) 50,000 shares
have been designated as Series C Cumulative Redeemable Preferred Stock and are
issued and outstanding, all of which are duly authorized, validly issued, fully
paid
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and nonassessable and not subject to preemptive rights created by statute,
Acquiror's Restated Certificate of Incorporation or Bylaws or any agreement to
which Acquiror is a party or by which Acquiror is bound. As of the date hereof,
the Number of Shares Issuable with Respect to the InterGroup Interest (as
defined in Section 2.6.19 of Article V of Acquiror's Restated Certificate of
Incorporation) is zero.
(b) Other than as described in the Acquiror SEC Documents or in
Section 5.2 of the Letter from Acquiror, dated the date hereof, addressed to the
Company (the "Acquiror Disclosure Letter"), no shares of the capital stock of
Acquiror are authorized, issued or outstanding, or reserved for any other
purpose, and there are no options, warrants or other rights (including
registration rights), agreements, arrangements or commitments of any character
to which Acquiror is a party relating to the issued or unissued capital stock of
Acquiror or any obligation of Acquiror to grant, issue or sell any shares of
capital stock of Acquiror by sale, lease, license or otherwise. Except as
disclosed in the Acquiror SEC Documents or in Section 5.2 of the Acquiror
Disclosure Letter, Acquiror has no outstanding bonds, debentures, notes or other
obligations the holders of which have the right to vote or which are convertible
into or exercisable for securities having the right to vote with the
stockholders of Acquiror on any matter. Except as set forth in Section 5.2 of
the Acquiror Disclosure Letter there are no voting trusts or other agreements or
understandings with respect to the voting of the capital stock of Acquiror.
5.3 NO CONFLICTS. Subject to obtaining the Acquiror Consents
(as defined in Section 5.5), the execution and delivery of this Agreement and
each of the Transaction Documents to which Acquiror is a party do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the terms hereof and thereof will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or to the increased,
additional, accelerated or guaranteed rights or entitlements of any Person
under, or result in the creation of any Encumbrances upon any of the properties
or assets of Acquiror under, any provision of (i) the Restated Certificate of
Incorporation and Bylaws of Acquiror, (ii) any note, bond, mortgage, indenture
or deed of trust, deed to secure debt or any license, lease,
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contract, commitment, permit, concession, franchise, agreement or other binding
arrangement to which Acquiror is a party or by which any of its properties or
assets may be bound or subject, (iii) any judgment, order, writ, injunction or
decree of any court, governmental body, administrative agency or arbitrator
applicable to Acquiror or its properties or assets, or (iv) any law, statute,
rule, regulation or judicial or administrative decision applicable to Acquiror;
except in the case of clauses (ii) and (iv), such conflicts, violations and
defaults, termination, cancellation and acceleration rights and entitlements and
Encumbrances that in the aggregate would not hinder or impair the consummation
of the transactions contemplated hereby or have a Material Adverse Effect with
respect to Acquiror.
5.4 STOCKHOLDER VOTE. At such time as all conditions to the
Merger have otherwise been satisfied, no vote of the holders of any class or
series of Acquiror's capital stock not theretofore obtained will be necessary or
required (under Applicable Law or otherwise) to approve this Agreement and the
transactions contemplated hereby.
5.5 CONSENTS. Except for (i) as set forth in Section 5.5 of the
Acquiror Disclosure Letter, (ii) compliance with and filings under the HSR Act,
(iii) the filing with the SEC by Acquiror of a registration statement on Form
S-4 registering under the Securities Act the shares of Media Stock and Series D
Preferred Stock to be issued in the Merger (the "Form S-4") and such reports
under the Exchange Act as may be required in connection with this Agreement and
the transactions contemplated hereby, (iv) the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware and appropriate
documents with the relevant authorities of other states in which the Company is
qualified to do business, (v) such filings and approvals as may be required by
any applicable state securities, "blue sky" or takeover laws, and (vi) such
filings in connection with Gains Taxes (the items in clauses (i) through (vi)
being collectively referred to herein as "Acquiror Consents"), no consents,
approvals, licenses, permits, orders or authorizations of, or registrations,
declarations, notices or filings with, any Governmental Authority or any Third
Party are required to be obtained or made by or with respect to Acquiror in
connection with the execution, delivery and performance of this Agreement or any
of the other agreements contemplated hereby to which it is a party or the
consummation of the transactions contemplated
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hereby and thereby or the taking by Acquiror of any other action contemplated
hereby or thereby, which, if not obtained or made, would have a Material Adverse
Effect with respect to Acquiror.
5.6 COMPLIANCE; NO DEFAULTS. (a) Except as set forth in
Section 5.6 of the Acquiror Disclosure Letter, neither Acquiror nor any of its
Subsidiaries is in violation of, is, to the knowledge of Acquiror, under
investigation with respect to any violation of, has been given notice or been
charged with violation of, or failed to comply with any Applicable Laws, except
for violations and failures to comply that would not have a Material Adverse
Effect with respect to Acquiror. Except as set forth in Section 5.6 of the
Acquiror Disclosure Letter, Acquiror and its Subsidiaries have all Permits which
are material to the operation of the businesses of Acquiror and its
Subsidiaries.
(b) Neither Acquiror nor any of its Subsidiaries is in default or
violation (and no event has occurred which, with notice or the lapse of time or
both, would constitute a default or violation) of any term, condition or
provision of (i) its Restated Certificate of Incorporation or Bylaws or other
comparable organizational document or (ii) any note, bond, mortgage, indenture,
license, agreement or other instrument or obligation to which Acquiror or any of
its Subsidiaries is now a party or by which Acquiror or any of its Subsidiaries
or any of their respective properties or assets may be bound, except in the case
of clause (ii), for defaults or violations which in the aggregate would not have
a Material Adverse Effect with respect to Acquiror.
5.7 ACQUIROR SEC DOCUMENTS; UNDISCLOSED LIABILITIES. (a)
Acquiror has filed all required reports, schedules, registration statements and
definitive proxy statements with the SEC since January 1, 1993 (as such
documents have since the time of their filing been amended, the "Acquiror SEC
Documents"). As of their respective dates, the Acquiror SEC Documents
(including any financial statements filed, to be filed or required to have been
filed as a part thereof) complied in all material respects with the requirements
of the Securities Act or the Exchange Act, as applicable, and the rules and
regulations of the SEC thereunder applicable to such Acquiror SEC Documents, and
none of the Acquiror SEC Documents contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the
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statements therein, in light of the circumstances under which they were made,
not misleading. The financial statements of Acquiror included in the Acquiror
SEC Documents comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the SEC
with respect thereto, have been prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto) and fairly present (subject, in the case of the unaudited
financial statements, to normal, recurring audit adjustments, which were not
individually or in the aggregate material) the consolidated financial position
of Acquiror and its consolidated Subsidiaries as at the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended.
(b) Except as disclosed in the Acquiror SEC Documents or in
Section 5.7 of the Acquiror Disclosure Letter, as of the date hereof, Acquiror
and its Subsidiaries do not have any material indebtedness, obligations or
liabilities of any kind (whether accrued, absolute, contingent or otherwise, and
whether due or to become due or asserted or unasserted) required by GAAP to be
reflected on a consolidated balance sheet of the Acquiror and its consolidated
Subsidiaries or in the notes, exhibits or schedules thereto.
5.8 LITIGATION. Except as set forth in the Acquiror SEC
Documents or in Section 5.8 of the Acquiror Disclosure Letter, there are no
Legal Proceedings against or affecting Acquiror or any of its Subsidiaries or
their respective properties or assets pending or, to the knowledge of Acquiror,
threatened, that individually or in the aggregate could (i) have a Material
Adverse Effect with respect to Acquiror or (ii) prevent, hinder or materially
delay the consummation of the transactions contemplated by this Agreement or the
Transaction Documents. Except as set forth in Section 5.8 of the Acquiror
Disclosure Letter, neither Acquiror nor any of its Subsidiaries is a party or
subject to or in default under any judgment, order, injunction or decree of any
Governmental Authority applicable to it or to its respective properties or
assets, which judgment, order, injunction, decree or default thereunder
constitutes a Material Adverse Effect with respect to Acquiror.
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5.9 ABSENCE OF CHANGES OR EVENTS. Except as disclosed in the
Acquiror SEC Documents, since the date of the most recent audited financial
statements included in the Acquiror SEC Documents, Acquiror and its Subsidiaries
have conducted their business operations only in the ordinary course and there
has not occurred (i) any change, occurrence or circumstance that had any
Material Adverse Effect with respect to Acquiror or (ii) other events or
conditions of any character that, individually or in the aggregate, have or
would reasonably be expected to have, a Material Adverse Effect with respect to
Acquiror or on the ability of Acquiror to perform its material obligations under
this Agreement and the Transaction Documents to which it is a party.
5.10 BROKERS AND INTERMEDIARIES. Neither Acquiror nor any of its
officers, directors or employees has employed any broker or finder or incurred
any liability for any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated by this Agreement and the Transaction
Documents, except that Acquiror has retained Lehman Brothers Inc., as its
financial advisor, whose fees and expenses shall be paid by Acquiror.
5.11 OWNERSHIP OF COMPANY CAPITAL STOCK. Neither Acquiror nor any
of its Subsidiaries owns, directly or indirectly, any shares of Company Capital
Stock.
ARTICLE VI
COVENANTS RELATING TO CONDUCT OF BUSINESS
6.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as otherwise
expressly permitted by the terms of this Agreement, from the date hereof to the
Effective Time, the Company shall, and shall cause its Subsidiaries to, carry on
their respective businesses in the ordinary course in substantially the same
manner as presently conducted (including with respect to advertising, promotions
and capital expenditures) and in compliance in all material respects with
Applicable Laws, use their reasonable best efforts consistent with past
practices to keep available the services of the present employees of the Company
and its Subsidiaries and to preserve their relationships with customers,
suppliers and others with whom the Company and its Subsidiaries deal to the end
that their goodwill and ongoing businesses shall not be materially impaired in
any
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material respect at the Closing Date. The Company shall not, and shall cause
its Subsidiaries not to, take any action that would, or that is reasonably
likely to, result in any of the representations and warranties of the Company
set forth in Article IV being untrue in any material respect as of the date made
or in any of the conditions to the consummation of the Merger set forth herein
not being satisfied. In addition, and without limiting the generality of the
foregoing, except as otherwise expressly permitted by the terms of this
Agreement or as set forth in Section 6.1 of the Company Disclosure Letter,
during the period from the date hereof to the Effective Time, the Company shall
not (and shall cause its Subsidiaries not to), without the written consent of
Acquiror, which decision regarding consents shall be made promptly (in light of
its circumstances) after receipt of notice seeking such consent:
(i) except for the Charter Amendment, amend its Restated
Certificate of Incorporation, Bylaws or other comparable organizational
documents;
(ii) subject to Sections 7.7 and 7.14(b), redeem or otherwise
acquire any shares of its capital stock, or issue any capital stock or any
option, warrant or right relating thereto or any securities convertible
into or exchangeable for any shares of its capital stock, or split,
combine or reclassify any of its capital stock or issue any securities in
exchange or in substitution for shares of its capital stock;
(iii) subject to Section 7.14(b), (A) grant or agree to grant to
any employee any increase in wages or bonus, severance, profit sharing,
retirement, deferred compensation, insurance or other compensation or
benefits, or establish any new compensation or benefit plans or
arrangements, or amend or agree to amend any existing Benefit Plans or
Equity Appreciation Rights Plans, except as may be required under existing
agreements or in the ordinary course of business consistent with past
practices or (B) enter into any new RSPA or amend the terms of any
existing RSPA or accelerate the vesting of any shares of Class B Common
Stock issued thereunder;
(iv) merge, amalgamate or consolidate with any other entity in any
transaction in which the Company is not the surviving corporation (other
than mergers between Subsidiaries of the Company), sell all or
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substantially all of its business or assets, or acquire all or
substantially all of the business or assets of any other Person;
(v) enter into or amend any employment, consulting, severance or
similar agreement with any individual, except with respect to severance
gifts or payments of a nominal nature to persons holding
non-officer/executive level positions in the ordinary course of business
consistent with past practice;
(vi) subject to Section 7.7, declare, set aside or make any
dividends, payments or distributions in cash, securities or property to
the stockholders of the Company, whether or not upon or in respect of any
share of Company Capital Stock;
(vii) incur or assume any Indebtedness other than as specifically
set forth in Section 6.1(vii) of the Company Disclosure Letter;
(viii) voluntarily grant any material Encumbrance on any of its
material assets, other than Encumbrances that are incurred in the ordinary
course of business;
(ix) make any change in any method of accounting or accounting
practice or policy, except as required by Applicable Laws or by GAAP;
(x) make or incur any capital expenditures that are not set forth
in Section 6.1(x) of the Company Disclosure Letter or that, individually,
are in excess of $25 million or, in the aggregate, in excess of $50
million;
(xi) subject to Section 7.7, sell, lease, swap or otherwise dispose
of any assets, other than (A) sales, leases, swaps or other dispositions
of such assets not having a fair market value in excess of $15 million
individually or $30 million in the aggregate (so long as the Company
provides notice to Acquiror of any sale, lease, swap or other disposition
of any asset having a fair market value of greater than $5 million) or (B)
swaps of Systems or assets of Systems in order to facilitate the
clustering of Systems or dispose of Systems located in the Acquiror
Region; PROVIDED, HOWEVER, that (1) such swaps shall not in the
aggregate involve more than 500,000 Subscribers of the Company or
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its Subsidiaries, (2) any cable television systems acquired by the Company
or any of its Subsidiaries in any such swap shall not be located in the
Acquiror Region, (3) any cable television systems acquired by the Company
in any such swap shall not be in a franchise area where there is a
substantial overbuild with any other CATV system owned by the Company,
Acquiror or any of their respective Affiliates, (4) the aggregate amount
of cash paid by the Company or any of its Subsidiaries in any such swap
shall not exceed $50 million in the aggregate, (5) any such swap shall
require the approval of Acquiror, which approval shall not be unreasonably
withheld and Acquiror shall be reasonably satisfied that the Company has
received substantially equivalent value including cash or other assets and
(6) to the extent that the Company or any Subsidiary must apply for the
consent of the Governmental Authority as a condition to the transfer of
control or assignment of any Franchise associated with any such swap, such
application shall include an application to the Governmental Authority,
and relevant information relating to the proposed transaction, requesting
contemporaneous approval for the anticipated acquisition of the Company or
its Subsidiary by Acquiror as contemplated herein and the transfer of
control of said Franchise to the Surviving Corporation in accordance with
the terms hereof; and PROVIDED, FURTHER, that any consent required
from a Governmental Authority as a condition to consummating such swap
shall be deemed a Required Franchise Consent;
(xii) acquire or agree to acquire by merging or consolidating with,
or by purchasing all or a substantial portion of the assets of or equity
in, or by any other manner, any business of any Person or acquire or agree
to acquire any assets (other than supplies, raw materials and inventory in
the ordinary course, capital expenditures permitted by clause (x) above
and asset swaps permitted by clause (xi) above);
(xiii) abandon, avoid, dispose, surrender, fail to file for timely
renewal, terminate or amend in any materially adverse manner the terms of
any material Franchises, any FCC license that would have a material
adverse effect on the operation of a System or the Social Contract Order,
except as amended by virtue of the proposed Social Contract Amendment, or,
with
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respect to any Material Franchise, fail to file for renewal pursuant to
Section 626(a) of the Cable Act;
(xiv) delete any programming service on the Systems or make material
change in the programming services offered on the Systems other than in
the ordinary course of business or as required by the Cable Act, the
Social Contract Order or any amendments thereto;
(xv) except as otherwise permitted by clauses (xi) and (xii),
modify, amend, terminate, renew or fail to use reasonable efforts to renew
any material contract or agreement necessary to continue the Company's
business in the ordinary course or waive, release or assign any material
rights or claims, other than in the ordinary course of business;
(xvi) offer free or reduced-price service as an inducement to any
Person, except in the ordinary course of business consistent with past
practice;
(xvii) except as permitted by Applicable Law, including the Social
Contract Order and any amendments thereto, and (A) as disclosed to
Acquiror in writing at least 30 days prior to any rate change, implement
any rate change, retiering or repackaging of CATV programming offered by
any of its Subsidiaries, (B) and as disclosed in writing to Acquiror at
least 30 days prior to any cost-of-service rate change make any
cost-of-service election under the rules and regulations adopted under the
Cable Act, (C) determine a method of refund pursuant to 47 C.F.R. Section
76.942(d) or 76.961(c) or (D) amend any Franchise or agree to make any
payments or commitments, including commitments to make future capital
improvements or provide future services, in connection with any renewal of
any Franchise other than that which the Company would make in the ordinary
course of business;
(xviii) enter into any agreement, understanding or commitment that
restrains, limits or impedes the Company's or Acquiror's ability to
compete with or conduct any business or line of business;
(xix) invest or enter into any agreement, understanding or
commitment, whether written or oral, by or on behalf of the Company or its
Subsidiaries, to
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invest or provide additional capital in respect of assets, businesses or
entities; PROVIDED, HOWEVER, that the restrictions contained in this
clause shall not apply to existing commitments as set forth in Section
6.1(xix) of the Company Disclosure Letter or to any investments in excess
of $10 million individually or $20 million in the aggregate;
(xx) except as otherwise provided in clause (xix) above or Section
7.14, enter into any material contract or agreement with, or make any loan
or advance to, any Affiliate (other than a wholly owned Subsidiary) of the
Company or any stockholder or Affiliate thereof;
(xxi) enter into, or amend the terms of, any agreement relating to
interest rate swaps, caps or other hedging or derivative instruments
relating to Indebtedness of the Company and its Subsidiaries, except as
required under agreements relating to existing Indebtedness and
Indebtedness permitted by clause (vii) above;
(xxii) conduct its business in a manner or take, or cause to be
taken, any other action (including, without limitation, effecting or
agreeing to effect or announcing an intention or proposal to effect, any
acquisition, business combination, merger, consolidation, restructuring or
similar transaction) that would or might reasonably be expected to prevent
Acquiror or the Company from consummating the transactions contemplated
hereby in accordance with the terms of this Agreement (regardless of
whether such action would otherwise be permitted or not prohibited
hereunder), including, without limitation, any action which may limit the
ability of Acquiror or the Company to consummate the transactions
contemplated hereby as a result of antitrust or other regulatory concerns;
(xxiii) purchase, sell or trade (or announce any intention or
proposal to purchase, sell or trade) any shares of Media Stock, or take
any other action a principal purpose of which is to affect the calculation
of the Determination Price; or
(xxiv) agree, whether in writing or otherwise, to do any of the
foregoing.
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Prior to the date hereof, Acquiror has delivered to the Company a list (which
the Acquiror may update from time to time) designating certain individuals of
the Acquiror to whom the Company may direct requests for consents under this
Section 6.1.
6.2 CONDUCT OF BUSINESS OF ACQUIROR. Except as set forth in
Section 6.2 of the Acquiror Disclosure Letter, from the date hereof to the
Effective Time, Acquiror shall not (and shall cause its Subsidiaries not to):
(i) issue shares of Media Stock or any option, warrant or right
relating thereto or any securities convertible into or exchangeable for
any shares of Media Stock at less than fair market value as determined by
the Board of Directors of Acquiror (other than pursuant to the terms of
existing options or benefit plans), or split, combine, redeem, convert or
reclassify the Media Stock or issue any securities in exchange or in
substitution for shares of Media Stock;
(ii) amend its Certificate of Incorporation or Bylaws (other than
the filing of a Certificate of Designations for the issuance of any series
of Preferred Stock of Acquiror) in any manner adverse to the holders of
Media Stock;
(iii) declare, set aside or make any dividends or distributions in
cash, securities or property to holders of Media Stock;
(iv) conduct its business in a manner or take, or cause to be
taken, any other action (including, without limitation, effecting or
agreeing to effect or announcing an intention or proposal to effect, any
acquisition, business combination, merger, consolidation, restructuring or
similar transaction) that would or might reasonably be expected to prevent
Acquiror or the Company from consummating the transactions contemplated
hereby in accordance with the terms of this Agreement (regardless of
whether such action would otherwise be permitted or not prohibited
hereunder), including, without limitation, any action which may limit the
ability of Acquiror or the Company to consummate the transactions
contemplated hereby as a result of antitrust or other regulatory concerns;
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(v) take any action that would, or that is reasonably likely to,
result in any of the representations and warranties of Acquiror set forth
in Article V being untrue in any material respect as of the date made or
any of the conditions to the Merger set forth herein not being satisfied;
(vi) purchase, sell (other than through primary issuances) or trade
(or announce any intention or proposal to purchase, sell or trade) any
shares of Media Stock, or take any other action a principal purpose of
which is to affect the calculation of the Determination Price, other then
pursuant to benefit plans in the ordinary course of business;
(vii) sell all or substantially all of the properties and assets of
the Media Group (within the meaning of Section 2.4.1(B) of Article V of
the Restated Certificate of Incorporation of Acquiror); or
(viii) acquire, or agree to acquire, any shares of Company Capital
Stock so long as, after giving effect to the purchase of the Put Shares
pursuant to Section 9.4, Acquiror would beneficially own less than 10% of
the Company Capital Stock.
6.3 ACCESS TO INFORMATION. (a) From the date hereof until the
Closing Date, the Company shall permit Acquiror and its representatives to have
full access to the management, facilities, suppliers, accounts, books, records
(including, without limitation, budgets, forecasts and personnel files and
records), contracts and other materials of the Company and its Subsidiaries
reasonably requested by Acquiror or such representatives and to make available
to Acquiror and its representatives the directors, officers, employees and
independent accountants of the Company for interviews for the purpose, among
other things, of verifying the information furnished to Acquiror, developing
transition plans and integrating the operations of the Company and its
Subsidiaries with the operations of Acquiror and its Subsidiaries and
Affiliates. Such access shall be subject to existing confidentiality agreements
and shall be conducted by Acquiror and its representatives during normal
business hours, upon reasonable advance notice and in such a manner as not to
interfere unreasonably with the business or operations of the Company and its
Subsidiaries.
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(b) From the date hereof until the Closing Date, Acquiror shall
permit the Company and its representatives to have full access to the
management, facilities, suppliers, accounts, books, records (including, without
limitation, budgets and forecasts), contracts and other materials of the Media
Group reasonably requested by the Company or such representatives and to make
available to the Company and its representatives the directors, officers,
employees and independent accountants of the Media Group for interviews for the
purpose, among other things, of verifying the information furnished to the
Company. Such access shall be subject to existing confidentiality agreements
and shall be conducted by the Company and its representatives during normal
business hours, upon reasonable advance notice and in such a manner as not to
interfere unreasonably with the business or operations of the Media Group.
(c) Each of the Company and Acquiror agrees that it will not, and
will cause each of their respective Affiliates and representatives not to, use
any information obtained pursuant to this Section 6.3 for any purpose unrelated
to the consummation of the transactions contemplated by this Agreement. The
Confidentiality Agreement, dated as of September 26, 1994, as amended on January
11, 1996, between Acquiror and the Company and the Confidentiality Agreement,
dated as of April 19, 1995, between Acquiror and the Company (the
"Confidentiality Agreements") shall apply with respect to information furnished
thereunder or hereunder and any other activities contemplated thereby.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1 PREPARATION OF FORM S-4 AND THE PROXY STATEMENT;
STOCKHOLDERS' MEETING; CHARTER AMENDMENT. (a)Promptly following the date of
this Agreement, the Company shall prepare and file with the SEC the Proxy
Statement and Acquiror shall prepare and file with the SEC the Form S-4, in
which the Proxy Statement will be included as a prospectus. Each of the Company
and Acquiror shall use its reasonable best efforts to have the Form S-4 declared
effective under the Securities Act as promptly as practicable after such filing.
The Company shall use its reasonable best efforts to cause the Proxy Statement
to be mailed to the Company's stockholders, as promptly as
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practicable after the Form S-4 is declared effective under the Securities Act.
Acquiror shall also take any action (other than qualifying to do business in any
jurisdiction in which it is not now so qualified or consenting to service of
process in any jurisdiction in which it has not previously so consented in any
action other than one arising out of the offering of the Media Stock and the
Series D Preferred Stock in such jurisdiction) required to be taken to qualify
the Media Stock and Series D Preferred Stock to be issued in the Merger under
any applicable state securities or "blue sky" laws prior to the Effective Time,
and the Company shall furnish all information concerning the Company and the
holders of the Company Capital Stock as may be reasonably requested in
connection with any such action.
(b) None of the information supplied or to be supplied by the
Company, on the one hand, or Acquiror, on the other hand, for inclusion or
incorporation by reference in (i) the Form S-4 will, at the time the Form S-4 is
filed with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, or (ii) the Proxy
Statement will, at the date it is first mailed to the stockholders of the
Company or at the time of each Stockholders' Meeting (as defined in Section
7.1(d)), contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement and the Form S-4 will comply as to form in all
material respects with the requirements of the Exchange Act or the Securities
Act, as the case may be. Notwithstanding the foregoing, (i) no representation
is made by the Company with respect to statements made or incorporated by
reference therein based on information supplied in writing by Acquiror
specifically for inclusion or incorporation by reference in the Proxy Statement
and (ii) no representation is made by Acquiror with respect to statements made
or incorporated by reference therein based on information supplied in writing by
the Company specifically for inclusion or incorporation by reference in the Form
S-4.
(c) The Company and Acquiror shall cooperate with each other and
provide to each other all information necessary in order to prepare the Proxy
Statement and the
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Form S-4. The Company and Acquiror shall notify each other promptly of the
receipt of any comments from the SEC or its staff and of any requests by the SEC
or its staff for amendments or supplements to the Form S-4 or the Proxy
Statement or for additional information and shall supply the other parties with
copies of all correspondence between the Company or any of its representatives,
or Acquiror or any of its representatives, as the case may be, on the one hand,
and the SEC or its staff, on the other hand, with respect thereto. The Company
and Acquiror shall use their respective reasonable best efforts to respond to
any comments of the SEC with respect to the Form S-4 and the Proxy Statement as
promptly as practicable. If at any time prior to the Effective Time there shall
occur (i) any event with respect to the Company or any of its Subsidiaries, or
with respect to other information supplied by the Company for inclusion in the
Proxy Statement or (ii) any event with respect to Acquiror, or with respect to
information supplied by Acquiror for inclusion in the Form S-4, in either case
which event is required to be described in an amendment of, or a supplement to,
the Proxy Statement or Form S-4, such event shall be so described, and such
amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the stockholders of the Company. Acquiror shall notify the
Company promptly upon (i) the declaration by the SEC of the effectiveness of the
Form S-4, (ii) the issuance or threatened issuance of any stop order or other
order preventing or suspending the use of any prospectus relating to the Form
S-4, (iii) any suspension or threatened suspension of the use of any prospectus
relating to the Form S-4 in any state, (iv) any proceedings commenced or
threatened to be commenced by the SEC or any state securities commission that
might result in the issuance of a stop order or other order or suspension of use
or (v) any request by the SEC to supplement or amend any prospectus relating to
the Form S-4 after the effectiveness thereof. Acquiror and, to the extent
applicable, the Company, shall use its reasonable best efforts to prevent or
promptly remove any stop order or other order preventing or suspending the use
of any prospectus relating to the Form S-4 and to comply with any such request
by the SEC or any state securities commission to amend or supplement the Form
S-4 or the prospectus relating thereto.
(d) The Company shall, as promptly as practicable, duly call, give
notice of, convene and hold a meeting of its stockholders (the "Initial
Stockholders' Meeting") for the purpose of obtaining the Stockholder Approvals.
The
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Company shall use its reasonable best efforts to hold such meeting as soon as
practicable. In the event the Charter Amendment is not approved at the Initial
Stockholders' Meeting, the Company shall, as promptly as practicable following
the date of the Initial Stockholders' Meeting, duly call, give notice of,
convene and hold another meeting of its stockholders (the "Additional
Stockholders' Meeting" and, together with the Initial Stockholders' Meeting,
collectively, the "Stockholders' Meetings" and individually, a "Stockholders'
Meeting") for the purpose of obtaining the Stockholder Approvals. The Company
shall, as promptly as practicable after the date of the Initial Stockholders'
Meeting, hold the Additional Stockholders' Meeting. Subject to the fiduciary
duties of the Board of Directors of the Company under Applicable Laws and to
Section 9.1(g), the Company shall, through the Board of Directors, recommend to
its stockholders adoption of this Agreement, the Charter Amendment and the other
transactions contemplated hereby and shall use its best efforts to solicit from
stockholders proxies in favor of adoption of this Agreement and the Charter
Amendment and to take all other action necessary to secure the Stockholder
Approvals at the Initial Stockholders' Meeting or the Additional Stockholders'
Meeting, as the case may be. Without limiting the generality of the foregoing,
the Company agrees that its obligations pursuant to the first and third
sentences of this Section 7.1(d) shall not be altered by the commencement,
public proposal or communication to the Company of any Acquisition Proposal (as
defined in Section 7.10).
(e) Subject to receipt of the Stockholder Approvals, the Company
shall take all actions necessary to cause the Charter Amendment to be executed,
acknowledged and filed and to become effective no later than immediately prior
to the Effective Time in accordance with the DGCL as soon as practicable after
the approval thereof at a Stockholders' Meeting.
(f) The Company shall make stock transfer records relating to the
Company available to Acquiror to the extent reasonably necessary to effectuate
the intent of this Agreement.
7.2 LETTER OF THE COMPANY'S ACCOUNTANTS. The Company shall use
its reasonable best efforts to cause to be delivered to Acquiror letters of (i)
Deloitte & Touche LLP, the Company's independent public accountants and (ii) any
other independent public accountants whose reports are
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included or incorporated by reference in the Form S-4, each dated a date within
two business days before the date on which the Form S-4 shall become effective
and addressed to Acquiror, in form and substance reasonably satisfactory to
Acquiror and customary in scope and substance for letters delivered by
independent public accountants in connection with registration statements
similar to the Form S-4.
7.3 LETTER OF ACQUIROR'S ACCOUNTANTS. Acquiror shall use its
reasonable best efforts to cause to be delivered to the Company a letter of
Coopers & Lybrand L.L.P., Acquiror's independent public accountants, dated a
date within two business days before the date on which the Form S-4 shall become
effective and addressed to the Company, in form and substance reasonably
satisfactory to the Company and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Form S-4.
7.4 REASONABLE BEST EFFORTS. Subject to the terms and
conditions of this Agreement, including, without limitation, Section 7.6, each
of the parties hereto agrees to use its reasonable best efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under Applicable Laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
(including the execution of the Transaction Documents to which they or any of
their Affiliates are a party), subject to the Stockholder Approval, including
(a) the obtaining of all necessary actions or nonactions, waivers, consents and
approvals from Governmental Authorities and the making of it all necessary
registrations and filings (including filings with Governmental Authorities, if
any), and the taking of all reasonable steps as may be necessary to obtain an
approval or waiver from, or to avoid an action or proceeding by, any
Governmental Authorities, (b) the obtaining of all necessary consents, approvals
or waivers from Third Parties and (c) the execution and delivery of any
additional instruments necessary to consummate the transactions contemplated by
this Agreement and the Transaction Documents. In furtherance of the foregoing,
Acquiror and the Company each shall furnish to the other such necessary
information and reasonable assistance as the other may request in connection
with obtaining any consents required to be obtained by it hereunder.
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7.5 FRANCHISE AND LICENSE CONSENTS. (a) Without limiting the
generality of Section 7.4, the Company and Acquiror shall each use their
respective reasonable best efforts to obtain all Franchise Consents and License
Consents, including taking the actions specified herein. In order to secure the
Franchise Consents and License Consents from Governmental Authorities and the
FCC, the Company shall proceed immediately in good faith and using its
reasonable best efforts, to prepare, file and prosecute each Franchise Consent
and License Consent from the relevant Governmental Authority and the FCC, with
the full right of participation by Acquiror including, without limitation, the
right of prior review and approval of correspondence or forms of transfer
resolutions, applications, ordinances or agreements to be submitted to
Governmental Authorities and the FCC (which approval shall not be unreasonably
withheld or delayed) and to be represented at all meetings or hearings as may be
scheduled to consider such submissions. The Company shall send notice of the
transactions contemplated in this Agreement to all Governmental Authorities.
The Company shall submit to each Governmental Authority whose consent is
required a form of ordinance or resolution, as appropriate, relating to the
transfer of the Franchise, which ordinance or resolution shall be in a form
reasonably acceptable to Acquiror and the Company. The Company shall consult
with Acquiror and promptly and regularly notify Acquiror with regard to all
material developments of the Franchise Consent and License Consent process, and
shall give Acquiror reasonable prior notice of all meetings scheduled with the
Governmental Authorities and the FCC. Acquiror shall use its reasonable best
efforts to promptly assist the Company and shall take such prompt and
affirmative actions as may reasonably be necessary in obtaining such approvals
and shall cooperate with the Company in the preparation, filing and prosecution
of such applications as may reasonably be necessary, including the preparation,
filing and prosecution of any joint applications required to be filed with the
Governmental Authorities or the FCC, and agrees to use its reasonable best
efforts to furnish all information as is reasonably or as is customarily
required by the approving entity, and, if required by a Governmental Authority
or the FCC upon reasonable notice, Acquiror shall have the obligation to be
represented at such meetings or hearings as may be scheduled to consider such
applications. Any administrative filing fees imposed or expenses for which
reimbursement is required by the Governmental Authority in connection with
obtaining the Franchise Consents or the License Consents shall be
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borne by the Company and each of the parties shall bear its own legal fees or
other costs of professional advisors incurred in the filing and prosection of
such applications. If, in connection with obtaining Franchise Consents or the
License Consents from a Governmental Authority or the FCC, a Governmental
Authority or the FCC impose new, material Franchise or license conditions as a
condition to granting its consent, Acquiror and the Company shall negotiate
jointly with such Governmental Authority or the FCC with respect to such
conditions, with such conditions to be accepted only if consented to by Acquiror
and the Company, which consent shall not be unreasonably withheld. Acquiror
agrees that prior to the Closing Date, it will not, without the prior written
consent of the Company, seek amendments, modifications or other changes to
Franchises and shall not institute any discussions with Governmental Authorities
or the FCC without the prior written consent of the Company and without offering
a representative of the Company an opportunity to participate or observe such
discussions. To the extent such request would not, in the reasonable judgment
of the Company, delay or impair the ability to obtain any Franchise Consents,
any application to any Governmental Authority for any Franchise Consent
necessary for the transfer of control of any Franchise shall request that the
relevant Governmental Authority also agree that no further Franchise Consent
shall be required for the subsequent transfer of control of, or assignment of,
such Franchise to a specified Person identified in such application who is an
Affiliate of Acquiror to which Acquiror intends to transfer or assign the
Franchise immediately prior to Closing. In addition, the Company will use
reasonable best efforts to obtain necessary transfers of all private mobile
radio service licenses.
(b) To the extent that any Franchise Consents listed in Section
4.6 of the Company Disclosure Letter have not been obtained by Final Order prior
to Closing (such Franchises hereinafter referred to as the "Non-Required
Franchises"), Acquiror and Company shall enter into negotiations to determine
the disposition of the Non-Required Franchises after Closing. In the event that
the parties agree to transfer any part of a System which includes, in part,
areas covered by a Non-Required Franchise (hereinafter the "Non-Required
Systems"), the parties shall continue to be subject to Section 7.5(a) until such
time as all Franchise Consents are obtained and the Non-Required Franchises are
transferred to Acquiror.
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7.6 ANTITRUST NOTIFICATION. (a) The Company and Acquiror shall
as promptly as practicable, but in no event later than 30 Business Days
following the execution and delivery of this Agreement, file with the FTC and
the DOJ the notification and report form required for the transactions
contemplated hereby and any supplemental information requested in connection
therewith pursuant to the HSR Act. Each of Acquiror and the Company shall
furnish to each other's counsel such necessary information and reasonable
assistance as the other may request in connection with its preparation of any
filing or submission that is necessary under the HSR Act. The Company and
Acquiror acknowledge that more than one filing may be required under the HSR Act
in order to consummate the transactions contemplated by this Agreement, and
agree to cooperate and furnish to each other's counsel such necessary
information and reasonable assistance as the other may request in connection
with its preparation of any subsequent filing.
(b) The Company and Acquiror shall keep each other apprised of the
status of any communications with, and any inquiries or requests for additional
information from, the FTC and the DOJ and shall comply promptly with any such
inquiry or request.
(c) Each of the Company and Acquiror shall use its reasonable best
efforts to obtain any clearance required under the HSR Act for the consummation
of the Merger, which efforts, for purposes of this Agreement shall not, except
as provided in Section 7.6(d), require Acquiror in order to obtain any consent
or clearance from the DOJ or any other Governmental Authority to (i) hold
separate, sell or otherwise dispose of any assets, including assets of the
Company, the effect of any of which, in the reasonable judgment of Acquiror,
would be to materially impair the value of the Merger to Acquiror or (ii)
contest any suit brought or threatened by the FTC or DOJ or attempt to lift or
rescind any injunction or restraining order obtained by the FTC or DOJ adversely
affecting the ability of the parties hereto to consummate the transactions
contemplated hereby.
(d) For purposes of Section 7.6(c), "reasonable best efforts"
shall include entry into a consent decree in any action brought by the DOJ or
into a consent order with the FTC where such decree or order requires the
divestiture of the Designated Assets and of the assets set forth in Section
7.6(d) of the Company Disclosure Letter, if and only
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if, such decree or order does not require, either absolutely or conditionally,
the divestiture of any other assets or of the stock of any other corporation, or
(except for reasonable and customary compliance and other requirements ancillary
to the required divestiture) impose any additional requirement or limitation on
Acquiror, on its ability to operate its current and contemplated businesses, or
on its ability to acquire assets or stock in any corporation; and only if such
decree or order provides that Acquiror shall have a period of at least 12 months
to effect such divestiture itself and an additional 12 months to divest pursuant
to a reasonable and customary trusteeship provision.
7.7 CERTAIN ACTIONS. (a) Except as otherwise specifically
limited by this Agreement, each of the Company and Acquiror agrees to use its
reasonable best efforts and to take, or cause to be taken, all actions and to
do, or cause to be done, all things necessary, proper or advisable to ensure
that there shall be no regulatory impediments, pursuant to the Communications
Act, the rules and regulations of the FCC, or otherwise, to the closing of the
transactions contemplated hereby and the Company agrees not to acquire any
assets or engage in any activities prior to the Closing of a type which Acquiror
would be precluded from acquiring or engaging in pursuant to the Communications
Act, the rules and regulations of the FCC or otherwise.
(b) On or prior to the Closing Date, the Company shall sell,
distribute to stockholders or otherwise dispose of the properties of the Company
and its Subsidiaries listed in Section 7.7 of the Company Disclosure Letter (the
"Designated Assets") in a manner acceptable to Acquiror, in its sole discretion.
(c) Not later than one hundred and twenty (120) days following the
date hereof, the Company and Acquiror shall agree to the fair market value of
the Designated Assets (the "Designated Asset Fair Market Value"). In the event
of a sale or other disposition of the Designated Assets for an amount less than
the Designated Asset Fair Market Value, the Share Price shall be reduced by the
quotient of (i) the excess of (x) the Designated Asset Fair Market Value over
(y) the amount of consideration received by the Company in respect of such sale
or disposition divided by (ii) the number of shares of Company Common Stock
outstanding immediately prior to the Effective Time on a fully diluted basis,
including giving effect to the
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conversion of all outstanding shares of Company Preferred Stock. In the event
of a distribution of the Designated Assets to the stockholders of the Company,
the Share Price shall be reduced by an amount equal to the quotient of (i) the
Designated Asset Fair Market Value divided by (ii) the number of shares of
Company Common Stock outstanding immediately prior to the Effective Time on a
fully diluted basis, including giving effect to the conversion of all
outstanding shares of Company Preferred Stock. The amount of any adjustment to
the Share Price pursuant to this Section 7.7(c) shall be referred to as the "Per
Share Adjustment Amount" and the Cash Consideration Amount shall be reduced by
the Per Share Adjustment Amount multiplied by the number of shares of Company
Common Stock outstanding immediately prior to the Effective Time on a fully
diluted basis, including giving effect to the conversion of all outstanding
shares of Company Preferred Stock.
7.8 SUPPLEMENTAL DISCLOSURE. The Company shall confer on a
regular and frequent basis with Acquiror, report on operational matters and
promptly notify Acquiror of, and furnish Acquiror with, any information it may
reasonably request with respect to, any event or condition or the existence of
any fact that would cause any of the conditions to Acquiror's obligation to
consummate the Merger not to be completed, and Acquiror shall promptly notify
the Company of, and furnish the Company any information it may reasonably
request with respect to, any event or condition or the existence of any fact
that would cause any of the conditions to the Company's obligation to consummate
the Merger not to be completed.
7.9 ANNOUNCEMENTS. Prior to the Closing, neither the Company
nor Acquiror will issue any press release or otherwise make any public statement
with respect to this Agreement and the transactions contemplated hereby without
the prior consent of the other (which consent shall not be unreasonably
withheld), except as may be required by Applicable Law or stock exchange
regulations (including, without limitation, pursuant to the United States
Federal securities laws in connection with any registration statement or report
filed thereunder), in which event the party required to make the release or
announcement shall, if possible, allow the other party reasonable time to
comment on such release or announcement in advance of such issuance.
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7.10 NO SOLICITATION. (a) From the date hereof until the
Effective Time, the Company shall not, nor shall it permit any of its
Subsidiaries to, nor shall it authorize or permit any of its officers,
directors, employees, agents, investment bankers, attorneys, financial advisors
or other representatives or those of any of its Subsidiaries (collectively,
"Company Representatives") to, directly or indirectly, solicit, initiate or
encourage (including by way of furnishing information or assistance) or take
other action to facilitate any inquiries or the making of any proposal that
constitutes or may reasonably be expected to lead to, an Acquisition Proposal
from any Third Party, or engage in any discussions or negotiations relating
thereto or in furtherance thereof or accept or enter any agreement with respect
to any Acquisition Proposal; PROVIDED, HOWEVER, that, notwithstanding
anything to the contrary in this Agreement, (i) prior to the approval of this
Agreement by the Stockholders of the Company, the Company may engage in
discussions or negotiations with, and may furnish information concerning the
Company and its business, properties and assets to, a Third Party who, without
any solicitation, initiation, encouragement, discussion or negotiation, directly
or indirectly, by or with the Company or any Company Representatives, or in
furtherance thereof makes a written, bona fide Acquisition Proposal that is not
subject to any material contingencies relating to financing and that is
reasonably capable of being financed and is financially superior to the
consideration to be received by the Company's stockholders pursuant to the
Merger (as determined in good faith by the Board of Directors after consultation
with the Company's financial advisors) if (1) the Board of Directors determines
in its good faith, after receipt of written advice of the Company's outside
legal counsel, that such action is advisable for the Board of Directors to act
in a manner consistent with its fiduciary duties under Applicable Law and (2)
prior to furnishing information with respect to the Company and its Subsidiaries
to, such Third Party, the Company shall receive from such Third Party an
executed confidentiality agreement in reasonably customary form on terms not
more favorable to such Person or entity than the terms contained in the
Confidentiality Agreements, or (ii) the Board of Directors may take and disclose
to the Company's stockholders a position with regard to a tender offer or
exchange offer to the extent required by Rule 14e-2(a) under the Exchange Act.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding sentence by any investment banker or
financial advisor
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retained by the Company, whether or not such Person is purporting to act of
behalf of the Company of any of its Subsidiaries or otherwise, shall constitute
a breach of this Section 7.10 by the Company.
(b) The Company shall promptly notify Acquiror orally and in
writing of any Acquisition Proposal or any inquiry with respect to or which
could lead to any Acquisition Proposal, within 24 hours of the receipt thereof,
including the identity of the Third Party making any such Acquisition Proposal
or inquiry and the material terms and conditions of any Acquisition Proposal,
and if such Acquisition Proposal or inquiry is in writing, shall deliver to
Acquiror a copy of such Acquisition Proposal or inquiry. The Company shall keep
Acquiror informed of the status and details of any such Acquisition Proposal or
inquiry.
(c) The Company shall immediately cease and cause to be terminated
any existing solicitation, initiation, encouragement, activity, discussion or
negotiation with any parties conducted heretofore by the Company or any Company
Representatives with respect to any of the foregoing.
(d) As used in this Agreement, "Acquisition Proposal" shall mean
any proposal or offer, other than a proposal or offer by Acquiror or any of its
Affiliates, for a tender or exchange offer, merger, consolidation or other
business combination involving the Company or any of its material Subsidiaries
or any proposal to acquire in any manner a substantial equity interest in or a
substantial portion of the assets of the Company or any of its material
Subsidiaries; PROVIDED, HOWEVER, that, the term "Acquisition Proposal" shall
not include any acquisition by the Company or any of its Subsidiaries of any
assets, businesses or entities in any transaction or series of related
transactions in exchange for other assets, businesses or entities of any Third
Party.
7.11 INDEMNIFICATION; DIRECTORS' AND OFFICERS INSURANCE. (a)
The Restated Certificate of Incorporation and Bylaws of the Surviving
Corporation at the Effective Time shall not be amended, repealed or otherwise
modified for a period of six years after the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who at any time
prior to the Effective Time were directors or officers of the Company or its
Subsidiaries in respect of actions or omissions occurring at or prior to the
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Effective Time (including, without limitation, the transactions contemplated by
this Agreement), unless such modification is required by law.
(b) From and after the Effective Time, the Surviving Corporation
shall, indemnify, defend and hold harmless each Person who is now, or has been
at any time prior to the date hereof or who becomes prior to the Effective Time,
an officer or director of the Company or any of its Subsidiaries (the
"Indemnified Parties") against all losses, claims, damages, costs, expenses
(including attorneys' fees and expenses), liabilities or judgments or amounts
that are paid in settlement with the approval of the indemnifying party (which
approval shall not be unreasonably withheld) of or in connection with any
threatened or actual claim, action, suit, proceeding or investigation based in
whole or in part on or arising in whole or in part out of the fact that such
Person is or was a director or officer of the Company or any of its Subsidiaries
or served as a director of any Third Party on behalf of the Company or any of
its Subsidiaries whether pertaining to any matter existing or occurring at or
prior to the Effective Time and whether asserted or claimed prior to, or at or
after, the Effective Time ("Indemnified Liabilities"), including, without
limitation, all Indemnified Liabilities based in whole or in part on, or arising
in whole or in part out of, or pertaining to this Agreement or the transactions
contemplated hereby, in each case to the fullest extent a corporation is
permitted under the DGCL to indemnify its own directors or officers as the case
may be (and the Company or the Surviving Corporation, as the case may be, will
pay expenses in advance of the final disposition of any such action or
proceeding to each Indemnified Party to the full extent permitted by law).
(c) The provisions of this Section 7.11 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party, his or her
heirs and his or her personal representatives and shall be binding on all
successors and assigns of Acquiror and the Company.
7.12 NYSE LISTING. Acquiror shall use its best efforts to cause
the shares of Media Stock and Series D Preferred Stock to be issued in the
Merger to be approved for listing on the NYSE, subject only to notice of
official issuance, prior to the Effective Time. If, for any reason, Acquiror
shall not be able to list the shares of the Series D Preferred Stock to be
issued in the Merger on the NYSE,
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Acquiror shall use its best efforts to, prior to the Effective Date, list such
shares on such other stock exchange, or cause such shares to be eligible for
trading on such other trading facility, as the Company may request.
7.13 AFFILIATES. Prior to the Closing Date, the Company shall
deliver to Acquiror a letter identifying all Persons who are, at the time this
Agreement is submitted to the stockholders of the Company, "affiliates" of the
Company for purposes of Rule 145 under the Securities Act. The Company shall
use its best efforts to cause each such Person to deliver to Acquiror on or
prior to the Closing Date a written agreement substantially in the form attached
as Exhibit D.
7.14 EMPLOYEE BENEFITS. (a) For a period of one year following
the Effective Time, Acquiror shall maintain in effect for employees of the
Company and its Subsidiaries benefits (other than RSPAs or similar benefits) no
less favorable in the aggregate than the benefits offered by the Company
immediately prior to the Effective Time. Acquiror agrees to honor and perform
all severance, employment and similar agreements of the Company disclosed in
Section 4.11 of the Company Disclosure Letter and each RSPA and related Tax
Liability Financing Agreement.
(b) Following the date hereof, the Company shall, after
consultation with Acquiror, be permitted to (i) forgive up to $35.7 million
principal amount of outstanding loans made by the Company to employees to enable
such employees to pay income Taxes incurred by such employees as a result of the
purchase of shares of Company Common Stock by such employees pursuant to the
RSPAs in accordance with the terms of an amendment to the Tax Liability
Financing Agreement substantially in the form set forth in Section 7.14 of the
Company Disclosure Letter; PROVIDED, HOWEVER, that any loan to an employee
of the Company who is, or reasonably can be expected to become, a "covered
employee" (within the meaning of Section 162(m) of the Code) shall in no event
be forgiven, in whole or in part, prior to the day following the Closing Date,
(ii) issue up to 350,000 shares of Company Common Stock pursuant to RSPAs
substantially in the form heretofore provided to Acquiror to employees of the
Company or any of its Subsidiaries; and PROVIDED, FURTHER, that, in each
case, such forgiveness or issuance acts as incentive for the purpose of
retaining and motivating such employee to continue in the employment of the
Company following the
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Effective Time and is implemented in a manner consistent with such purpose.
(c) If, following the Effective Time, the termination of the
employee's employment with the Company or any of its Subsidiaries results in the
acceleration of the vesting of an award under any RSPA or the forgiveness of a
loan related to an RSPA pursuant to a Tax Liability Financing Agreement (other
than as a result of termination of employment by reason of the employee's death
or disability) (an "Acceleration Event") and as a result of such Acceleration
Event, the employee either (i) becomes subject to an excise tax (the "Excise
Tax") under Section 4999 of the Code that such employee would not have been
subject to without the occurrence of such Acceleration Event or (ii) the amount
of the Excise Tax imposed on such employee is greater than the amount of the
Excise Tax that would have been imposed without the occurrence of such
Acceleration Event (the "Incremental Excise Tax"), Acquiror shall pay or shall
cause to be paid to the employee, at the time specified below, an additional
amount (the "Additional Payment") sufficient to (a) in the case of clause (i)
above, reimburse the employee for the Excise Tax and in the case of clause (ii)
above, reimburse the employee for the Incremental Excise Tax and (b) in either
case, reimburse the employee for any federal, state or local income tax or any
additional excise tax under Section 4999 of the Code payable with respect to any
Additional Payment made pursuant to this Section 7.14(c). The Additional
Payment provided for in this Section 7.14(c) shall be made no later than the due
date for the Excise Tax or Incremental Excise Tax (as the case may be) imposed.
In the event of any dispute in the calculations made pursuant to this Section
7.14(c), an independent big six accounting firm shall be selected to resolve any
such dispute and the decision of such accounting firm shall be final and binding
on the Company and the employee. The fees and costs of such accounting firm
shall be shared equally among the Company and the employee.
7.15 REGISTRATION RIGHTS AGREEMENT. Acquiror shall execute and
deliver to the other parties thereto the Registration Rights Agreement at or
prior to the Closing.
7.16 TAX TREATMENT. (a) Each of Acquiror and the Company shall
use its reasonable best efforts to cause the Merger to qualify as a
reorganization under the provisions of Sections 368(a) of the Code and to obtain
the opinions of counsel referred to in Sections 8.2(c) and 8.3(c).
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(b) The Company and Acquiror agree that if a ruling satisfactory
to the Company, Acquiror and The Providence Journal Company is obtained from the
IRS, this Agreement shall be amended to permit the creation of a newly-formed
holding company to acquire the capital stock of the Company and Acquiror.
7.17 SERIES D PREFERRED STOCK. Prior to the Effective Time,
Acquiror shall file with the Secretary of State of the State of Delaware a
Certificate of Designation, in the form of Exhibit C hereto, with respect to the
shares of Series D Preferred Stock issuable pursuant to Section 3.1.
7.18 COMPANY INDEBTEDNESS. The Company shall assist Acquiror,
and shall take such actions as Acquiror may reasonably request at Acquiror's
sole expense in order to facilitate with respect to the amendment, repayment,
redemption, refinancing or other restructuring of outstanding Indebtedness of
the Company on or after the Effective Time in connection with the Merger.
7.19 AUTHORIZATION OF ISSUANCE OF MERGER CONSIDERATION. Acquiror
shall obtain any authorizations and consents necessary, and shall take such
further actions as may be required, for the issuance of the Media Stock and the
Series D Preferred Stock to holders of Company Common Stock pursuant to the
terms of this Agreement.
7.20 ATTRIBUTION. Following the Effective Time, the board of
directors of Acquiror shall attribute all of the assets and liabilities of the
Company and its Subsidiaries to the Media Group pursuant to Sections 2.5.1 and
2.6.15 of Article V of the Restated Certificate of Incorporation of Acquiror as
in effect as of the date hereof.
7.21 FURTHER ASSURANCES. Each of the parties hereto shall
execute such documents and other instruments and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof and
consummate and evidence the transactions contemplated hereby or, at and after
the Closing Date, to evidence the consummation of the transactions contemplated
by this Agreement. Upon the terms and subject to the conditions hereof, each of
the parties hereto shall take or cause to be taken all actions and to do or
cause to be done all other things necessary, proper or advisable to consummate
and make effective as promptly as practicable the transactions contemplated by
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this Agreement and to obtain in a timely manner all necessary waivers, consents
and approvals and to effect all necessary registrations and filings.
ARTICLE VIII
CONDITIONS PRECEDENT
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) STOCKHOLDER APPROVALS; CHARTER AMENDMENT. The Company shall
have obtained the Stockholder Approvals and the Charter Amendment shall
have been executed, acknowledged and filed and shall have become effective
in accordance with the DGCL.
(b) HSR ACT. (i) The waiting periods (and any extension
thereof) applicable to the Merger under the HSR Act shall have expired or
been terminated; (ii)neither the FTC nor DOJ shall have authorized the
institution of enforcement proceedings (that have not been dismissed or
otherwise disposed of) to delay, prohibit, or otherwise restrain the
transactions contemplated by the Agreement; (iii) no such proceeding will
be pending as of the Closing Date and (iv) other than as contemplated by
Section 7.6(d), no injunction or order shall have been issued by a court
of competent jurisdiction and remain in effect as of the Closing Date.
(c) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation,
injunction, restraining order or decree of any court or Governmental
Authority of competent jurisdiction shall be in effect that restrains or
prevents the transactions contemplated hereby.
(d) FORM S-4. The Form S-4 shall have been declared effective
under the Securities Act and shall not be the subject of any stop order or
proceedings seeking a stop order, and any material "blue sky" and other
state securities laws applicable to the issuance of the Media Stock and
Series D Preferred Stock shall have been complied with.
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(e) NYSE LISTING. The shares of Media Stock issuable to the
Company's stockholders pursuant to this Agreement shall have been approved
for listing on the NYSE, subject only to official notice of issuance.
(f) CONVERSION OF COMPANY PREFERRED STOCK; CERTAIN ELECTIONS.
The holders of shares of Company Preferred Stock shall have converted such
shares into shares of Company Common Stock, effective no later than
immediately prior to the Effective Time.
8.2 CONDITIONS OF OBLIGATIONS OF ACQUIROR. The obligations of
Acquiror to effect the Merger are subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by Acquiror:
(a) REPRESENTATIONS AND WARRANTIES. There shall be no breach of
any representation or warranty of the Company made hereunder that,
individually or together with all other such breaches, results in a
Material Adverse Effect with respect to the Company. Acquiror shall have
received a certificate from the Company dated the Closing Date signed by
an authorized officer of the Company certifying to the fulfillment of this
condition.
(b) AGREEMENTS. The Company shall have performed and complied
in all material respects with all of its respective undertakings,
covenants, conditions and agreements required by this Agreement to be
performed or complied with by it prior to or at the Closing. Acquiror
shall have received a certificate from the Company dated the Closing Date
signed by an authorized officer of the Company and certifying to the
fulfillment of this condition.
(c) TAX OPINION. Acquiror shall have received an opinion of
Weil, Gotshal & Manges LLP, dated the Closing Date, to the effect that (i)
the Merger should be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; (ii) each
of Acquiror and the Company should be a party to the reorganization within
the meaning of Section 368(b) of the Code; and (iii) no gain or loss
should be recognized by the Company or Acquiror as a result of the Merger.
In rendering such opinion, Weil, Gotshal & Manges LLP may receive and rely
upon representations contained in certificates of the
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Company, Acquiror, and certain stockholders of the Company.
(d) LETTERS FROM AFFILIATES. Acquiror shall have received from
each Person in the letter referred to in Section 7.13 an executed copy of
an agreement substantially in the form of Exhibit D.
(e) CONSENTS. All Company Consents (other than Franchise
Consents) and Acquiror Consents shall have been obtained, except where the
failure to obtain any such consent would not have a Material Adverse
Effect with respect to the Company or Acquiror, as the case may be.
(f) TRANSACTION DOCUMENTS. Each of the Transaction Documents
which were not executed on the date hereof shall have been duly authorized
and executed by the parties thereto other than Acquiror.
(g) DISSENTING SHARES. Acquiror shall have received evidence,
in form and substance reasonably satisfactory to it, that the number of
Dissenting Shares shall constitute no greater than 10% of the total number
of shares of Company Common Stock (assuming conversion of the Company
Preferred Stock) outstanding immediately prior to the Effective Time.
(h) OTHER ACTIONS. The Company shall have disposed of the
Designated Assets as provided in Section 7.7.
(i) LITIGATION. Except as described in Section 7.6(c), there
shall not be pending or threatened by any Governmental Authority any suit,
action or proceeding, (i) seeking to restrain or prohibit the Merger or
seeking to obtain from Acquiror or the Company or any of their respective
Subsidiaries in connection with the Merger any material damages, (ii)
seeking to prohibit or limit the ownership or operation by Acquiror, the
Company or any of their respective Subsidiaries of any material portion of
the business or assets of Acquiror and its Subsidiaries taken as a whole
or the Company and its Subsidiaries taken as a whole, or to compel
Acquiror, the Company or any of their respective Subsidiaries to dispose
of or hold separate any material portion of the business or assets of
Acquiror and its Subsidiaries taken as a whole or the Company
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and its Subsidiaries taken as a whole, in each case as a result of the
Merger or any of the other transactions contemplated by this Agreement or
the Transaction Documents, (iii) seeking to impose limitations on the
ability of Acquiror to acquire or hold, or exercise full rights of
ownership of, the shares of Company Capital Stock, including the right to
vote such shares of Company Capital Stock on all matters properly
presented to the stockholders of the Company or (iv) seeking to prohibit
Acquiror from effectively controlling in any material respect any portion
of the business or operations of the Company or any of its Subsidiaries
taken as a whole, which, in each case, has a reasonable likelihood of
success and if determined in a manner adverse to the Company or Acquiror,
could reasonably be expected to result in a Material Adverse Effect with
respect to Acquiror or the Company.
(j) FRANCHISE AND LICENSE CONSENTS. The Company shall have
obtained, in accordance with the terms of Section 7.5, (i) all Franchise
Consents required pursuant to this Section 8.2(j) (the "Required Franchise
Consents"); (ii) all License Consents for each FCC license set forth in
Section 4.6 of the Company Disclosure Letter and (iii) to the extent
required by the FCC or any Governmental Authority with jurisdiction, the
Social Contract Consent; PROVIDED, HOWEVER, that each Franchise
Consent and License Consent and the Social Contract Consent required to be
obtained hereunder shall be a Final Order. The aggregate number of
Subscribers covered by the Required Franchise Consents (i) as to which
Franchise Consents are obtained in accordance with the terms of Section
7.5 and (ii) that do not require Franchise Consents, shall equal at least
ninety percent (90%) of the total number of Subscribers covered by all
Franchises and shall equal at least ninety-five percent (95%) of the total
number of Subscribers covered by Franchises located within the thirty
largest Metropolitan Statistical Areas (as ranked on the basis of the 1994
U.S. Census by Rand McNally) in which the Company or its Subsidiaries
operates a Franchise, in each case as of March 31, 1996 based on the
Company's month-end billing report as of such date, as adjusted to reflect
any acquisitions or dispositions of Systems. The aggregate number of
Required Franchise Consents (i) as to which Franchise Consents are
obtained in accordance with the terms of Section 7.5 and (ii) that do not
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require Franchise Consents, shall equal at least eighty-five percent (85%)
of the total number of Franchises as of the date hereof.
(k) CORPORATE PROCEEDINGS AND DOCUMENTS. All corporate
proceedings taken by the Company in connection with the transactions
contemplated hereby and all documents incident thereto shall be reasonably
satisfactory in all material respects to Acquiror and Acquiror's counsel,
and Acquiror and Acquiror's Counsel shall have received all such
counterpart originals or certified or other copies of such documents as
they may reasonably request.
8.3 CONDITIONS OF OBLIGATIONS OF THE COMPANY. The obligation of
the Company to effect the Merger is subject to the satisfaction of the following
conditions, any or all of which may be waived in whole or in part by the
Company:
(a) REPRESENTATIONS AND WARRANTIES. There shall be no breach of
any representation or warranty of Acquiror made hereunder that,
individually or together with all other such breaches, results in a
Material Adverse Effect with respect to Acquiror. The Company shall have
received a certificate dated the Closing Date signed by an authorized
officer of Acquiror certifying to the fulfillment of this condition.
(b) AGREEMENTS. Acquiror shall have performed and complied in
all material respects with all of their respective undertakings,
covenants, conditions and agreements required by this Agreement to be
performed or complied with by Acquiror prior to or at the Closing. The
Company shall have received a certificate dated the Closing Date signed by
an authorized officer of Acquiror certifying to the fulfillment of this
condition.
(c) TAX OPINION. The Company shall have received an opinion of
Sullivan & Worcester LLP, dated the Closing Date, to the effect that (i)
the Merger will be treated for Federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; (ii) each
of the Acquiror and the Company will be a party to the reorganization
within the meaning of Section 368(b) of the Code; and (iii) gain, if any,
realized will be recognized by a stockholder of
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the Company as a result of the Merger, but not in excess of the amount of
cash received by such stockholder. In rendering such opinion, Sullivan &
Worcester LLP, may receive and rely upon representations contained in
certificates of Acquiror, the Company, and certain stockholders of the
Company.
(d) CONSENTS. All Company Consents and Acquiror Consents shall
have been obtained, except where the failure to obtain any such consent
would not have a Material Adverse Effect with respect to the Company or
Acquiror, as the case may be.
(e) TRANSACTION DOCUMENTS. Each of the Transaction Documents
shall have been duly authorized and executed by the parties thereto other
than the Company.
(f) PREFERRED STOCK LISTING. The shares of Series D Preferred
Stock issuable to the Company's stockholders pursuant to this Agreement
shall have been approved for listing on the NYSE or otherwise approved for
listing or eligible for trading as provided in Section 7.12 hereof,
subject only to official notice of issuance.
(g) CORPORATE PROCEEDINGS AND DOCUMENTS. All corporate
proceedings taken by Acquiror in connection with the transactions
contemplated hereby and all documents incident thereto shall be reasonably
satisfactory in all material respects to the Company and the Company's
counsel, and the Company and the Company's counsel shall have received all
such counterpart originals or certified or other copies of such documents
as they may reasonably request.
ARTICLE IX
TERMINATION AND AMENDMENT
9.1 TERMINATION. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, whether before
or after approval of the matters presented in connection with the Merger by the
stockholders of the Company:
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(a) by mutual written consent of the Company, on the one hand, and
Acquiror, on the other hand, or by mutual action of their respective
boards of directors;
(b) by Acquiror, if any of the conditions set forth in Section 8.1
or 8.2 shall have become incapable of fulfillment, and shall not have been
waived by Acquiror, or if the Company shall breach in any material respect
any of its representations, warranties or obligations hereunder and such
breach shall not have been cured in all material respects or waived and
the Company shall not have provided reasonable assurance that such breach
will be cured in all material respects on or before the Closing Date, but
only if such breach, singly or together with all other such breaches,
would have a Material Adverse Effect with respect to the Company;
(c) by the Company, if any of the conditions set forth in Section
8.1 or 8.3 shall have become incapable of fulfillment, and shall not have
been waived by the Company, or if Acquiror shall breach in any material
respect any of its representations, warranties or obligations hereunder
and such breach shall not have been cured in all material respects or
waived and Acquiror shall not have provided reasonable assurance that such
breach will be cured in all material respects on or before the Closing
Date, but only if such breach, singly or together with all other such
breaches, would have a Material Adverse Effect with respect to Acquiror;
(d) by either the Company or Acquiror, if the Merger shall not
have been consummated on or before August 31, 1997 (the "Termination
Date"); PROVIDED, HOWEVER, that if all the conditions set forth in
Article VIII (other than the conditions set forth in Sections 8.1(a),
8.1(b), 8.1(c), 8.2(e), 8.2(h), 8.2(i) and 8.2(j)) have been satisfied at
the Termination Date, either Acquiror or the Company may, by notice to the
other prior to such date, extend the Termination Date to the latest date
so extended by either party but in no event later than December 31, 1997;
(e) by either the Company or Acquiror if the Stockholder Approvals
shall not have been obtained by reason of the failure to obtain the
required vote upon a vote held at the Stockholders' Meetings (including
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any postponements or adjournments thereof); PROVIDED, HOWEVER, that
if the Stockholder Approvals are not obtained at the Initial Stockholders'
Meeting solely by reason of a failure to obtain approval of the Charter
Amendment, then this Agreement shall not be terminable unless the
Stockholder Approvals shall not have been obtained by reason of a failure
to obtain the required vote upon a vote held at the Additional
Stockholders' Meeting;
(f) by Acquiror, if the Company shall have (i) withdrawn or
modified, in a manner adverse to Acquiror, its approval or recommendation
of this Agreement or any of the transactions contemplated hereby, (ii)
failed to include such recommendation in the Proxy Statement, (iii)
approved or recommended any Acquisition Proposal from a Third Party or
(iv) resolved to do any of the foregoing;
(g) by the Company, prior to the approval of this Agreement by the
stockholders of the Company, if the Board of Directors shall approve, and
the Company shall enter into, a definitive agreement providing for the
implementation of an Acquisition Proposal; PROVIDED, HOWEVER, that (i)
the Company is not then in breach of Section 7.10, (ii) prior to such
termination, the Company has negotiated with Acquiror in good faith to
make such adjustments in the terms and conditions of this Agreement as
would enable the Company to proceed with the transactions contemplated
hereby and (iii) the Board of Directors, has determined in good faith (on
the basis of the terms of such Acquisition Proposal and the terms of this
Agreement, after giving effect to any concessions offered by Acquiror
pursuant to clause (ii) above), after receipt of written advice from the
Company's outside legal counsel, that such termination is advisable for
the Board of Directors to act in a manner consistent with its fiduciary
duties to stockholders under Applicable Law and (iv) the Company shall
provide to Acquiror prior written notice of such termination, which notice
shall advise Acquiror of the matters described in clauses (ii) and (iii)
above;
(h) by the Company pursuant to Section 3.1(d)(ii)(B); or
(i) by Acquiror pursuant to Section 3.1(d)(ii)(C).
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Notwithstanding the foregoing, a party shall not be permitted to terminate this
Agreement pursuant to clause (b), (c) or (d) hereof if such party is in breach
of any of its material representations, warranties, covenants or agreements
contained in this Agreement.
9.2 EFFECT OF TERMINATION. In the event of termination by the
Company or Acquiror pursuant to Section 9.1, written notice thereof shall
promptly be given to the other parties and, except as otherwise provided herein,
the transactions contemplated by this Agreement shall be terminated, without
further action by any party. Notwithstanding the foregoing, nothing in this
Section 9.2 shall be deemed to release any party from any liability for any
breach by such party of the terms and provisions of this Agreement or to impair
the right of the Company, on the one hand, and Acquiror, on the other hand, to
compel specific performance of the other party of its or their obligations under
this Agreement.
9.3 FEES AND EXPENSES. In order to induce Acquiror to, among
other things, enter into this Agreement, the Company agrees that if this
Agreement is terminated (A) by Acquiror pursuant to Section 9.1(f) hereof, (B)
by the Company pursuant to Section 9.1(g) hereof, or (C) by the Company or
Acquiror pursuant to Section 9.1(e) hereof and the Board of Directors shall have
materially modified or withdrawn its approval, determination or recommendation
of this Agreement or any of the transactions contemplated hereby prior to the
Initial Stockholders' Meeting or there shall have been an Acquisition Proposal
and such proposal shall not have been withdrawn prior to the Initial
Stockholders' Meeting and within one year thereafter the Company enters into a
definitive agreement with respect to such Acquisition Proposal (including any
definitive agreement relating to an Acquisition Proposal offered by the same
proponent or its Affiliate as such Acquisition Proposal), then the Company shall
promptly pay Acquiror a fee of $125 million, plus an amount equal to the actual
reasonable fees and expenses paid or payable by or on behalf of Acquiror to its
attorneys, accountants, environmental consultants, management consultants, and
other consultants and advisors in connection with the negotiation, execution and
delivery of this Agreement and the transactions contemplated hereby; PROVIDED,
HOWEVER, that payment for fees and expenses shall in no event exceed $15
million. Any payment required by this Section 9.3 shall be made in same day
funds to Acquiror by the Company no later than five
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Business Days following termination of this Agreement by Acquiror or the
Company, as the case may be.
9.4 CERTAIN PURCHASE OBLIGATIONS. (a) In order to induce the
Company to, among other things, enter into this Agreement, Acquiror agrees that
if this Agreement is terminated by the Company pursuant to Section 9.1(h), then
the Company shall have the right, for a period of 30 days thereafter, to require
Acquiror to purchase from the Company (the "Put Right") 5,650,000 shares of
Series B Convertible Preferred Stock, par value $.01 per share, of the Company,
having the rights, preferences and terms set forth in the Certificate of
Designations attached as Exhibit E hereto (the "Put Shares") for an aggregate
purchase price of $282.5 million.
(b) Following termination by the Company of this Agreement
pursuant to Section 9.1(h), the Company may exercise the Put Right by delivering
to Acquiror a written notice of such exercise (the "Put Exercise Notice"), which
shall specify a date not less than 90 days from the date of such notice for the
closing of the purchase of the Put Shares by Acquiror.
(c) The closing with respect to the purchase of the Put Shares
shall take place on the earlier of (i) the date specified in the Put Exercise
Notice and (ii) the second Business Day following the date on which the last of
the conditions set forth in Section 9.4(d) is fulfilled or waived, unless
another date, time or place is agreed to in writing by the parties hereto (the
"Put Closing Date"). At such closing, the Company shall deliver to Acquiror
certificates representing the Put Shares and Acquiror shall deliver to the
Company $282.5 million by wire transfer of immediately available funds to an
account designated by the Company.
(d) The obligations of Acquiror to purchase the Put Shares shall
be subject to the satisfaction prior to the Put Closing Date of the following
conditions:
(i) HSR ACT. The waiting periods (and any extension thereof)
applicable to the purchase of the Put Shares under the HSR Act shall have
expired or been terminated and there shall be no authorized or pending
action by a Governmental Authority seeking to restrain or prevent the
purchase of the Put Shares.
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(ii) NO INJUNCTIONS OR RESTRAINTS. No statute, rule, regulation,
injunction, restraining order or decree of any nature of any court or
Governmental Authority shall be in effect that restrains or prevents the
purchase of the Put Shares.
(iii) REPRESENTATIONS AND WARRANTIES. There shall be no breach
of any representation or warranty of the Company made hereunder that,
individually or together with all other such breaches, results in a
Material Adverse Effect with respect to the Company. Acquiror shall have
received a certificate from the Company dated the Put Closing Date signed
by an authorized officer of the Company certifying to the fulfillment of
this condition.
(iv) AGREEMENTS. The Company shall have performed and complied
in all material respects with all of its respective undertakings,
covenants, conditions and agreements required by this Agreement to be
performed or complied with by it prior to or at the Put Closing Date.
Acquiror shall have received a certificate from the Company dated the Put
Closing Date signed by an authorized officer of the Company and certifying
to the fulfillment of this condition.
(v) FRANCHISE CONSENTS. To the extent any Franchise(s)
individually or collectively representing more than 5% of total
Subscribers of the Company and its Subsidiaries require notice to, or the
consent of, a Governmental Authority in connection with the purchase by
Acquiror of the Put Shares, the consent of each such Governmental
Authority shall have been obtained by the Company.
(vi) REGISTRATION RIGHTS AGREEMENT. The Company and Acquiror
shall have entered into a Registration Rights Agreement substantially in
the form of Exhibit F hereto.
(e) From and after the Put Closing Date, for so long as Acquiror
owns any of the Put Shares, Acquiror shall not acquire, or agree to acquire,
directly or indirectly, any shares of Company Capital Stock, or any rights or
options to acquire shares of Company Capital Stock, if as a result of any such
acquisition, Acquiror would beneficially own 10 percent or more of the Company
Capital Stock.
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9.5 AMENDMENT. Subject to Applicable Law, this Agreement may be
amended, modified or supplemented only by written agreement of Acquiror and the
Company at any time prior to the Effective Time with respect to any of the terms
contained herein; PROVIDED, HOWEVER, that, after this Agreement is approved
by the Company's stockholders, no such amendment or modification shall (i)
alter or change the amount or kind of consideration to be delivered to the
stockholders of the Company or (ii) alter or change any of the terms and
conditions of this Agreement, if such alteration or change would adversely
affect the holders of any class of capital stock of the Company.
9.6 EXTENSION; WAIVER. At any time prior to the Effective Time,
the parties hereto, by action taken or authorized by their respective boards of
directors, may, to the extent legally allowed: (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto;
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto; and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party. The failure
of any party hereto to assert any of its rights hereunder shall not constitute a
waiver of such rights nor in any way effect the validity of this Agreement or
any part hereof or the right of such party thereafter to enforce each and every
provision of this Agreement. No waiver of any breach of or non-compliance with
this Agreement shall be held to be a waiver of any other or subsequent breach or
non-compliance.
ARTICLE X
GENERAL PROVISIONS
10.1 FRUSTRATION OF THE CLOSING CONDITIONS. Neither the Company
nor Acquiror may rely on the failure of any condition precedent set forth in
Article VIII to be satisfied if such failure was caused by such party's (or
parties') failure to act in good faith or to use its reasonable best efforts to
consummate the transactions contemplated by this Agreement in accordance with
Section 7.4.
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10.2 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
The representations, warranties and agreements in this Agreement shall terminate
at the Effective Time or upon the termination of this Agreement pursuant to
Article IX, except that the agreements set forth in Articles I, II and III and
Sections 7.11, 7.14 and 7.20 shall survive the Effective Time and those set
forth in Sections 9.2, 9.3, 9.4 and Article X hereof shall survive termination.
10.3 EXPENSES. Except as otherwise provided herein, including in
Sections 7.5 and 9.3, each of the parties hereto shall pay the fees and expenses
of its respective counsel, accountants and other experts and shall pay all other
costs and expenses incurred by it in connection with the negotiation,
preparation and execution of this Agreement and the Transaction Documents and
the consummation of the transactions contemplated hereby and thereby;
PROVIDED, HOWEVER, that the Company shall pay, with funds of the Company and
not with funds provided by Acquiror, any and all property or transfer Taxes
imposed on the Company or any Gains Taxes.
10.4 APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware without
reference to choice of law principles, including all matters of construction,
validity and performance.
10.5 NOTICES. Notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if signed by the respective Persons giving them (in the case of any
corporation the signature shall be by an officer thereof) and delivered by hand,
deposited in the United States mail (registered or certified, return receipt
requested), properly addressed and postage prepaid, or delivered by telecopy:
If to the Company, to:
Continental Cablevision, Inc.
The Pilot House
Lewis Wharf
Boston, Massachusetts 02110
Telephone: (617) 742-9500
Telecopy: (617) 742-0530
Attention: Amos B. Hostetter, Jr.
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with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
Telephone: (212) 408-5100
Telecopy: (212) 541-5369
Attention: Dennis J. Friedman, Esq.
and:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 338-2800
Telecopy: (617) 338-2880
Attention: Patrick K. Miehe, Esq.
If to Acquiror, to:
U S WEST, Inc
7800 East Orchard Road
Englewood, Colorado 80111
Telephone: (303) 793-6310
Telecopy: (303) 793-6707
Attention: General Counsel
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
Attention: Dennis J. Block, Esq.
Such names and addresses may be changed by notice given in accordance with this
Section 10.5.
10.6 ENTIRE AGREEMENT. This Agreement and the Transaction
Documents (including the Exhibits attached hereto, all of which are a part
hereof) contain the entire understanding of the parties hereto and thereto with
respect to the subject matter contained herein and therein, supersede and cancel
all prior agreements, negotiations, correspondence, undertakings and
communications of the parties, oral or written, respecting such subject matter.
There are no restrictions, promises, representations,
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warranties, agreements or undertakings of any party hereto or to any of the
Transaction Documents with respect to the transactions contemplated by this
Agreement and the Transaction Documents other than those set forth herein or
therein or made hereunder or thereunder. Notwithstanding the foregoing, the
Confidentiality Agreements shall remain in full force and effect and shall
survive any termination of this Agreement.
10.7 HEADINGS; REFERENCES. The article, section and paragraph
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. All
references herein to "Articles", "Sections" or "Exhibits" shall be deemed to be
references to Articles or Sections hereof or Exhibits hereto unless otherwise
indicated.
10.8 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original, but all of
which shall constitute one and the same original.
10.9 PARTIES IN INTEREST; ASSIGNMENT. Neither this Agreement nor
any of the rights, interest or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties. This
Agreement shall inure to the benefit of and be binding upon the Company and
Acquiror and shall inure to the sole benefit of the Company and Acquiror and
their respective successors and permitted assigns. Except as set forth in
Section 7.11 and Section 7.14(c), nothing in this Agreement, express or implied,
is intended to confer upon any other Person any rights or remedies under or by
reason of this Agreement.
10.10 SEVERABILITY; ENFORCEMENT. The invalidity of any portion
hereof shall not affect the validity, force or effect of the remaining portions
hereof. If it is ever held that any restriction hereunder is too broad to
permit enforcement of such restriction to its fullest extent, each party agrees
that a court of competent jurisdiction may enforce such restriction to the
maximum extent permitted by law, and each party hereby consents and agrees that
such scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction.
10.11 SPECIFIC PERFORMANCE. The parties hereto agree that the
remedy at law for any breach of this
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Agreement will be inadequate and that any party by whom this Agreement is
enforceable shall be entitled to specific performance in addition to any other
appropriate relief or remedy. Such party may, in its sole discretion, apply to
a court of competent jurisdiction for specific performance or injunctive or such
other relief as such court may deem just and proper in order to enforce this
Agreement or prevent any violation hereof and, to the extent permitted by
Applicable Law, each party waives any objection to the imposition of such
relief.
10.12 JURISDICTION. Each party to this Agreement hereby
irrevocably agrees that any legal action, suit or proceeding arising out of or
relating to this Agreement, the Transaction Documents or any other agreements or
transactions contemplated hereby shall be brought in the Chancery Court of the
State of Delaware and each party hereto agrees not to assert, by way of motion,
as a defense or otherwise, in any such action, suit or proceeding any claim that
it is not subject personally to the jurisdiction of such court, that the action,
suit or proceeding is brought in an inconvenient forum, that the venue of the
action, suit or proceeding is improper or that this Agreement, any Transaction
Document, any other agreement or transaction or the subject matter hereof or
thereof may not be enforced in or by such court. Each party hereto further and
irrevocably submits to the jurisdiction of such court in any action, suit or
proceeding.
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
U S WEST, INC.
By:/s/ Charles M. Lillis
_____________________________________
Name: Charles M. Lillis
Title: Executive Vice President; President
and Chief Executive Officer of the U S
WEST Media Group
CONTINENTAL CABLEVISION, INC.
By:/s/ Amos B. Hostetter, Jr.
______________________________________
Name: Amos B. Hostetter, Jr.
Title: Chairman of the Board and Chief
Executive Officer
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EXHIBIT A
CERTIFICATE OF AMENDMENT
OF
RESTATED CERTIFICATE OF INCORPORATION
OF
CONTINENTAL CABLEVISION, INC.
Continental Cablevision, Inc. a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, at a meeting duly
called and held on Febuary 27, 1996, in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware, duly
adopted resolutions setting forth a proposed amendment to the Restated
Certificate of Incorporation of the Corporation. The resolutions setting forth
the proposed amendement are as follows:
RESOLVED: That section H of Article FOURTH of the Corporation's Restated
Certificate of Incorporation be amended to read as follows:
H. OTHER RIGHTS. Except as otherwise required by the
Delaware General Corporation Law or as otherwise provided in this
Restated Certificate of Incorporation, and except as provided in
the Agreement and Plan of Merger, dated as of Febuary 27, 1996,
as the same may be amended from time to time, between US WEST,
Inc., a Delaware corporation, and the Corporation, each share of
Class A Common Stock and each share of Class B Common Stock shall
have identical powers, preferences, rights and privileges.
RESOLVED: That the foregoing amendment to the Restated Certificate of
Incorporation of the Corporation is recommended to the
stockholders for approval as being in the best interests
of the Corporation and that said amendment be presented to the
stockholders for their adoption and that a special meeting of
the stockholders duly be called for that purpose.
<PAGE>
-2-
SECOND: The stockholders of the Corporation (including (i) the holders of
the Class A Common Stock, the Class B Common Stock, and the Series A convertible
Preferred Stock voting together as a single class, (ii) the holders of the
Class A Common Stock voting together as a seperate class and (iii) the holders
of the Class B Common Stock voting together as a seperate class) approved said
proposed amendment at a special meeting of stockholders for which written notice
was given pursuant to Section 222 of the General Corporation Law of the State of
Delaware.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by William T. Schleyer, its duly authorized officer, this _____ day of
__________, 1996.
CONTINENTAL CABLEVISION, INC.
By:/s/
______________________________
Name: William T. Schleyer
Title: President
<PAGE>
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT, dated as of _________ __, 1996, among
U S WEST, INC. , a Delaware corporation ("Acquiror"), Amos B. Hostetter, Jr.
("Hostetter"), the Amos B. Hostetter, Jr. 1989 Trust (the "Trust") and the
Hostetter Foundation (the "Foundation" and, together with Hostetter and the
Trust, the "Stockholders").
W I T N E S S E T H:
WHEREAS, Acquiror and CONTINENTAL CABLEVISION, INC., a Delaware
corporation (the "Company"), are parties to an Agreement and Plan of Merger,
dated as of February 27, 1996 (as in effect on the date hereof, the "Merger
Agreement"), pursuant to which the Company will merge with and into Acquiror
(the "Merger"), with Acquiror continuing as the surviving corporation; and
WHEREAS, Acquiror has agreed to provide registration rights to the
Stockholders with respect to the stock to be received in connection with the
Merger, subject to the terms and conditions set forth herein.
NOW, THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS. Capitalized terms used but not defined herein
shall have the meanings assigned to such terms in the Merger Agreement. For
purposes of this Agreement, the following terms shall have the following
meanings:
"BLACKOUT PERIOD" shall mean any Section 6(a) Period and any
Section 6(b) Period.
"CLOSING PRICE", for any class of securities, shall mean the last
reported sale price per share of such security, regular way, as shown on the
Composite Tape of the NYSE, or, in case no such sale takes place on such day,
the average of the closing bid and asked prices on the NYSE, or, if such
security is not listed or admitted to trading on the NYSE, on the principal
national securities exchange on which such security is listed or admitted to
trading, or, if it is not listed or admitted to trading on any national
securities exchange, the last reported sale price per share of such security,
or, in case no such sale takes place on such day,
<PAGE>
the average of the closing bid and asked prices, in either case as reported by
Nasdaq.
"CURRENT MARKET PRICE" for any class of securities on any
applicable date shall mean the average of the daily Closing Prices per share of
such security for the ten (10) consecutive Trading Days ending on the third
Trading Day immediately preceding such date.
"EFFECTIVE PERIOD" shall mean a period commencing on the date of
this Agreement and ending on the earliest of (i) the first date as of which all
Registrable Securities cease to be Registrable Securities, (ii) the sixth
anniversary of the Closing Date and (iii) the date on which the aggregate number
of Registrable Securities issued and outstanding (assuming conversion of all
shares of Series D Preferred Stock held by the Holders) shall no longer exceed
one tenth (1/10) of the aggregate number of Registrable Securities (adjusted
appropriately to reflect any stock dividends, splits, combinations, exchange,
reorganization, recapitalization or reclassification involving the Media Stock
or Series D Preferred Stock or resulting from a merger or consolidation or
similar transaction involving Acquiror or the like after the date hereof)
outstanding on the date hereof.
"HOLDER" shall mean each Stockholder listed on Schedule A hereto
and each Permitted Assignee that becomes a holder of Registrable Securities,
provided that if such Person is not a Stockholder listed on Schedule A hereto,
such Permitted Assignee has agreed in writing to become a Holder hereunder and
to be bound by the terms and conditions of this Agreement.
"NASD" shall mean the National Association of Securities Dealers,
Inc.
"NASDAQ" shall mean the Nasdaq National Market.
"NYSE" shall mean the New York Stock Exchange, Inc.
"PERMITTED ASSIGNEE" shall mean (w) Hostetter, (x) Hostetter's
lineal descendants, (y) a trust for the benefit of, the estate of, executors,
personal representatives, administrators, guardians or conservators of any of
the individuals referred to in the foregoing clauses (w) and (x) (but only in
their capacity as such) and
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(z) charitable trusts and charitable foundations (in addition to the Foundation)
formed by Hostetter or the Trust.
"PROSPECTUS" shall mean the prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement
with respect to the terms of the offering of any portion of the Registrable
Securities covered by any Registration Statement and by all other amendments and
supplements to the prospectus, including post-effective amendments and all
material incorporated by reference in such prospectus.
"REGISTRABLE SECURITIES" shall mean any and all of (i) the shares
of Media Stock issued pursuant to the Merger, (ii) the shares of Series D
Preferred Stock issued pursuant to the Merger, (iii) the shares of Media Stock
or other securities of Acquiror issuable or issued upon conversion of the Series
D Preferred Stock issued pursuant to the Merger and (iv) any securities issuable
or issued or distributed in respect of any of the securities identified in
clauses (i), (ii) or (iii) by way of stock dividend or stock split or in
connection with a combination of shares, recapitalization, reorganization,
merger, consolidation or otherwise. Securities will cease to be Registrable
Securities in accordance with Section 2 hereof.
"REGISTRATION EXPENSES" means any and all expenses incident to
performance of or compliance with this Agreement, including, without limitation,
(i) all SEC, NASD and securities exchange registration and filing fees, (ii) all
fees and expenses of complying with state securities or blue sky laws (including
fees and disbursements of counsel for any underwriters in connection with blue
sky qualifications of the Registrable Securities), (iii) all processing,
printing, copying, messenger and delivery expenses, (iv) all fees and expenses
incurred in connection with the listing of the Registrable Securities on any
securities exchange pursuant to Section 7(h), (v) the fees and disbursements of
counsel for Acquiror and of its independent public accountants and (vi) the
reasonable fees and expenses of any special experts retained in connection with
the requested registration, but excluding (x) underwriting discounts and
commissions and transfer taxes, if any, and (y) any fees or disbursements of
counsel to the Holders or any Holder.
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"REGISTRATION STATEMENT" means any registration statement
(including a Shelf Registration) of Acquiror referred to in Section 3 or 4,
including any Prospectus, amendments and supplements to any such registration
statement, including post-effective amendments, and all exhibits and all
material incorporated by reference in any such registration statement.
"RELATED SECURITIES" means any securities of Acquiror similar or
identical to any of the Registrable Securities, including, without limitation,
any class of capital stock of Acquiror and all options, warrants, rights and
other securities convertible into, or exchangeable or exercisable for, any class
of capital stock of Acquiror.
"SECTION 6(a) PERIOD" has the meaning specified in Section 6(a).
"SECTION 6(b) PERIOD" has the meaning specified in Section 6(b).
"SHELF REGISTRATION" means a "shelf" registration statement on an
appropriate form pursuant to Rule 415 under the Securities Act (or any successor
rule that may be adopted by the SEC).
"TRADING DAY", for any class of securities, shall mean, so long as
such securities are listed or admitted to trading on the NYSE, a day on which
the NYSE is open for the transaction of business, or, if such securities are not
listed or admitted to trading on the NYSE, a day on which the principal national
securities exchange on which such securities are listed is open for the
transaction of business, or, if such securities are not so listed or admitted
for trading on any national securities exchange, a day on which Nasdaq is open
for the transaction of business.
"UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING" shall mean an
offering in which securities of Acquiror are sold to an underwriter for
reoffering to the public.
2. SECURITIES SUBJECT TO THIS AGREEMENT. The securities entitled
to the benefits of this Agreement are the Registrable Securities. For the
purposes of this Agreement, as to any particular Registrable Securities, such
Registrable Securities shall cease to be Registrable Securities when and to the
extent that (i) a Registration
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Statement covering such Registrable Securities has been declared effective under
the Securities Act and such Registrable Securities have been disposed of
pursuant to such effective Registration Statement, (ii) such Registrable
Securities are distributed to the public pursuant to and in accordance with Rule
144 (or any similar provision then in force) under the Securities Act, (iii)
such Registrable Securities have been otherwise transferred to a party that is
not a Permitted Assignee, (iv) the Effective Period ends or (v) such Registrable
Securities have ceased to be outstanding.
3. PIGGY-BACK REGISTRATION RIGHTS. (a) Whenever Acquiror shall
propose to file a Registration Statement under the Securities Act relating to
the public offering of Media Stock for cash (other than pursuant to a
Registration Statement on Form S-4 or Form S-8 or any successor forms thereto,
or filed in connection with an exchange offer or an offering of securities
solely to existing stockholders or employees of Acquiror and other than pursuant
to a Registration Statement filed in connection with an offering by Acquiror of
securities convertible into or exchangeable for Media Stock) for sale for its
own account, Acquiror shall (i) give written notice at least fifteen Business
Days prior to the filing thereof to each Holder then outstanding, specifying the
approximate date on which Acquiror proposes to file such Registration Statement
and the intended method of distribution in connection therewith, and advising
such Holder of such Holder's right to have any or all of the Registrable
Securities then held by such Holder included among the securities to be covered
thereby and (ii) at the written request of any such Holder given to Acquiror at
least two Business Days prior to the proposed filing date, include among the
securities covered by such Registration Statement the number of Registrable
Securities that such Holder shall have requested be so included. Subject to
reduction in accordance with paragraph (b) of this Section 3, Acquiror shall
cause the Registration Statement to include the Registrable Securities requested
to be included in the Registration Statement for such offering in the case of
Registrable Securities which are Media Stock, on the same terms and conditions
as the shares of Media Stock included therein and in the case of Registrable
Securities which are Series D Preferred Stock, on terms which would not conflict
or interfere with in any material respect (including, without limitation,
adversely affect the pricing of) the offering by Acquiror of Media Stock.
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(b) If the lead managing underwriter selected by Acquiror for an
underwritten offering pursuant to Section 3(a) determines in writing that
marketing factors require a limitation on the number of shares of Media Stock
and/or Series D Preferred Stock (or other securities convertible into or
exchangeable for Media Stock) to be offered and sold by stockholders of Acquiror
in such offering, there shall be included in the offering, first, all securities
proposed by Acquiror to be sold for its account and, second, only that number of
shares of Media Stock and Series D Preferred Stock (and other securities
convertible into or exchangeable for Media Stock), if any, requested to be
included in such Registration Statement by stockholders of Acquiror that such
lead managing underwriter reasonably and in good faith believes will not
substantially interfere with (including, without limitation, adversely affect
the pricing of) the offering of all the shares of Media Stock that the Company
desires to sell for its own account. In such event and provided the managing
underwriter has so notified Acquiror in writing, the number of shares of Media
Stock and Series D Preferred Stock (and other securities of Acquiror convertible
into or exchangeable for Media Stock) to be offered and sold by stockholders of
Acquiror, including Holders of Registrable Securities, desiring to participate
in such offering shall be allocated among such stockholders of Acquiror on a pro
rata basis based upon the number of shares of Media Stock (assuming conversion
of the Series D Preferred Stock and other securities convertible into or
exchangeable for Media Stock held by such stockholders) each such stockholder
beneficially owns.
(c) Nothing in this Section 3 shall create any liability on the
part of Acquiror to the Holders of Registrable Securities if Acquiror for any
reason should decide not to file a Registration Statement proposed to be filed
under Section 3(a) or to withdraw such Registration Statement subsequent to its
filing, regardless of any action whatsoever that a Holder may have taken,
whether as a result of the issuance by Acquiror of any notice hereunder or
otherwise.
(d) A request by Holders to include Registrable Securities in a
proposed offering pursuant to Section 3(a) shall not be deemed to be a request
for a demand registration pursuant to Section 4.
4. DEMAND REGISTRATION RIGHTS. (a) Upon the written request
(the "Initial Request") of Holders of at
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least a majority in number of the Registrable Securities (assuming conversion of
all Series D Preferred Stock held by Holders) that Acquiror effect the
registration with the SEC under and in accordance with the provisions of the
Securities Act of all or part of such Holder's or Holders' Registrable
Securities and specifying the aggregate number of shares of Registrable
Securities requested to be so registered, Acquiror will promptly give written
notice of such requested registration to all other Holders. Within 15 days
after receipt of Acquiror's notice (such 15 day period being the "Additional
Request Period"), each such other Holder shall notify Acquiror in writing as to
whether such Holder wishes to have any or all of its Registrable Securities
included in such requested registration. Thereupon, subject to Section 4(f),
Acquiror shall use its best efforts to file a Registration Statement as
expeditiously as practicable (the terms of any underwritten offering or other
distribution to be determined by the Holders of a majority of the Registrable
Securities so requested to be registered); PROVIDED, HOWEVER, that Acquiror
shall not be required to take any action pursuant to this Section 4:
(i) if prior to the date of such request Acquiror shall have
effected four registrations pursuant to this Section 4;
(ii) if Acquiror has effected a registration pursuant to this
Section 4 within the 90-day period next preceding such request;
(iii) if Acquiror shall at the time have effective a Shelf
Registration pursuant to which the Holder or Holders that requested
registration could effect the disposition of such Registrable Securities
pursuant to an underwritten offering or such other method of distribution
requested by such Holder or Holders;
(iv) if the Registrable Securities that Acquiror shall have been
requested to register shall have a then current market value of less than
$100,000,000, unless such registration request is for all remaining
Registrable Securities; or
(v) during the pendency of any Blackout Period;
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and PROVIDED, FURTHER, that Acquiror shall be permitted to satisfy its
obligations under this Section 4(a) by amending (to the extent permitted by
applicable law) any Shelf Registration previously filed by Acquiror under the
Securities Act so that such Shelf Registration (as amended) shall permit the
disposition (in accordance with the intended methods of disposition specified as
aforesaid) of all of the Registrable Securities for which a demand for
registration has been made under this Section 4(a). If Acquiror shall so amend
a previously filed Shelf Registration, it shall be deemed to have effected a
registration for purposes of this Section 4.
(b) A registration requested pursuant to this Section 4 shall not
be deemed to be effected for purposes of this Section 4: (i) if it has not been
declared effective by the SEC or become effective in accordance with the
Securities Act, (ii) if after it has become effective, such registration is
materially interfered with by any stop order, injunction or similar order or
requirement of the SEC or other governmental agency or court for any reason not
attributable to any of the Holders and has not thereafter become effective, or
(iii) if the conditions to closing specified in the underwriting agreement, if
any, entered into in connection with such registration are not satisfied or
waived, other than by reason of a failure on the part of any of the Holders.
(c) Should a Registration Statement filed pursuant to this Section
4 not become effective due to the failure of the Holders to perform their
obligations under this Agreement or the inability of the Holders to reach
agreement with the underwriters on price or other customary terms for such
transaction, or in the event the Holders of a majority in number of the
Registrable Securities (assuming conversion of all Series D Preferred Stock held
by Holders) determine to withdraw or do not pursue a request for registration
pursuant to this Section 4 (in each of the foregoing cases, provided that at
such time Acquiror is in compliance in all material respects with its
obligations under this Agreement), then (subject to the last sentence of this
Section 4(c)) such registration shall be deemed to have been effected for
purposes of this Section 4. In such event, the Holders of Registrable
Securities who requested registration shall reimburse Acquiror for all its
out-of-pocket expenses incurred in the preparation, filing and processing of the
Registration Statement. If such reimbursement is made within 30 Business Days
following a
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request therefor, such registration shall not be deemed to have been effected
for purposes of this Section 4.
(d) Acquiror will not include any securities that are not
Registrable Securities in any Registration Statement (including a Shelf
Registration referred to in the second proviso of Section 4(a)) filed pursuant
to a demand made under this Section 4 without the prior written consent of the
Holders of a majority in number of the Registrable Securities covered by such
Registration Statement (including a Shelf Registration referred to in the second
proviso of Section 4(a)).
(e) If the lead managing underwriter of an underwritten offering
made pursuant to this Section 4 shall advise Acquiror in writing (with a copy to
the Holders of Registrable Securities participating in such offering) that, in
its opinion, the number of Registrable Securities requested to be included in
such registration exceeds the number which can be sold in such offering within a
price range acceptable to the Holders of a majority in number of the Registrable
shares requested to be included in such offering, Acquiror will reduce to the
number which Acquiror is so advised can be sold in such offering within such
price range the Registrable Securities requested to be included in such
offering. If, as a result of any such reduction, the number of Registrable
Securities requested to be included in such registration by the Holders of
Registrable Securities participating in such offering is reduced by twenty-five
percent (25%) or more, then notwithstanding anything to the contrary contained
in this Agreement, a registration will not be deemed to have been effected for
purposes of this Section 4; PROVIDED, HOWEVER, that the provisions of this
sentence shall only apply to the first request made by Holders for a
registration pursuant to this Section 4. In the case of such a registration
which would have been deemed to be a registration for purposes of this Section 4
but for the application of the immediately preceding sentence, Acquiror
nonetheless shall pay the Registration Expenses in connection with such
registration.
(f) Prior to the filing by Acquiror of a Registration Statement
pursuant to Section 4(a), Acquiror shall have the right, exercisable for the ten
day period following the end of the Additional Request Period, upon written
notice to the Holders requesting registration, to purchase for cash from such
Holders on a pro rata basis all of the Registrable Securities which such Holders
requested
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to be registered pursuant to such Registration Statement (the "Purchased
Securities"). The exercise of such right shall constitute Acquiror's legal and
binding commitment to purchase the Purchased Securities in accordance with this
Section 4(f). The closing of the purchase by Acquiror of the Purchased
Securities shall take place within 30 days of delivery of such notice and the
purchase price per Purchased Security shall be equal to the Current Market Price
of such Purchased Security on the date of the Initial Request, less the amount
of any customary discounts and commissions that would be payable by Acquiror or
a similar issuer in connection with an underwritten offering of similar
securities (which discounts and commissions shall not exceed 5% of such Current
Market Price). At the closing of the sale of the Purchased Securities, the
Holders shall deliver to Acquiror certificates representing the Purchased
Securities and Acquiror shall deliver to the Holders the purchase price of the
Purchased Securities by wire transfer of immediately available funds. Following
the purchase of the Purchased Shares by Acquiror, a registration shall be deemed
to have been effected for purposes of this Section 4.
5. SELECTION OF UNDERWRITERS. In connection with any offering
pursuant to a Registration Statement filed pursuant to a demand made in
accordance with Section 4, Acquiror shall have the right to select a managing
underwriter or underwriters to administer the offering, so long as such managing
underwriter or underwriters shall be reasonably satisfactory to Holders of a
majority in number of the Registrable Securities to be included in such offering
(assuming conversion of all Series D Preferred Stock held by Holders);
PROVIDED, HOWEVER, that such Holders shall have the right to select one
co-managing underwriter, so long as such co-managing underwriter shall be
reasonably satisfactory to Acquiror. The managing underwriter or underwriters
selected by Acquiror shall be deemed reasonably satisfactory to Holders of a
majority in number of the Registrable Securities to be included in such offering
(assuming conversion of all Series D Preferred Stock held by Holders) unless
such Holders sends a written notice of objection to Acquiror within 10 days of
receipt of notice from Acquiror of the appointment of a managing underwriter or
underwriters and the co-managing underwriter selected by such Holders shall be
deemed to be reasonably satisfactory to Acquiror unless Acquiror sends a written
notice of objection to such Holders within 10 days of receipt of notice from
such Holders of the appointment of a co-managing underwriter.
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6. BLACKOUT PERIODS. (a) If Acquiror determines in good faith
that the registration and distribution of Registrable Securities (or the use of
the Registration Statement or related Prospectus) would interfere with any
pending financing, acquisition, corporate reorganization or any other corporate
development involving Acquiror or any of its subsidiaries (or would require
premature disclosure thereof) and promptly gives the Holders of Registrable
Securities written notice of such determination, Acquiror shall be entitled to
(i) postpone the filing of the Registration Statement otherwise required to be
prepared and filed by Acquiror pursuant to Section 3 or 4, or (ii) elect that
the Registration Statement not be used, in either case for a reasonable period
of time, but not to exceed 90 days (a "Section 6(a) Period"). Any such written
notice shall contain a general statement of the reasons for such postponement or
restriction on use and an estimate of the anticipated delay. Acquiror shall
promptly notify each Holder of the expiration or earlier termination of a
Section 6(a) Period.
(b) If (i) during the Effective Period, Acquiror shall file a
registration statement (other than in connection with the registration of
securities issuable pursuant to an employee stock option, stock purchase or
similar plan on Form S-8 or pursuant to a merger, exchange offer or a
transaction of the type specified in Rule 145(a) under the Securities Act) with
respect to any Related Securities and (ii) with reasonable written prior notice,
(A) Acquiror (in the case of a non-underwritten offering pursuant to such
registration statement) advises the Holders in writing that a sale or
distribution of Registrable Securities would adversely affect such offering or
(B) the managing underwriter or underwriters (in the case of an underwritten
offering) advise Acquiror in writing (in which case Acquiror shall notify the
Holders), that a sale or distribution of Registrable Securities would adversely
impact such offering, then each Holder shall, to the extent not inconsistent
with Applicable Law, refrain from effecting any sale or distribution of
Registrable Securities, including sales pursuant to Rule 144 under the
Securities Act, during the 10-day period prior to, and during the 90-day period
beginning on, the effective date of such registration statement (a "Section 6(b)
Period").
(c) The Effective Period and, in the case where the use of an
effective Registration Statement is prohibited under Section 6(a), the period
for which a Registration
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Statement shall be kept effective pursuant to Section 7(b), as the case may be,
shall be extended by a number of days equal to the number of days of any
Blackout Period occurring during such period. Except as provided below, the
beginning of any Blackout Period shall be at least 120 days after the end of any
prior Blackout Period; PROVIDED, HOWEVER, that once during any consecutive
12 months during the Effective Period a Section 6(b) Period may begin on or
within five days of the last day of a Section 6(a) Period. Notwithstanding
anything to the contrary contained herein, the aggregate number of days included
in all Blackout Periods during any consecutive 18 months during the Effective
Period shall not exceed 180 days.
(d) During the five day period prior to, and during the 30 day
period commencing on, the effective date of a registration statement filed by
Acquiror on behalf of Holders in connection with an underwritten offering
pursuant to Section 4(a), Acquiror hereby agrees not to effect (except pursuant
to employee benefit plans, the U S WEST Shareowner Investment Plan or a similar
plan) any public sale or distribution of (i) Media Stock, if the Registrable
Securities included in such registration include shares of Media Stock, and (ii)
preferred stock convertible into Media Stock, if the Registrable Securities
included in such registration include shares of Series D Preferred Stock.
7. REGISTRATION PROCEDURES. If and whenever Acquiror is required
to use its best efforts to effect or cause the registration of any Registrable
Securities under the Securities Act as provided in this Agreement, Acquiror
shall, as expeditiously as possible:
(a) prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities on any form for which Acquiror then
qualifies or that counsel for Acquiror shall deem appropriate, and which
form shall be available for the sale of the Registrable Securities in
accordance with the intended methods of distribution thereof, and use its
best efforts to cause such Registration Statement to become and remain
effective;
(b) prepare and file with the SEC amendments and post-effective
amendments to such Registration Statement and such amendments and
supplements to the Prospectus used in connection therewith as may be
necessary to maintain the effectiveness of such
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registration or as may be required by the rules, regulations or
instructions applicable to the registration form utilized by Acquiror or
by the Securities Act for a Shelf Registration or otherwise necessary to
keep such Registration Statement effective for at least 90 days and cause
the Prospectus as so supplemented to be filed pursuant to Rule 424 under
the Securities Act, and to otherwise comply with the provisions of the
Securities Act with respect to the disposition of all securities covered
by such Registration Statement until the earlier of (x) such 90th day and
(y) such time as all Registrable Securities covered by such Registration
Statement have ceased to be Registrable Securities (it being understood
that Acquiror at its option may determine to maintain such effectiveness
for a longer period, whether pursuant to a Shelf Registration or
otherwise); PROVIDED, HOWEVER, that a reasonable time before filing a
Registration Statement or Prospectus, or any amendments or supplements
thereto (other than reports required to be filed by it under the Exchange
Act), Acquiror shall furnish to the Holders, the managing underwriter and
their respective counsel for review and comment, copies of all documents
proposed to be filed and shall not file any such documents (other than as
aforesaid) to which any of them reasonably object prior to the filing
thereof;
(c) furnish to each Holder of such Registrable Securities and to
any underwriter in connection with an underwritten offer such number of
conformed copies of such Registration Statement and of each amendment and
post-effective amendment thereto (in each case including all exhibits) and
such number of copies of any Prospectus or Prospectus supplement and such
other documents as such Holder or underwriter may reasonably request in
order to facilitate the disposition of the Registrable Securities by such
Holder or underwriter (Acquiror hereby consenting to the use (subject to
the limitations set forth in the last paragraph of this Section 7) of the
Prospectus or any amendment or supplement thereto in connection with such
disposition);
(d) use its best efforts to register or qualify such Registrable
Securities covered by such Registration Statement under such other
securities or "blue sky" laws of such jurisdictions as each Holder
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<PAGE>
shall reasonably request, except that Acquiror shall not for any such
purpose be required to qualify generally to do business as a foreign
corporation in any jurisdiction where, but for the requirements of this
Section 7(d), it would not be obligated to be so qualified, to subject
itself to taxation in any such jurisdiction, or to consent to general
service of process in any such jurisdiction;
(e) notify each Holder of any such Registrable Securities covered
by such Registration Statement, at any time when a Prospectus relating
thereto is required to be delivered under the Securities Act within the
appropriate period mentioned in Section 7(b), of Acquiror's becoming aware
that the Prospectus included in such Registration Statement, as then in
effect, includes an untrue statement of a material fact or omits to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then
existing, and at the request of any such Holder, prepare and furnish to
such Holder a reasonable number of copies of an amendment or supplement to
such Registration Statement or related Prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such Registrable
Securities, such Prospectus shall not include an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances then existing;
(f) notify each Holder covered by such Registration Statement at
any time:
(i) when the Prospectus or any Prospectus supplement or
post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the
same has become effective;
(ii) of any request by the SEC for amendments or supplements
to the Registration Statement or the Prospectus or for additional
information;
(iii) of the issuance by the SEC of any stop order suspending
the effectiveness of the Registration Statement or any order
preventing the
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use of a related Prospectus, or the initiation (or any overt
threats) of any proceedings for such purposes;
(iv) of the receipt by Acquiror of any written notification
of the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation (or overt
threats) of any proceeding for that purpose); and
(v) if at any time the representations and warranties of
Acquiror contemplated by paragraph (i)(1) below cease to be true and
correct in all material respects;
(g) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders an earnings statement that shall satisfy the provisions of Section
11(a) of the Securities Act, provided that Acquiror shall be deemed to
have complied with this paragraph if it has complied with Rule 158 of the
Securities Act;
(h) use its best efforts to cause all such Registrable Securities
to be listed on any securities exchange on which the class of Registrable
Securities being registered is then listed, if such Registrable Securities
are not already so listed and if such listing is then permitted under the
rules of such exchange, and to provide a transfer agent and registrar for
such Registrable Securities covered by such Registration Statement no
later than the effective date of such Registration Statement;
(i) enter into agreements (including an underwriting agreement in
the form customarily entered into by Acquiror in a comparable underwritten
offering) and take all other appropriate and all commercially reasonable
actions in order to expedite or facilitate the disposition of such
Registrable Securities and in such connection, whether or not an
underwriting agreement is entered into and whether or not the registration
is an underwritten registration:
(i) make such representations and warranties to the Holders
of such Registrable Securities and the underwriters, if any, in
form, substance and
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scope as are customarily made by Acquiror to underwriters in
comparable underwritten offerings;
(ii) obtain opinions of counsel to Acquiror and updates
thereof (which counsel and opinions shall be reasonably satisfactory
(in form, scope and substance) to the managing underwriters, if any,
and the Holders of a majority in number of the Registrable
Securities being sold) addressed to such Holders and the
underwriters covering the matters customarily covered in opinions
requested in comparable underwritten offerings by Acquiror;
(iii) obtain "cold comfort" letters and updates thereof from
Acquiror's independent certified public accountants addressed to the
selling Holders of Registrable Securities and the underwriters, if
any, such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters by
independent accountants in connection with comparable underwritten
offerings on such date or dates as may be reasonably requested by
the managing underwriter;
(iv) provide the indemnification in accordance with the
provisions and procedures of Section 10 hereof to all parties to be
indemnified pursuant to such Section; and
(v) deliver such documents and certificates as may be
reasonably requested by the Holders of a majority in number of the
Registrable Securities being sold and the managing underwriters, if
any, to evidence compliance with clause (f) above and with any
customary conditions contained in the underwriting agreement or
other agreement entered into by Acquiror;
(j) cooperate with the Holders of Registrable Securities covered
by such Registration Statement and the managing underwriter or
underwriters to facilitate, to the extent reasonable under the
circumstances, the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing the securities to be sold
under such Registration Statement, and enable such securities to be in
such denominations and registered in such names as the
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managing underwriter or underwriters, if any, or such Holders may request
and/or in a form eligible for deposit with the Depository Trust Company;
(k) make available for inspection by any Holder included in such
Registration Statement, any underwriter participating in any disposition
pursuant to such Registration Statement, and any attorney, accountant or
other agent retained by any such Holder or underwriter (collectively, the
"Inspectors"), reasonable access to appropriate officers of Acquiror and
Acquiror's subsidiaries to ask questions and to obtain information
reasonably requested by such Inspector and all financial and other records
and other information, pertinent corporate documents and properties of any
of Acquiror and its subsidiaries and affiliates (collectively, the
"Records"), as shall be reasonably necessary to enable them to exercise
their due diligence responsibility; PROVIDED, HOWEVER, that the
Records that Acquiror determines, in good faith, to be confidential and
which it notifies the Inspectors in writing are confidential shall not be
disclosed to any Inspector unless such Inspector signs a confidentiality
agreement reasonably satisfactory to Acquiror or either (i) the disclosure
of such Records is necessary to avoid or correct a misstatement or
omission of a material fact in such Registration Statement or (ii) the
release of such Records is ordered pursuant to a subpoena or other order
from a court of competent jurisdiction; PROVIDED, FURTHER, that any
decision regarding the disclosure of information pursuant to subclause (i)
shall be made only after consultation with counsel for the applicable
Inspectors; and PROVIDED, FURTHER, that each Holder agrees that it
will, promptly after learning that disclosure of such Records is sought in
a court having jurisdiction, give notice to Acquiror and allow Acquiror,
at Acquiror's expense, to undertake appropriate action to prevent
disclosure of such Records; and
(l) in the event of the issuance of any stop order suspending the
effectiveness of the Registration Statement or of any order suspending or
preventing the use of any related Prospectus or suspending the
qualification of any Registrable Securities included in the Registration
Statement for sale in any jurisdiction, Acquiror will use all commercially
reasonable efforts promptly to obtain its withdrawal.
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Acquiror may require each Holder as to which any registration is
being effected to furnish Acquiror with such information regarding such Holder
and pertinent to the disclosure requirements relating to the registration and
the distribution of such securities as Acquiror may from time to time reasonably
request in writing.
Each Holder agrees that, upon receipt of any notice from Acquiror of
the happening of any event of the kind described in Section 7(e), such Holder
shall forthwith discontinue disposition of Registrable Securities pursuant to
the Prospectus or Registration Statement covering such Registrable Securities
until such Holder's receipt of the copies of the supplemented or amended
Prospectus contemplated by Section 7(e), and, if so directed by Acquiror, such
Holder will deliver to Acquiror (at Acquiror's expense) all copies, other than
permanent file copies then in such Holder's possession, of the Prospectus
covering such Registrable Securities current at the time of receipt of such
notice. In the event Acquiror shall give any such notice, the Effective Period
and the period mentioned in Section 7(b) shall be extended by the number of days
during the period from the date of the giving of such notice pursuant to Section
7(e) and through the date when each seller of Registrable Securities covered by
such Registration Statement shall have received the copies of the supplemented
or amended Prospectus contemplated by Section 7(e).
8. REGISTRATION EXPENSES. Acquiror shall pay all Registration
Expenses in connection with all registrations of Registrable Securities pursuant
to Sections 3 and 4 and each Holder shall pay (x) all fees and expenses of
counsel to such Holder and any counsel to the Holders and (y) all underwriting
discounts and commissions and transfer taxes, if any, relating to the sale or
disposition of such Holder's Registrable Securities pursuant to the Registration
Statement.
9. RULE 144. Acquiror agrees that it shall timely file the
reports required to be filed by it under the Securities Act or the Exchange Act
(including, without limitation, the reports under sections 13 and 15 (d) of the
Exchange Act referred to in paragraph (c)(1) of Rule 144 under the Securities
Act), and shall take such further actions as any Holder may reasonably request,
all to the extent required to enable Holders to sell Registrable
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Securities, from time to time, pursuant to the resale limitations of (a) Rule
144 under the Securities Act, as such rule may be hereafter amended, or (b) any
similar rules or regulations hereafter adopted by the SEC. Upon the written
request of any Holder, Acquiror shall deliver to such Holder a written statement
verifying that it has complied with such requirements.
10. INDEMNIFICATION; CONTRIBUTION. (a) INDEMNIFICATION BY
ACQUIROR. Acquiror agrees to indemnify and hold harmless each Holder included
in any registration of Registrable Securities pursuant to this Agreement, its
trustees, officers and directors and each Person who controls such Holder
(within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act), and any agent or investment adviser thereof against all losses,
claims, damages, liabilities and expenses (including reasonable attorneys' fees
and expenses) incurred by such party pursuant to any actual or threatened
action, suit, proceeding or investigation arising out of or based upon (i) any
untrue or alleged untrue statement of material fact contained in any
Registration Statement, any Prospectus or preliminary Prospectus, or any
amendment or supplement to any of the foregoing or (ii) any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of a Prospectus or a
preliminary Prospectus, in light of the circumstances then existing) not
misleading, except in each case insofar as the same arise out of or are based
upon, any such untrue statement or omission made in reliance on and in
conformity with information with respect to such Holder furnished in writing to
Acquiror by such Holder or its counsel expressly for use therein. In connection
with an underwritten offering, Acquiror will indemnify the underwriters thereof,
their officers, directors and agents and each Person who controls such
underwriters (within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act) to the same extent as provided above with respect to the
indemnification of the Holders. Notwithstanding the foregoing provisions of this
Section 10(a), Acquiror will not be liable to any Holder, any Person who
participates as an underwriter in the offering or sale of Registrable Securities
or any other Person, if any, who controls such Holder or underwriter (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act),
under the indemnity agreement in this Section 10(a) for any such loss, claim,
damage, liability (or action or proceeding in
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respect thereof) or expense that arises out of such Holder's or other Person's
failure to send or deliver a copy of a final Prospectus to the Person asserting
an untrue statement or alleged untrue statement or omission or alleged omission
at or prior to the written confirmation of the sale of the Registrable
Securities to such Person if such statement or omission was corrected in such
final Prospectus and Acquiror has previously furnished copies thereof to such
Holder in accordance with this Agreement.
(b) INDEMNIFICATION BY HOLDERS OF REGISTRABLE SECURITIES. In
connection with the any registration of Registrable Securities pursuant to this
Agreement, each Holder included in such registration shall furnish to Acquiror
and any underwriter in writing such information, including the name, address and
the amount of Registrable Securities held by such Holder, as Acquiror or any
underwriter reasonably requests for use in the Registration Statement relating
to such registration or the related Prospectus and agrees to indemnify and hold
harmless Acquiror, all other Holders and any underwriter, each such party's
officers and directors and each Person who controls each such party (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act),
and any agent or investment adviser thereof against all losses, claims, damages,
liabilities and expenses (including reasonable attorneys' fees and expenses)
incurred by each such party pursuant to any actual or threatened action, suit,
proceeding or investigation arising out of or based upon (i) any untrue or
alleged untrue statement of material fact contained in any Registration
Statement, any Prospectus or preliminary Prospectus, or any amendment or
supplement to any of the foregoing or (ii) any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein (in the case of a Prospectus or a preliminary Prospectus,
in light of the circumstances then existing) not misleading, but only to the
extent that any such untrue statement or omission is made in reliance on and in
conformity with information with respect to such Holder furnished in writing to
Acquiror or any underwriter by such Holder or its counsel specifically for
inclusion therein.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled
to indemnification hereunder agrees to give prompt written notice to the
indemnifying party after the receipt by such indemnified party of any written
notice of the commencement of any action, suit, proceeding or
20
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investigation or threat thereof made in writing for which such indemnified party
may claim indemnification or contribution pursuant to this Section 10 (provided
that failure to give such notification shall not affect the obligations of the
indemnifying party pursuant to this Section 10 except to the extent the
indemnifying party shall have been actually prejudiced as a result of such
failure). In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate therein and, to the extent
that it shall wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party shall not be liable to such indemnified
party under these indemnification provisions for any legal expenses of other
counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. Notwithstanding the foregoing, if (i) the indemnifying
party shall not have employed counsel reasonably satisfactory to such
indemnified party to take charge of the defense of such action within a
reasonable time after notice of commencement of such action (so long as such
failure to employ counsel is not the result of an unreasonable determination by
such indemnified party that counsel selected pursuant to the immediately
preceding sentence is unsatisfactory), or (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnifying
party and such indemnified party and such indemnified party shall have
reasonably concluded that there may be legal defenses available to it which are
different from or additional to those available to the indemnifying party which,
if the indemnifying party and such indemnified party were to be represented by
the same counsel, could result in a conflict of interest for such counsel or
materially prejudice the prosecution of the defenses available to such
indemnified party, then such indemnified party shall have the right to employ
separate counsel, in which case the fees and expenses of one counsel or firm of
counsel (plus one local or regulatory counsel or firm of counsel) selected by a
majority in interest of the indemnified parties shall be borne by the
indemnifying party and the fees and expenses of all other counsel retained by
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the indemnified parties shall be paid by the indemnified parties. No
indemnified party shall consent to entry of any judgment or enter into any
settlement without the consent (which consent, in the case of an action, suit,
claim or proceeding exclusively seeking monetary relief, shall not be
unreasonably withheld) of each indemnifying party.
(d) CONTRIBUTION. If the indemnification from the indemnifying
party provided for in this Section 10 is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified party in connection with the actions
which resulted in such losses, claims, damages, liabilities and expenses, as
well as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 10(c), any legal and
other fees and expenses reasonably incurred by such indemnified party in
connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 10(d) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 10(d), no underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such underwriter has otherwise been required to pay by reason of
22
<PAGE>
such untrue or alleged untrue statement or omission or alleged omission and no
Holder shall be required to contribute any amount in excess of the amount by
which the total price at which the Registrable Securities of such Holder were
offered to the public exceeds the amount of any damages which such Holder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
If indemnification is available under this Section 10, the
indemnifying parties shall indemnify each indemnified party to the fullest
extent provided in Section 10(a) or (b), as the case may be, without regard to
the relative fault of such indemnifying parties or indemnified party or any
other equitable consideration provided for in this Section 10(d).
(e) The provisions of this Section 10 shall be in addition to any
liability which any party may have to any other party and shall survive any
termination of this Agreement. The indemnification provided by this Section 10
shall remain in full force and effect irrespective of any investigation made by
or on behalf of an indemnified party, so long as such indemnified party does not
act in a fraudulent, reckless or grossly negligent manner.
11. PARTICIPATION IN UNDERWRITTEN OFFERINGS. No Holder may
participate in any underwritten offering hereunder unless such Holder (a) in the
case of a registration pursuant to Section 3, agrees to sell such Holder's
securities on the basis provided in any underwriting arrangements approved by
Acquiror in its reasonable discretion and (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements.
12. MISCELLANEOUS. (a) REMEDIES. Each Holder, in addition
to being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement.
(b) AMENDMENTS AND WAIVERS. Except as otherwise provided
herein, the provisions of this Agreement may not be
23
<PAGE>
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, unless Acquiror has obtained the written
consent of Holders of at least a majority in number of the Registrable
Securities then outstanding.
(c) NOTICES. Notices, requests, permissions, waivers, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if signed by the respective Persons giving them (in the case of any
corporation the signature shall be by an officer thereof) and delivered by hand,
deposited in the United States mail (registered or certified, return receipt
requested), properly addressed and postage prepaid, or delivered by telecopy:
If to a Holder, to:
Amos B. Hostetter, Jr.
c/o CONTINENTAL CABLEVISION, INC.
The Pilot House, Lewis Wharf
Boston, Massachusetts 02110
Telephone: (617) 742-9500
Telecopy: (617) 742-0530
Attention: Amos B. Hostetter, Jr.
with a copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 338-2800
Telecopy: (617) 338-2880
Attention: Patrick K. Miehe, Esq.
If to Acquiror, to:
U S WEST, INC.
7800 East Orchard Road
Englewood, Colorado 80111
Telephone: (303) 793-6310
Telecopy: (303) 793-6707
Attention: General Counsel
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<PAGE>
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
Attention: Dennis J. Block, Esq.
(d) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the successors of each of the parties;
PROVIDED, HOWEVER, that any successor to a Holder shall have agreed in
writing to become a Holder under this Agreement and to be bound by the terms and
conditions hereof and to become a Stockholder under the Stockholders Agreement
and to be bound by the terms and conditions thereof. This Agreement and the
provisions of this Agreement that are for the benefit of the Holders shall not
be assignable by any Holder to any Person and any such purported assignment
shall be null and void.
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
(f) DESCRIPTIVE HEADINGS. The descriptive headings used herein
are inserted for convenience of reference only and are not intended to be part
of or to affect the meaning or interpretation of this Agreement.
(g) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof.
(h) SEVERABILITY. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be in any way
impaired thereby, it being intended that all remaining provisions contained
herein shall not be in any way impaired thereby, it being intended
25
<PAGE>
that all of the rights and privileges of the Holder shall be enforceable to the
fullest extent permitted by law.
(i) ENTIRE AGREEMENT. This Agreement is intended by the parties
as a final expression and a complete and exclusive statement of the agreement
and understanding of the parties hereto in respect of the subject matter hereof.
There are no restrictions, promises, warranties or undertakings with respect to
the subject matter hereof, other than those set forth or referred to herein.
This Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
26
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first written above.
U S WEST, INC.
By:_____________________________________
Name:
Title:
________________________________________
Amos B. Hostetter, Jr.
THE AMOS B. HOSTETTER, JR. 1989 TRUST
By:_____________________________________
Name: Amos B. Hostetter, Jr.
Title: Trustee
By:_____________________________________
Name: Timothy P. Neher
Title: Trustee
THE HOSTETTER FOUNDATION
By:_____________________________________
Name:
Title:
27
<PAGE>
EXHIBIT C
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF SERIES D CONVERTIBLE
PREFERRED STOCK
OF
U S WEST, INC.
--------------------
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
---------------------
U S WEST, INC., a corporation organized and existing by virtue of the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that the following resolution was duly adopted by action of the
Board of Directors of the Corporation at a meeting duly held on February 26,
1996.
RESOLVED that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of Section
3 of Article V of the Restated Certificate of Incorporation of the Corporation
(the "Certificate of Incorporation"), and Section 151(g) of the General
Corporation Law of the State of Delaware, such Board of Directors hereby
creates, from the authorized shares of Preferred Stock, par value $1.00 per
share (the "Preferred Stock"), of the Corporation authorized to be issued
pursuant to the Certificate of Incorporation, a series of Preferred Stock, and
hereby fixes the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, of the shares of such series as follows:
The series of Preferred Stock hereby established shall consist of
20,000,000 shares designated as Series D Convertible Preferred Stock. The
rights, preferences and limitations of such series shall be as follows:
<PAGE>
1. DEFINITIONS. Unless otherwise defined herein, terms used herein
shall have the meanings assigned to them in Section 2.6 of Article V of the
Certificate of Incorporation and the following terms shall have the indicated
meanings:
1.1 "Board of Directors" shall mean the Board of Directors of
the Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take such
action.
1.2 "Capital Stock" shall mean any and all shares of corporate
stock of a Person (however designated and whether representing rights to vote,
rights to participate in dividends or distributions upon liquidation or
otherwise with respect to the Corporation, or any division or subsidiary
thereof, or any joint venture, partnership, corporation or other entity).
1.3 "Certificate" shall mean the certificate of the voting
powers, designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, of
Series D Convertible Preferred Stock filed with respect to this resolution with
the Secretary of State of the State of Delaware pursuant to Section 151 of the
General Corporation Law of the State of Delaware.
1.4 "Closing Price" shall mean the last reported sale price of
the Media Stock (or such other class or series of common stock into which shares
of this Series are then convertible), regular way, as shown on the Composite
Tape of the NYSE, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices on the NYSE, or, if the Media Stock (or such
other class or series of common stock) is not listed or admitted to trading on
the NYSE, on the principal national securities exchange on which such stock is
listed or admitted to trading, or, if it is not listed or admitted to trading on
any national securities exchange, the last reported sale price of the Media
Stock (or such other class or series of common stock), or, in case no such sale
takes place on such day, the average of the closing bid and asked prices, in
either case as reported by Nasdaq.
2
<PAGE>
1.5 "Communications Stock" shall mean the class of U S WEST
Communications Group Common Stock, par value $.01 per share, of the Corporation
or any other class of stock resulting from (x) successive changes or
reclassifications of such stock consisting solely of changes in par value, or
from par value to no par value or (y) a subdivision or combination, and in any
such case including any shares thereof authorized after the date of the
Certificate, together with any associated rights to purchase other securities of
the Corporation which are at the time represented by the certificates
representing such shares.
1.6 "Conversion Date" shall have the meaning set forth in
Section 3.5.
1.7 "Conversion Price" shall have the meaning set forth in
Section 3.1 hereof.
1.8 "Conversion Rate" shall have the meaning set forth in
Section 3.1 hereof.
1.9 "Converting Holder" shall have the meaning set forth in
Section 3.5 hereof.
1.10 "Current Market Price" on any applicable record date,
Conversion Date or Redemption Date referred to in Section 3 or Section 4 shall
mean the average of the daily Closing Prices per share of Media Stock (or such
other class or series of common stock into which shares of this Series are then
convertible) for the ten (10) consecutive Trading Days ending on the third
Trading Day immediately preceding such record date, Conversion Date or
Redemption Date.
1.11 "Dividend Payment Date" shall have the meaning set forth in
Section 2.1 hereof.
1.12 "Effective Time" shall mean the effective time of the
Merger.
1.13 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
1.14 "Exchange Rate" for each share of this Series called for
exchange shall be a number of shares of Media Stock (or such other class or
series of common stock
3
<PAGE>
into which shares of this Series are then convertible) equal to the quotient of
(x) the sum of (I) the Liquidation Value plus (II) the amount of accrued and
unpaid dividends on such share of Series D Stock to the Redemption Date divided
by (y) the product of (I) .95 multiplied by (II) the Current Market Price on the
Redemption Date.
1.15 "Extraordinary Cash Distributions" shall mean, with respect
to any consecutive 12-month period, all cash dividends and cash distributions on
the outstanding shares of Media Stock during such period (other than cash
dividends or cash distributions for which a prior adjustment to the Conversion
Rate was previously made) to the extent such cash dividends and cash
distributions exceed, on a per share of Media Stock basis, 10% of the average
daily Closing Price of the Media Stock over such period.
1.16 "Junior Stock" shall mean the Media Stock, the
Communications Stock and the shares of any other class or series of stock of the
Corporation which, by the terms of the Certificate of Incorporation or of the
instrument by which the Board of Directors, acting pursuant to authority granted
in the Certificate of Incorporation, shall fix the relative rights, preferences
and limitations thereof, shall be junior to the Series D Stock in respect of the
right to receive dividends or to participate in any distribution of assets other
than by way of dividends.
1.17 "Liquidation Value" shall have the meaning set forth in
Section 6.2 hereof.
1.18 "Media Group Disposition Redemption" shall have the meaning
set forth in Section 4.1 hereof.
1.19 "Media Group Disposition Dividend" shall have the meaning
set forth in Section 4.1 hereof.
1.20 "Media Group Special Dividend" shall have the meaning set
forth in Section 4.1 hereof.
1.21 "Media Group Special Events" shall have the meaning set
forth in Section 4.1 hereof.
1.22 "Media Group Subsidiary Redemption" shall have the meaning
set forth in Section 4.1 hereof.
4
<PAGE>
1.23 "Media Stock" shall mean the class of U S WEST Media Group
Common Stock, par value $.01 per share, of the Corporation or any other class of
stock resulting from (x) successive changes or reclassifications of such stock
consisting solely of changes in par value, or from par value to no par value or
(y) a subdivision or combination, and in any such case including any shares
thereof authorized after the date of the Certificate, together with any
associated rights to purchase other securities of the Corporation which are at
the time represented by the certificates representing such shares.
1.24 "Media Group Tender or Exchange Offer" shall have the
meaning set forth in Section 4.1 hereof.
1.25 "Merger" shall mean the merger of Continental Cablevision,
Inc., a Delaware corporation, with and into the Corporation pursuant to the
terms of the Merger Agreement.
1.26 "Merger Agreement" shall mean the Agreement and Plan of
Merger, dated as of February 27, 1996, between the Corporation and Continental
Cablevision, Inc., a Delaware corporation.
1.27 "Nasdaq" shall mean the Nasdaq National Market.
1.28 "NYSE" shall mean the New York Stock Exchange, Inc.
1.29 "Parity Stock" shall mean the Series A Stock, the Series B
Stock, the Series C Stock and the shares of any other class or series of stock
of the Corporation (other than Junior Stock) which, by the terms of the
Certificate of Incorporation or of the instrument by which the Board of
Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall fix the relative rights, preferences and limitations
thereof, shall, in the event that the stated dividends thereon are not paid in
full, be entitled to share ratably with the Series D Stock in the payment of
dividends, including accumulations, if any, in accordance with the sums which
would be payable on such shares if all dividends were declared and paid in full,
or shall, in the event that the amounts payable thereon on liquidation are not
paid in full, be entitled to share ratably with the Series D Stock in any
distribution of
5
<PAGE>
assets other than by way of dividends in accordance with the sums which would be
payable in such distribution if all sums payable were discharged in full;
PROVIDED, HOWEVER, that the term "Parity Stock" shall be deemed to refer (i) in
Section 6 hereof, to any stock which is Parity Stock in respect of the
distribution of assets; and (ii) in Sections 5.1 and 5.2 hereof, to any stock
which is Parity Stock in respect of either dividend rights or the distribution
of assets and which, pursuant to the Certificate of Incorporation or any
instrument in which the Board of Directors, acting pursuant to authority granted
in the Certificate of Incorporation, shall so designate, is entitled to vote
with the holders of Series D Stock.
1.30 "Person" shall mean an individual, corporation, limited
liability company, partnership, joint venture, association, trust,
unincorporated organization or other entity.
1.31 "Preferred Stock" shall mean the class of Preferred Stock,
par value $1.00 per share, of the Corporation authorized at the date of the
Certificate, including any shares thereof authorized after the date of the
Certificate.
1.32 "Record Date" shall have the meaning set forth in Section
2.1 hereof.
1.33 "Redemption Date" shall mean the date on which the
Corporation shall effect the redemption or exchange of all or any part of the
outstanding shares of this Series pursuant to Section 4.1.
1.34 "Redemption Price" for each share of this Series called for
redemption shall be equal to the sum of (x) the Liquidation Value plus (y) an
amount equal to the accrued and unpaid dividends on such share of Series D Stock
to the Redemption Date.
1.35 "Redemption Rescission Event" shall mean the occurrence of
(a) any general suspension of trading in, or limitation on prices for,
securities on the principal national securities exchange on which shares of
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) are registered and listed for trading (or, if
shares of Media Stock (or such other class or series of common stock) are not
6
<PAGE>
registered and listed for trading on any such exchange, in the over-the-counter
market) for more than six-and-one-half (61/2) consecutive trading hours, (b) any
decline in either the Dow Jones Industrial Average or the Standard & Poor's
Index of 500 Industrial Companies (or any successor index published by Dow Jones
& Company, Inc. or Standard & Poor's Corporation) by either (i) an amount in
excess of 10%, measured from the close of business on any Trading Day to the
close of business on the next succeeding Trading Day during the period
commencing on the Trading Day preceding the day notice of any redemption or
exchange of shares of this Series is given (or, if such notice is given after
the close of business on a Trading Day, commencing on such Trading Day) and
ending at the Redemption Date or (ii) an amount in excess of 15% (or, if the
time and date fixed for redemption or exchange is more than 15 days following
the date on which notice of redemption or exchange is given, 20%), measured from
the close of business on the Trading Day preceding the day notice of such
redemption or exchange is given (or, if such notice is given after the close of
business on a Trading Day, from such Trading Day) to the close of business on
any Trading Day on or prior to the Redemption Date, (c) a declaration of a
banking moratorium or any suspension of payments in respect of banks by Federal
or state authorities in the United States or (d) the commencement of a war or
armed hostilities or other national or international calamity directly or
indirectly involving the United States which in the reasonable judgment of the
Corporation could have a material adverse effect on the market for the Media
Stock (or such other class or series of common stock into which shares of this
Series are then convertible).
1.36 "Rescission Date" shall have the meaning set forth in
Section 4.5 hereof.
1.37 "Senior Stock" shall mean the shares of any class or series
of stock of the Corporation which, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall fix the
relative rights, preferences and limitations thereof, shall be senior to the
Series D Stock in respect of the right to receive dividends or to participate in
any distribution of assets other than by way of dividends.
7
<PAGE>
1.38 "Series A Stock" shall mean the series of Preferred Stock
authorized and designated as Series A Junior Participating Cumulative Preferred
Stock at the date of the Certificate, including any shares thereof authorized
and designated after the date of the Certificate.
1.39 "Series B Stock" shall mean the series of Preferred Stock
authorized and designated as Series B Junior Participating Cumulative Preferred
Stock at the date of the Certificate, including any shares thereof authorized
and designated after the date of the Certificate.
1.40 "Series C Stock" shall mean the series of Preferred Stock
authorized and designated as Series C Cumulative Redeemable Preferred Stock at
the date of the Certificate, including any shares thereof authorized and
designated after the date of the Certificate.
1.41 "Series D Stock" and "this Series" shall mean the series of
Preferred Stock authorized and designated as the Series D Convertible Preferred
Stock, including any shares thereof authorized and designated after the date of
the Certificate.
1.42 "Surrendered Shares" shall have the meaning set forth in
Section 3.5 hereof.
1.43 "Trading Day" shall mean, so long as the Media Stock (or
such other class or series of common stock into which shares of this Series are
then convertible) is listed or admitted to trading on the NYSE, a day on which
the NYSE is open for the transaction of business, or, if the Media Stock (or
such other class or series of common stock) is not listed or admitted to trading
on the NYSE, a day on which the principal national securities exchange on which
the Media Stock (or such other class or series of common stock) is listed is
open for the transaction of business, or, if the Media Stock (or such other
class or series of common stock) is not so listed or admitted for trading on any
national securities exchange, a day on which Nasdaq is open for the transaction
of business.
2. DIVIDENDS.
2.1 The holders of the outstanding Series D Stock shall be
entitled to receive dividends, as and when declared by the Board of Directors
out of funds legally
8
<PAGE>
available therefor, and any dividends declared by the Board of Directors out of
funds legally available therefor in accordance with Section 3.6(d). Each
dividend shall be at the annual rate equal to ____% per share of Series D Stock
(which is equivalent to $__________ quarterly and $__________ annually per
share). (1) All dividends shall be
- -------------------------
1. The dividend rate (the "Dividend Rate") shall be equal to the sum of 4.375%
(the "Base Dividend Rate") plus the Adjustment Amount (as defined below). If
the Calculation Price (as defined in the Merger Agreement) is less than $24.50,
the Corporation shall have the right, in its sole discretion, to (i) increase
the Base Dividend Rate to 6.00% and (ii) increase the Conversion Rate pursuant
to footnote 2.
The Base Dividend Rate shall be subject to adjustment in the following
manner:
(i) If the Adjustment Amount is less than seven basis points in absolute
terms, then the Adjustment Amount shall be deemed to be zero and the
Dividend Rate shall equal the Base Dividend Rate.
(ii) If the Adjustment Amount is greater than or equal to seven basis
points in absolute terms, then the Dividend Rate shall be equal to the
Base Dividend Rate plus the Adjustment Amount, rounded to the nearest
multiple of 0.125%.
"Adjustment Amount" shall be equal to the product of (x) the sum of (1) the
Change In Weighted Average Yield plus (2) the Change In Credit Spread multiplied
by (y) the Discount Factor.
"Change In Weighted Average Yield" shall equal the sum (whether positive or
negative) of the following, based upon the average market closing levels of
Treasury securities for the 10 Trading Days ending 5 Trading Days prior to the
Effective Time:
(i) the change (whether positive or negative) since February 27, 1996 in
basis points in 3-year Treasury yields x 0.25;
(continued...)
9
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payable in cash on or about the first day of November, February, May and August
in each year, beginning on the first such date that is more than 15 days after
the Effective Time, as fixed by the Board of Directors, or such other dates as
are fixed by the Board of Directors (each a "Dividend Payment Date"), to the
holders of record of Series D Stock at the close of business on or about the
15th day of the month next preceding such first day of January, April, July or
October as the case may be, as fixed by the
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1. (...continued)
(ii) the change (whether positive or negative) since February 27, 1996 in
basis points in 5-year Treasury yields x 0.25;
(iii) the change (whether positive or negative) since February 27, 1996 in
basis points in 10-year Treasury yields x 0.25; and
(iv) the change (whether positive or negative) since February 27, 1996 in
basis points in 20-year Treasury yields x 0.25.
"Change In Credit Spread" shall equal (whether positive or negative) the
average credit spread measured in basis points on U S WEST Financing I's 7.96%
Trust Originated Preferred Securities (based upon the closing market price
expressed as a stripped current yield) over the 30-year Treasury "pricing bond"
for the 10 Trading Days ending 5 Trading Days prior to the Effective Time minus
159.5 basis points.
"Discount Factor" shall equal 0.55.
For example, if (i) the Base Dividend Rate is 4.375%, (ii) the average
3-year Treasury, 5-year Treasury, 10-year Treasury and 20-year Treasury yields
are each 20 basis points lower at the Effective Time than they are on February
27, 1996 and (iii) the Change In Credit Spread is fifty basis points, then the
Adjustment Amount shall equal 16.5 basis points ((-20 basis points + fifty basis
points) x 0.55). Because such Adjustment Amount is greater than seven basis
points, the Dividend Rate would be equal to the Base Dividend Rate plus the
Adjustment Amount (or 4.540%), rounded to the yield which is at the nearest
multiple of 0.125% (or 4.500%).
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Board of Directors, or such other dates as are fixed by the Board of Directors
(each a "Record Date"). Such dividends shall accrue on each share cumulatively
on a daily basis, whether or not there are unrestricted funds legally available
for the payment of such dividends and whether or not earned or declared, from
and after the day immediately succeeding the Effective Time and any such
dividends that become payable for any partial dividend period shall be computed
on the basis of the actual days elapsed in such period. All dividends that
accrue in accordance with the foregoing provisions shall be cumulative from and
after the day immediately succeeding the Effective Time. The per share dividend
amount payable to each holder of record of Series D Stock on any Dividend
Payment Date shall be rounded to the nearest cent. The dividend rate per share
of this Series shall be appropriately adjusted from time to time to reflect any
split or combination of the shares of this Series.
2.2 Except as hereinafter provided in this Section 2.2 and
except for redemptions by the Corporation pursuant to Sections 4.1(b), 4.1(c) or
4.1(d), unless all dividends on the outstanding shares of Series D Stock and any
Parity Stock that shall have accrued through any prior Dividend Payment Date
shall have been paid, or declared and funds set apart for payment thereof, no
dividend or other distribution (payable other than in shares of Junior Stock)
shall be paid to the holders of Junior Stock or Parity Stock, and no shares of
Series D Stock, Parity Stock or Junior Stock shall be purchased, redeemed or
otherwise acquired by the Corporation or any of its subsidiaries (except by
conversion into or exchange for Junior Stock), nor shall any monies be paid or
made available for a purchase, redemption or sinking fund for the purchase or
redemption of any Series D Stock, Junior Stock or Parity Stock. When dividends
are not paid in full upon the shares of this Series and any Parity Stock, all
dividends declared upon shares of this Series and all Parity Stock shall be
declared pro rata so that the amount of dividends declared per share on this
Series and all such Parity Stock shall in all cases bear to each other the same
ratio that accrued dividends per share on the shares of this Series and all such
Parity Stock bear to each other. No interest, or sum of money in lieu of
interest, shall be payable in respect of any dividend payment or payments on
this Series which may be in arrears.
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3. CONVERSION RIGHTS.
3.1 (a) Subject to Section 3.1(b), each holder of a share of
this Series shall have the right at any time to convert such share into a number
of shares of Media Stock equal to [ ] shares of Media Stock for each share of
this Series, subject to adjustment as provided in this Section 3 (such rate, as
so adjusted from time to time, is herein called the "Conversion Rate"; and the
"Conversion Price" at any time shall mean the Liquidation Value per share
divided by the Conversion Rate in effect at such time (rounded to the nearest
one hundredth of a cent)) (2).
(b) The right of a holder of a share of this Series called for
redemption or exchange pursuant to Sections 4.1(a) or 4.1(c) to convert such
share into Media Stock (or such other class or series of common stock into which
shares of this Series are then convertible) pursuant to Section 3.1(a) shall
terminate at the close of business on the Redemption Date unless the Corporation
defaults in the payment of the Redemption Price or Exchange Rate or, in the case
of a redemption or exchange pursuant to Section 4.1(a), the Corporation
exercises its right to rescind such redemption or exchange pursuant to Section
4.5, in which case such right of conversion shall not terminate at the close of
business on such date. The right of a holder of a share of this Series called
for redemption pursuant to Section 4.1(b): (i) in connection with a Media Group
Subsidiary Redemption, a Media Group Tender or Exchange Offer or a Media Group
Disposition Redemption involving a Disposition of all (not merely substantially
all) of the properties and assets attributed to the Media Group, to convert such
share into Media Stock pursuant to Section 3.1(a) shall terminate at the close
of business on the Redemption Date; (ii) in connection with a Media Group
Disposition Dividend or Media Group Special Dividend, to
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2. The Conversion Rate shall be equal to the quotient of (x) $50 divided by
(y) the product of (I) 1.25 multiplied by (II) the Calculation Price (as defined
in the Merger Agreement). If the Calculation Price is less than $24.50, the
Corporation shall have the right, in its sole discretion, to (i) set the
Conversion Rate equal to the quotient of (x) $50 divided by (y) the product of
(I) 1.40 multiplied by (II) the Calculation Price and (ii) increase the Base
Dividend Rate in accordance with footnote 1.
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<PAGE>
convert such share into Media Stock pursuant to Section 3.1(a) shall terminate
at the close of business on the record date for determining holders entitled to
receive such dividend; and (iii) in connection with a Media Group Disposition
Redemption involving a Disposition of substantially all (but not all) of the
properties and assets attributed to the Media Group, to convert such share into
Media Stock shall terminate at the close of business on the date on which shares
of Media Stock are selected to be redeemed in such Media Group Disposition
Redemption, unless, in any of the foregoing cases, the Corporation defaults in
the payment of the Redemption Price or the conditions to such redemption set
forth in the last sentence of Section 4.1(b) shall not have been satisfied, in
which event such right of conversion shall not terminate at the close of
business on such date. In the event the Corporation converts all of the
outstanding shares of Media Stock into shares of Communications Stock (or, if
the Communications Stock is not Publicly Traded at such time and shares of any
other class or series of common stock of 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), the right of a holder of a share of
this Series called for redemption pursuant to Section 4.1(d) in connection with
an event substantially similar to a Media Group Special Event to convert such
share into Communications Stock (or such other class or series of common stock)
shall terminate on a date comparable to the date specified in the preceding
sentence with respect to a Media Group Special Event substantially similar to
such event.
3.2 If any shares of this Series are surrendered for conversion
subsequent to the Record Date preceding a Dividend Payment Date but on or prior
to such Dividend Payment Date (except shares called for redemption or exchange
on a Redemption Date between such Record Date and Dividend Payment Date and with
respect to which such redemption or exchange has not been rescinded), the
registered holder of such shares at the close of business on such Record Date
shall be entitled to receive the dividend, if any, payable on such shares on
such Dividend Payment Date notwithstanding the conversion thereof. Except as
provided in this Section 3.2, no adjustments in respect of payments of dividends
on shares surrendered for conversion or any dividend on the Media Stock issued
upon conversion shall be made upon the conversion of any shares of this Series.
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<PAGE>
3.3 The Corporation may, but shall not be required to, in
connection with any conversion of shares of this Series, issue a fraction of a
share of Media Stock, and if the Corporation shall determine not to issue any
such fraction, the Corporation shall, subject to Section 3.6(g), make a cash
payment (rounded to the nearest cent) equal to such fraction multiplied by the
Closing Price of the Media Stock on the last Trading Day prior to the date of
conversion.
3.4 Any holder of shares of this Series electing to convert such
shares into Media Stock shall surrender the certificate or certificates for such
shares at the office of the transfer agent or agents therefor (or at such other
place in the United States as the Corporation may designate by notice to the
holders of shares of this Series) during regular business hours, duly endorsed
to the Corporation or in blank, or accompanied by instruments of transfer to the
Corporation or in blank, or in form satisfactory to the Corporation, and shall
give written notice to the Corporation at such office that such holder elects to
convert such shares of this Series. The Corporation shall, as soon as
practicable and in any event within five Trading Days (subject to Section
3.6(g)) after such surrender of certificates for shares of this Series,
accompanied by the written notice above prescribed issue and deliver at such
office to the holder for whose account such shares were surrendered, or to his
nominee, (i) certificates representing the number of shares of Media Stock to
which such holder is entitled upon such conversion and (ii) if less than the
full number of shares of this Series represented by such certificate or
certificates is being converted, a new certificate of like tenor representing
the shares of this Series not converted.
3.5 Conversion shall be deemed to have been made immediately
prior to the close of business as of the date that certificates for the shares
of this Series to be converted, and the written notice prescribed in Section
3.4, are received by the transfer agent or agents for this Series (such date
being referred to herein as the "Conversion Date"). The Person entitled to
receive the Media Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such Media Stock as of the close of business on
the Conversion Date and such conversion shall be at the Conversion Rate in
effect on such date. Notwithstanding anything to the contrary contained herein,
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<PAGE>
in the event the Corporation shall have rescinded a redemption or exchange of
shares of this Series pursuant to Section 4.5, any holder of shares of this
Series that shall have surrendered shares of this Series for conversion
following the day on which notice of the redemption or exchange shall have been
given but prior to the later of (a) the close of business on the Trading Day
next succeeding the date on which public announcement of the rescission of such
redemption or exchange shall have been made and (b) the date which is three
Trading Days following the mailing of the notice of rescission required by
Section 4.5 (a "Converting Holder") may rescind the conversion of such shares
surrendered for conversion by (i) properly completing a form prescribed by the
Corporation and mailed to holders of shares of this Series (including Converting
Holders) with the Corporation's notice of rescission, which form shall provide
for the certification by any Converting Holder rescinding a conversion on behalf
of any beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of shares of this Series that the beneficial ownership (within the meaning
of such Rule) of such shares shall not have changed from the date on which such
shares were surrendered for conversion to the date of such certification and
(ii) delivering such form to the Corporation no later than the close of business
on that date which is fifteen (15) Trading Days following the date of the
mailing of the Corporation's notice of rescission. The delivery of such form by
a Converting Holder shall be accompanied by (x) any certificates representing
shares of Media Stock issued to such Converting Holder upon a conversion of
shares of this Series that shall be rescinded by the proper delivery of such
form (the "Surrendered Shares"), (y) any securities, evidences of indebtedness
or assets (other than cash) distributed by the Corporation to such Converting
Holder by reason of such Converting Holder's being a record holder of the
Surrendered Shares and (z) payment in New York Clearing House funds or other
funds acceptable to the Corporation of an amount equal to the sum of (I) any
cash such Converting Holder may have received in lieu of the issuance of
fractional shares upon conversion and (II) any cash paid or payable by the
Corporation to such Converting Holder by reason of such Converting Holder being
a record holder of the Surrendered Shares. Upon receipt by the Corporation of
any such form properly completed by a Converting Holder and any certificates,
securities, evidences of indebtedness, assets or cash payments required to be
returned or made by such Converting Holder to the Corporation as set forth
15
<PAGE>
above, the Corporation shall instruct the transfer agent or agents for shares of
Media Stock and shares of this Series to cancel any certificates representing
the Surrendered Shares (which Surrendered Shares shall be deposited in the
treasury of the Corporation) and reissue certificates representing shares of
this Series to such Converting Holder (which shares of this Series shall,
notwithstanding their surrender for conversion, be deemed to have been
outstanding at all times). The Corporation shall, as promptly as practicable,
and in no event more than five (5) Trading Days, following the receipt of any
such properly completed form and any such certificates, securities, evidences of
indebtedness, assets or cash payments required to be so returned or made, pay to
the Converting Holder or as otherwise directed by such Converting Holder any
dividend or other payment made on such shares of this Series during the period
from the time such shares shall have been surrendered for conversion to the
rescission of such conversion. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any form submitted to
the Corporation to rescind the conversion of shares of this Series, including
questions as to the proper completion or execution of any such form or any
certification contained therein, shall be resolved by the Corporation, whose
good faith determination shall be final and binding. The Corporation shall not
be required to deliver certificates for shares of Media Stock while the stock
transfer books for such stock or for this Series are duly closed for any purpose
(but not for a period in excess of two Trading Days) or during any period
commencing at a Redemption Rescission Event and ending at either (i) the time
and date at which the Corporation's right of rescission shall expire pursuant to
Section 4.5 if the Corporation shall not have exercised such right or (ii) the
close of business on that day which is fifteen (15) Trading Days following the
date of the mailing of a notice of rescission pursuant to Section 4.5 if the
Corporation shall have exercised such right of rescission, but certificates for
shares of Media Stock shall be delivered as soon as practicable after the
opening of such books or the expiration of such period.
3.6 The Conversion Rate shall be adjusted from time to time as
follows for events occurring after the Effective Time:
(a) In case the Corporation shall, at any time or from time to
time, (i) pay a dividend or make a
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<PAGE>
distribution in shares of Media Stock, (ii) combine the outstanding shares
of Media Stock into a smaller number of shares, or (iii) subdivide or
reclassify the outstanding shares of Media Stock, then the Conversion Rate
in effect immediately before such action shall be adjusted so that
immediately following such event the holders of the Series D Stock shall be
entitled to receive upon conversion thereof the kind and amount of shares
of capital stock of the Corporation which they would have owned or been
entitled to receive upon or by reason of such event if such shares of
Series D Stock had been converted immediately before the record date (or,
if no record date, the effective date) for such event. An adjustment made
pursuant to this Section 3.6(a) shall become effective immediately after
the opening of business on the day next following the record date in the
case of a dividend or distribution and shall become effective immediately
after the opening of business on the day next following the effective date
in the case of a subdivision, combination or reclassification. For the
purposes of this Section 3.6(a), if holders of Media Stock are entitled to
elect the kind or amount of securities receivable upon the payment of any
such divided, subdivision, combination or reclassification, each holder of
Series D Stock shall be deemed to have failed to exercise any such right of
election (provided that if the kind or amount of securities receivable upon
such dividend, distribution, subdivision, combination or reclassification
is not the same for each nonelecting share, then the kind and amount of
securities receivable upon such dividend, distribution, subdivision,
combination or reclassification for each nonelecting share shall be deemed
to be the kind and amount so receivable per share by a plurality of the
nonelecting shares).
(b) If the Corporation shall issue rights, warrants or options
to all holders of Media Stock entitling them (for a period not exceeding 45
days from the record date referred to below) to subscribe for or purchase
shares of Media Stock at a price per share less than the Current Market
Price (determined as of the record date for the determination of
stockholders entitled to receive such rights, warrants or options), then,
in any such event, the Conversion Rate shall be adjusted by multiplying the
Conversion Rate in effect
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<PAGE>
immediately prior to the opening of business on such record date by a
fraction, the numerator of which shall be the number of shares of Media
Stock outstanding on such record date plus the maximum number of additional
shares of Media Stock offered for subscription pursuant to such rights,
warrants or options, and the denominator of which shall be the number of
shares of Media Stock outstanding on such record date plus the maximum
number of additional shares of Media Stock which the aggregate offering
price of the maximum number of shares of Media Stock so offered for
subscription or purchase pursuant to such rights, warrants or options would
purchase at such Current Market Price (determined by multiplying such
maximum number of shares by the exercise price of such rights, warrants or
options (plus any other consideration received by the Corporation upon the
issuance or exercise of such rights, warrants or options) and dividing the
product so obtained by such Current Market Price). Such adjustment shall
become effective at the opening of business on the day next following the
record date for the determination of stockholders entitled to receive such
rights, warrants or options. To the extent that shares of Media Stock are
not delivered after the expiration of such rights, warrants or options, the
Conversion Rate shall be readjusted to the Conversion Rate which would then
be in effect had the adjustments made upon the record date for the
determination of stockholders entitled to receive such rights, warrants or
options been made upon the basis of delivery of only the number of shares
of Media Stock actually delivered and the amount actually paid therefor.
In determining whether any rights, warrants or options entitle the holders
to subscribe for or purchase shares of Media Stock at a price per share
less than such Current Market Price, there shall be taken into account any
consideration received by the Corporation upon issuance and upon exercise
of such rights, warrants or options. The value of such consideration, if
other than cash, shall be determined by the good faith business judgment of
the Board of Directors, whose determination shall be conclusive.
(c) If the Corporation shall pay a dividend or make a
distribution to all holders of outstanding shares of Media Stock, of
capital stock, cash, evidences of its indebtedness or other assets of the
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Corporation (but excluding (x) any cash dividends or distributions (other
than Extraordinary Cash Distributions) and (y) dividends or distributions
referred to in Section 3.6(a)), then the Conversion Rate shall be adjusted
by multiplying the Conversion Rate in effect immediately prior to the
opening of business on the record date for the determination of
stockholders entitled to receive such dividend or distribution by a
fraction, the numerator of which shall be the Current Market Price
(determined as of such record date), and the denominator of which shall be
such Current Market Price less either (A) the fair market value (as
determined by the good faith business judgment of the Board of Directors,
whose determination shall be conclusive), as of such record date, of the
portion of the capital stock, assets or evidences of indebtedness to be so
distributed applicable to one share of Media Stock or (B), if applicable,
the amount of the Extraordinary Cash Distribution to be distributed per
share of Media Stock. The adjustment pursuant to the foregoing provisions
of this Section 3.6(c) shall become effective at the opening of business on
the day next following the record date for the determination of
stockholders entitled to receive such dividend or distribution.
(d) In lieu of making an adjustment to the Conversion Rate
pursuant to Sections 3.6(a), 3.6(b) or 3.6(c) above for a dividend or
distribution or an issue of rights, warrants or options, the Corporation
may distribute out of funds legally available therefor to the holders of
shares of this Series, or reserve for distribution out of funds legally
available therefor with each share of Media Stock delivered to a person
converting a share of this Series pursuant to this Section 3, such dividend
or distribution or such rights, warrants or options; PROVIDED, HOWEVER,
that in the case of such a reservation, on the date, if any, on which a
person converting a share of this Series would no longer be entitled to
receive such dividend or distribution or receive or exercise such rights,
warrants or options, such dividend or distribution shall be deemed to have
occurred, or such rights, warrants or options shall be deemed to have
issued, and the Conversion Rate shall be adjusted as provided in Section
3.6(a), 3.6(b) or 3.6(c), as the case may be (with such termination date
being the relevant date of
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determination for purposes of determining the Current Market Price).
(e) The Corporation shall be entitled to make such additional
increases in the Conversion Rate, in addition to the adjustments required
by subsections 3.6(a) through 3.6(c), as shall be determined by the Board
of Directors to be necessary in order that any dividend or distribution in
Media Stock, any subdivision, reclassification or combination of shares of
Media Stock or any issuance of rights or warrants referred to above, shall
not be taxable to the holders of Media Stock for United States Federal
income tax purposes.
(f) To the extent permitted by applicable law, the Corporation
may from time to time increase the Conversion Rate by any amount for any
period of time if the period is at least 20 Trading Days, the increase is
irrevocable during such period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the
Corporation, which determination shall be conclusive.
(g) In any case in which this Section 3.6 shall require that any
adjustment be made effective as of or immediately following a record date,
the Corporation may elect to defer (but only for five (5) Trading Days
following the occurrence of the event which necessitates the filing of the
statement referred to in Section 3.9(a)) issuing to the holder of any
shares of this Series converted after such record date (i) the shares of
Media Stock and other capital stock of the Corporation issuable upon such
conversion over and above the shares of Media Stock and other capital stock
of the Corporation issuable upon such conversion on the basis of the
Conversion Rate prior to adjustment and (ii) paying to such holder any
amount in cash in lieu of any fraction thereof pursuant to Section 3.3;
PROVIDED, HOWEVER, that the Corporation shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event requiring
such adjustment.
(h) All calculations under this Section 3 shall be made to the
nearest cent, one-hundredth of a
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share or, in the case of the Conversion Rate, one hundred-thousandth.
Notwithstanding any other provision of this Section 3, the Corporation
shall not be required to make any adjustment of the Conversion Rate unless
such adjustment would require an increase or decrease of at least 1.00000%
of such Conversion Rate. Any lesser adjustment shall be carried forward
and shall be made at the time of and together with the next subsequent
adjustment which, together with any adjustment or adjustments so carried
forward, shall amount to an increase or decrease of at least 1.00000% in
such rate. Any adjustments under this Section 3 shall be made successively
whenever an event requiring such an adjustment occurs.
(i) If the Corporation shall take a record of the holders of
Media Stock for the purpose of entitling them to receive a dividend or
other distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment in the Conversion
Rate then in effect shall be required by reason of the taking of such
record.
(j) Subject to Section 3.6(e) hereof, no adjustment shall be
made pursuant to this Section 3.6 with respect to any share of Series D
Stock that is converted prior to the time such adjustment otherwise would
be made.
3.7 In case of (a) any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation in which the
Corporation is the surviving or continuing corporation and which does not result
in any reclassification of, or change (other than a change in par value or from
par value to no par value or from no par value to par value, or as a result of a
subdivision or combination) in, outstanding shares of Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) or (b) any sale or conveyance of all or substantially all of the
property and assets of the Corporation, then lawful provision shall be made as
part of the terms of such transaction whereby the holder of each share of Series
D Stock which is not converted into the right to receive stock or other
securities and property in connection with such
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transaction shall have the right thereafter, during the period such share shall
be convertible, to convert such share into the kind and amount of shares of
stock or other securities and property receivable upon such consolidation,
merger, sale or conveyance by a holder of the number of shares of Media Stock
(or such other class or series of common stock into which shares of this Series
are then convertible) into which such shares of this Series could have been
converted immediately prior to such consolidation, merger, sale or conveyance,
subject to adjustment which shall be as nearly equivalent as may be practicable
to the adjustments provided for in this Section 3. If holders of Media Stock
(or such other class or series of common stock into which shares of this Series
are then convertible) are entitled to elect the kind or amount of securities or
other property receivable upon such consolidation, merger, sale or conveyance,
all adjustments made pursuant to this Section 3.7 shall be based upon (i) the
election, if any, made in writing to the Secretary of the Corporation by the
record holder of the largest number of shares of Series D Stock prior to the
earlier of (x) the last date on which a holder of Media Stock (or such other
class or series of common stock) may make such an election and (y) the date
which is five (5) Trading Days prior to the record date for determining the
holders of Media Stock (or such other class or series of common stock) entitled
to participate in the transaction (or if no such record date is established, the
effective date of such transaction) or (ii) if no such election is timely made,
an assumption that such holder of Media Stock (or such other class or series of
common stock) failed to exercise such rights of election (provided that if the
kind or amount of securities or other property receivable upon such
consolidation, merger, sale or conveyance is not the same for each nonelecting
share, then the kind and amount of securities or other property receivable upon
such consolidation, merger, sale or conveyance for each nonelecting share shall
be deemed to be the kind and amount so receivable per share by a plurality of
the nonelecting shares). Concurrently with the mailing to holders of Media
Stock (or such other class or series of common stock) of any document pursuant
to which such holders may make an election regarding the kind or amount of
securities or other property that will be receivable by such holder in any
transaction described in clause (a) or (b) of the first sentence of this Section
3.7, the Corporation shall mail a copy thereof to the holders of shares of the
Series D Stock. The Corporation shall not enter into any of
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the transactions referred to in clauses (a) or (b) of the first sentence of this
Section 3.7 unless, prior to the consummation thereof, effective provision shall
be made in a certificate or articles of incorporation or other constituent
document or written instrument of the Corporation or the entity surviving the
consolidation or merger, if other than the Corporation, or the entity acquiring
the Corporation's assets, unless, in either case, such entity is a direct or
indirect subsidiary of another entity, in which case such provision shall be
made in the certificate or articles of incorporation or other constituent
document or written instrument of such other entity (any such entity or other
entity being the "Surviving Entity") so as to assume the obligation to deliver
to each holder of shares of Series D Stock such stock or other securities and
property and otherwise give effect to the provisions set forth in this Section
3.7. The provisions of this Section 3.7 shall apply similarly to successive
consolidations, mergers, sales or conveyances.
3.8 After the date, if any, on which all outstanding shares of
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) are converted into or exchanged for shares of
another class or series of common stock of the Corporation, each share of this
Series shall thereafter be convertible into or exchangeable for the number of
shares of such other class or series of common stock receivable upon such
conversion or exchange by a holder of that number of shares or fraction thereof
of Media Stock (or such other class or series of common stock into which shares
of this Series are then convertible) into which one share of this Series was
convertible immediately prior to such conversion or exchange. From and after
any such conversion or exchange, Conversion Rate adjustments as nearly
equivalent as may be practicable to the adjustments pursuant to Sections 3.6 and
3.7 which, prior to such exchange, were made in respect of Media Stock (or such
other class or series of common stock into which shares of this Series are then
convertible) shall instead be made pursuant to such Sections 3.6 and 3.7 in
respect of shares of such other class or series of common stock.
3.9 Whenever the Conversion Rate is adjusted as provided in this
Section 3, the Corporation (or, in the case of Section 3.7, the Corporation or
the Surviving Entity, as the case may be, shall forthwith place on file
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with its transfer agent or agents for this Series a statement signed by a duly
authorized officer of the Corporation or the Surviving Entity, as the case may
be, stating the adjusted Conversion Rate determined as provided herein. Such
statements shall set forth in reasonable detail such facts as shall be necessary
to show the reason for and the manner of computing such adjustment. Promptly
after the adjustment of the Conversion Rate, the Corporation or the Surviving
Entity, as the case may be, shall mail a notice thereof to each holder of shares
of this Series. Whenever the Conversion Rate is increased pursuant to Section
3.6(f), such notice shall be mailed to each holder of shares of this Series as
promptly as possible after the Corporation shall have determined to effect such
increase and, in any event, at least 15 Trading Days prior to the date such
increased Conversion Rate takes effect, and such notice shall state such
increased Conversion Rate and the period during which it will be in effect.
Where appropriate, the notice required by this Section 3.9(a) may be given in
advance and included as part of the notice required pursuant to Section 3.9(b)
or 3.9(c).
(b) Subject to the provisions of Section 3.9(c), if: (i) the
Corporation takes any action that would require an adjustment of the
Conversion Rate pursuant to Sections 3.6 through 3.8; (ii) there shall be any
consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation is required, or the sale or
transfer of all or substantially all of the assets of the Corporation; or
(iii) there shall occur the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, then the Corporation shall, as promptly as
possible, but at least 10 Trading Days prior to the record date or other date
set for definitive action if there shall be no record date, a notice stating
the action or event for which such notice is being given and the record date
for and the anticipated effective date of such action or event. Failure to
give or receive such notice or any defect therein shall not affect the
legality or validity of the related transaction.
(c) If the Corporation intends to convert all of the
outstanding shares of Media Stock into shares of Communications Stock (or, if
the Communications Stock is not Publicly Traded at such time and shares of
any other class or series of common stock of the Corporation (other than
Media Stock) are then Publicly Traded, of such other class
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or series of common stock as has the largest Market Capitalization) (as provided
in Section 2.4 of Article V of the Certificate of Incorporation), then the
Corporation shall, not earlier than the 35th Trading Day and not later than the
45th Trading Day prior to the date of such conversion, cause notice to be filed
with the transfer agent or agents for this Series and given to each record
holder of shares of this Series, setting forth: (1) a statement that all
outstanding shares of Media Stock shall be converted; (2) the date of such
conversion; (3) the per share number of shares of Communications Stock (or such
other class or series of common stock) to be received with respect to each share
of Media Stock, including details as to the calculation thereof; (4) the place
or places where certificates for shares of Media Stock, properly endorsed or
assigned for transfer (unless the Corporation shall waive such requirement), are
to be surrendered for delivery of certificates for shares of Communications
Stock (or such other class or series of common stock); (5) the number of shares
of Media Stock outstanding and the number of shares of Media Stock into or for
which outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price; (6) a
statement to the effect that, subject to Section 2.4.5(I) of Article V of the
Certificate of Incorporation, dividends on shares of such Media Stock shall
cease to be paid as of the date of such conversion; (7) that a holder of shares
of this Series shall be entitled to receive shares of Communications Stock (or
such other class or series of common stock) pursuant to such conversion if such
holder converts shares of this Series on or prior to the date of such
conversion; and (8) a statement as to what such holder will be entitled to
receive pursuant to the terms of Section 3.8 if such holder thereafter properly
converts shares of this Series. In addition, from and after any conversion of
Media Stock effected in accordance with Section 2.4 of Article V of the
Certificate of Incorporation, if (x) a class or series of common stock of the
Corporation exists in addition to the class or series of common stock into which
the Media Stock was converted and (y) the Corporation intends to convert the
class or series of common stock into which the Media Stock was converted into
another such class or series of common stock of the Corporation, then the
Corporation shall give notice comparable to the notice described in the
preceding sentence of its intention to effect such a conversion. In
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the event of any conflict between the notice provisions of this Section 3.9(c)
and Section 3.9(b), the notice provisions of this Section 3.9(c) shall govern.
3.10 There shall be no adjustment of the Conversion Rate in case
of the issuance of any stock of the Corporation in a reorganization, acquisition
or other similar transaction except as specifically set forth in this Section 3.
If any action or transaction would require adjustment of any Conversion Rate
established hereunder pursuant to more than one paragraph of this Section 3,
only the adjustment which would result in the largest increase of such
Conversion Rate shall be made.
3.11 The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
stock, for the purpose of effecting the conversion of the shares of this Series,
such number of its duly authorized shares of Media Stock (or, if applicable, any
other shares of Capital Stock of the Corporation) as shall from time to time be
sufficient to effect the conversion of all outstanding shares of this Series
into such Media Stock (or such other shares of Capital Stock) at any time;
PROVIDED, HOWEVER, that nothing contained herein shall preclude the Corporation
from satisfying its obligations in respect of the conversion of the shares by
delivery of purchased shares of Media Stock (or such other shares of Capital
Stock) that are held in the treasury of the Corporation. All shares of Media
Stock (or such other shares of Capital Stock of the Corporation) which shall be
deliverable upon conversion of the shares of this Series shall be duly and
validly issued, fully paid and nonassessable. For purposes of this Section 3,
the number of shares of Media Stock or any other class or series of common
stock of the Corporation at any time outstanding shall not include any shares of
Media Stock or such other class or series of common stock then owned or held by
or for the account of Corporation or any subsidiary of the Corporation.
3.12 If any shares of Media Stock (or such other class or series
of common stock into which shares of this Series are then convertible) which
would be issuable upon conversion of shares of this Series hereunder require
registration with or approval of any governmental authority before such shares
may be issued upon conversion, the Corporation will in good faith and as
expeditiously as
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possible cause such shares to be duly registered or approved, as the case may
be. The Corporation will endeavor to list the shares of (or depositary shares
representing fractional interests in) Media Stock (or such other class or series
of common stock into which shares of this Series are then convertible) required
to be delivered upon conversion of shares of this Series prior to such delivery
upon the principal national securities exchange upon which the outstanding Media
Stock (or such other class or series of common stock) is listed at the time of
such delivery.
3.13 The Corporation shall pay any and all issue, stamp,
documentation, transfer or other taxes that may be payable in respect of any
issue or delivery of shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) on
conversion of shares of this Series pursuant hereto. The Corporation shall not,
however, be required to pay any tax which is payable in respect of any transfer
involved in the issue or delivery of Media Stock (or such other class or series
of common stock) in a name other than that in which the shares of this Series so
converted were registered, and no such issue or delivery shall be made unless
and until the Person requesting such issue has paid to the Corporation the
amount of such tax, or has established, to the satisfaction of the Corporation,
that such tax has been paid.
4. REDEMPTION OR EXCHANGE.
4.1 (a) Except as provided in Section 4.1(b), the shares of
this Series shall not be redeemable by the Corporation prior to the third
anniversary of the Effective Time. The Corporation may, at its sole option,
subject to Section 2.2 hereof, from time to time on and after the third
anniversary of the Effective Time and prior to the fifth anniversary of the
Effective Time, exchange shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) for all or
any part of the outstanding shares of this Series at the Exchange Rate;
PROVIDED, HOWEVER, that such an exchange may only be effected if the Closing
Price shall be greater than the product of (x) the Conversion Price multiplied
by (y) 1.35, on 20 of the 30 Trading Days immediately prior to the date of the
notice delivered by the Corporation pursuant to Section 4.3(a) to holders of
shares of this Series to be exchanged. The Corporation may, at its sole option,
subject to Section 2.2 hereof, from time to
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time on and after the fifth anniversary of the Effective Time, at its election
either: (i) redeem, out of funds legally available therefor, all or any part of
the outstanding shares of this Series at the Redemption Price; (ii) exchange
shares of Media Stock (or such other class or series of common stock into which
shares of this Series are then convertible) for all or any part of the
outstanding shares of this Series at the Exchange Rate; or (iii) effect a
combination of the options described in the foregoing clauses (i) and (ii) (in
which event each holder of shares of this Series which are selected for
redemption and exchange pursuant to Section 4.2 shall receive the same
proportion of cash and shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) (except for
cash paid in lieu of fractional shares) paid to other holders of shares of this
Series selected for redemption and exchange).
(b) The Corporation shall redeem, out of funds legally available
therefor, all of the outstanding shares of this Series, at the Redemption Price,
if any of the following events with respect to the Media Group occur (such
events being collectively referred to herein as the "Media Group Special
Events"):
(i) (A) the Corporation redeems all of the outstanding shares
of Media Stock in exchange for shares of common stock of the Media Group
Subsidiaries as provided in Section 2.4.3 of Article V of the Certificate
of Incorporation (the "Media Group Subsidiary Redemption") or (B) following
a Disposition of all or substantially all of the properties and assets
attributed to the Media Group, the Corporation either (1) pays a dividend
on the Media Stock in an amount equal to the product of the Outstanding
Media Fraction multiplied by the Fair Value of the Net Proceeds of such
Disposition as provided in Section 2.4.1(A)(1)(a) of Article V of the
Certificate of Incorporation (the "Media Group Disposition Dividend"), or
(2) redeems shares of Media Stock for an amount equal to the product of the
Outstanding Media Fraction multiplied by the Fair Value of the Net Proceeds
of such Disposition as provided in Section 2.4.1(A)(1)(b) of Article V of
the Certificate of Incorporation (the "Media Group Disposition
Redemption"); or
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(ii) the Corporation pays a dividend on, or the Corporation or
any of its subsidiaries consummates a tender offer or exchange offer for,
shares of Media Stock and the aggregate amount of such dividend or the
consideration paid in such tender offer or exchange offer is an amount
equal to the Fair Value of all or substantially all of the properties and
assets attributed to the Media Group (the "Media Group Special Dividend" or
the "Media Group Tender or Exchange Offer", respectively); PROVIDED,
HOWEVER, that the calculation of the Fair Value of all or substantially all
of the properties and assets attributed to the Media Group shall be made
without giving effect to any money borrowed by the Corporation or any of
its subsidiaries in connection with such dividend or tender offer or
exchange offer, as the case may be.
The Redemption Date for shares of this Series to be redeemed by the Corporation
pursuant to this Section 4.1(b) shall be, if the applicable Media Group Special
Event is (I) the Media Group Subsidiary Redemption, the date of such exchange,
(II) the Media Group Disposition Dividend or the Media Group Special Dividend,
the date of payment of such dividend, (III) the Media Group Disposition
Redemption, the date of such redemption or (IV) the Media Group Tender or
Exchange Offer, the date such tender offer or exchange offer is consummated.
Notwithstanding anything to the contrary contained in this Section 4.1(b), any
redemption pursuant to this Section 4.1(b) shall be conditioned upon the actual
redemption of Media Stock for shares of common stock of the Media Group
Subsidiaries, payment of the Media Group Disposition Dividend or the amount due
as a result of the Media Group Disposition Redemption (in each case in the
required kind of capital stock, cash, securities and/or other property), payment
of the Media Group Special Dividend or the consummation of the Media Group
Tender or Exchange Offer, as the case may be.
(c) The Corporation shall, on the twentieth anniversary of the
Effective Time, at its election either: (i) redeem, out of funds legally
available therefor, all of the outstanding shares of this Series at the
Redemption Price; (ii) exchange shares of Media Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
for all of the outstanding shares of this Series at the Exchange Rate; or (iii)
effect a combination of the options described in the foregoing
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clauses (i) and (ii) (in which event each holder of shares of this Series shall
receive the same proportion of cash and shares of Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) (except for cash paid in lieu of fractional shares) paid to other
holders of shares of this Series).
(d) The Corporation shall redeem, out of funds legally available
therefore, all of the outstanding shares of this Series at the Redemption Price,
if (i) the Corporation converts all of the outstanding shares of Media Stock
into shares of Communications Stock (or, if the Communications Stock is not
Publicly Traded at such time and shares of any other class or series of common
stock of 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 provided in Section 2.4 of Article V of the Certificate of
Incorporation and (ii) at any time following such conversion (A) an event
substantially similar to any Media Group Special Event occurs in respect to the
Communications Stock (or such other class or series of common stock) and (B) at
the time of such event shares of another class or series of common stock of the
Corporation (other then Communications Stock or such other class or series of
common stock) are then Publicly Traded. The Redemption Date for, and the
conditions to, any such redemption shall be determined in a manner consistent
with the Redemption Date and conditions set forth in Section 4.1(b) for a
redemption resulting from a substantially similar Media Group Special Event.
(e) The Corporation shall be entitled to effect an exchange of
shares of Media Stock (or such other class or series of common stock into which
shares of this Series are then convertible) for shares of Series D Stock
pursuant to Section 4.1(a) or 4.1(c) only to the extent Media Stock (or such
other class or series of common stock) shall be available for issuance
(including delivery of previously issued shares of Media Stock (or such other
class or series) held in the Corporation's treasury on the Redemption Date).
The Corporation may, but shall not be required to, in connection with any
exchange of shares of this Series pursuant to Section 4.1(a) or 4.1(c), issue a
fraction of a share of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible), and if the
Corporation shall determine not to issue any such fraction, the Corporation
shall make a
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cash payment (rounded to the nearest cent) equal to such fraction multiplied by
the Closing Price of the Media Stock (or such other class or series of common
stock) on the last Trading Day prior to the Redemption Date.
4.2 In the event that fewer than all of the outstanding shares
of this Series are to be redeemed and/or exchanged pursuant to Section 4.1(a),
subject to clause (iii) of the third sentence of Section 4.1(a), the aggregate
number of shares of this Series held by each holder which will be redeemed
and/or exchanged shall be determined by the Corporation by lot or pro rata or by
any other method as may be determined by the Board of Directors in its sole
discretion to be equitable, and the certificate of the Corporation's Secretary
or an Assistant Secretary filed with the transfer agent or transfer agents for
this Series in respect of such determination by the Board of Directors shall be
conclusive.
4.3 (a) If the Corporation determines to redeem and/or exchange
shares of this Series pursuant to Section 4.1(a) or 4.1(c), the Corporation
shall, not later than the 15th Trading Day nor earlier than the 60th Trading Day
prior to the Redemption Date, cause notice to be filed with the transfer agent
or agents for this Series and to be given to each record holder of the shares to
be redeemed and/or exchanged, setting forth: (1) the Redemption Date; (2) in
the case of a redemption or exchange pursuant to Section 4.1(c), that all shares
of this Series outstanding on the Redemption Date shall be redeemed and/or
exchanged by the Corporation; (3) in the case of a redemption or exchange
pursuant to Section 4.1(a), the total number of shares of this Series to be
redeemed and/or exchanged and, if fewer than all the shares held by such holder
are to be redeemed and/or exchanged, the aggregate number of such shares which
will be redeemed and/or exchanged; (4) the Redemption Price and/or the manner in
which the Exchange Rate will be calculated prior to the Redemption Date; (5)
that, if applicable, the Corporation shall determine on or prior to the second
Trading Day preceding the Redemption Date the percentage of such holder's shares
to be redeemed and the percentage of such holder's shares to be exchanged; (6)
that shares of this Series called for redemption or exchange may be converted at
any time prior to the Redemption Date (unless the Corporation (i) shall, in the
case of a redemption, default in payment of the Redemption Price or, in the case
of an exchange, fail to exchange the shares of
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this Series for the applicable number of shares of Media Stock or (ii) shall, in
the case of a redemption pursuant to Section 4.1(a), exercise its right to
rescind such redemption or exchange pursuant to Section 4.5, in which case such
right of conversion shall not terminate at such time and date); (7) the
applicable Conversion Price; (8) the place or places where certificates for such
shares are to be surrendered for payment of the Redemption Price and/or the
Exchange Rate, as the case may be; and (9) that dividends on the shares to be
redeemed and/or exchanged will cease to accrue on the Redemption Date.
Promptly, following the Redemption Date, the Corporation shall cause notice to
be filed with the transfer agent or agents for this Series and to be given to
each record holder of the shares to be redeemed and/or exchanged setting forth
the percentage of such holder's shares which the Corporation has elected to
redeem and the percentage of such holder's shares which the Corporation has
elected to exchange.
(b) If the Corporation determines to effect a Media Group
Subsidiary Redemption, the Corporation shall, not later than the 30th Trading
Day and not earlier than the 45th Trading Day prior to the Redemption Date,
cause notice to be filed with the transfer agent or agents for this Series and
given to each record holder of shares of this Series, setting forth: (1) the
Redemption Date (which, pursuant to the penultimate sentence of Section 4.1(b),
shall be the same as the date specified in clause (8) below); (2) that all
shares of this Series outstanding on the Redemption Date shall be redeemed by
the Corporation; (3) the Redemption Price; (4) that the redemption of the shares
of this Series shall be conditioned upon the consummation of the Media Group
Subsidiary Redemption; (5) the place or places where certificates for shares of
this Series, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for payment of the Redemption
Price; (6) that dividends on the shares to be redeemed will cease to accrue on
the Redemption Date; (7) a statement that all shares of Media Stock outstanding
on the date of the Media Group Subsidiary Redemption shall be redeemed in
exchange for shares of common stock of the Media Group Subsidiaries; (8) the
date of such Media Group Subsidiary Redemption; (9) the Outstanding Media
Fraction on the date of such notice; (10) the place or places where certificates
for shares of Media Stock, properly endorsed or assigned for transfer (unless
the Corporation shall waive such
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requirement), are to be surrendered for delivery of certificates for shares
of the Media Group Subsidiaries; (11) a statement to the effect that, subject to
Section 2.4.5(I) of Article V of the Certificate of Incorporation, dividends on
the Media Stock shall cease to be paid as of the Redemption Date; (12) the
number of shares of Media Stock outstanding and the number of shares of Media
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, including the number of outstanding shares of this Series and the
Conversion Price; and (13) that a holder of shares of this Series shall be
entitled to receive shares of common stock of the Media Group Subsidiaries upon
the Media Group Subsidiary Redemption in lieu of the Redemption Price only if
such holder converts such shares of this Series on or prior to the Redemption
Date.
(c) If the Corporation determines to effect a Media Group
Disposition Dividend, the Corporation shall, not later than the 30th Trading Day
following the consummation of the Disposition by the Corporation of all or
substantially all of the properties and assets attributed to the Media Group,
cause notice to be filed with the transfer agent or agents for this Series and
given to each record holder of shares of this Series, setting forth: (1) the
anticipated Redemption Date (which, pursuant to the penultimate sentence of
Section 4.1(b), shall be the same as the date specified in clause (8) below);
(2) that all shares of this Series outstanding on the Redemption Date shall be
redeemed by the Corporation; (3) the Redemption Price; (4) that the redemption
of the shares of this Series shall be conditioned upon the payment of the Media
Group Disposition Dividend; (5) the place or places where certificates for
shares of this Series, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for payment of the
Redemption Price; (6) that dividends on the shares to be redeemed will cease to
accrue on the Redemption Date; (7) the record date for determining holders of
Media Stock entitled to receive the Media Group Disposition Dividend, which
shall be not earlier than the 40th Trading Day and not later than the 50th
Trading Day following the consummation of such Disposition; (8) the anticipated
date of payment of the Media Group Disposition Dividend (which shall not be more
than 85 Trading Days following the consummation of such Disposition); (9) the
type of property to be paid as such
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dividend in respect of the outstanding shares of Media Stock; (10) the Net
Proceeds of such Disposition; (11) the Outstanding Media Fraction on the date of
such notice; (12) the number of outstanding shares of Media Stock and the number
of shares of Media Stock into or for which outstanding Convertible Securities
are then convertible, exchangeable or exercisable and the conversion, exchange
or exercise price thereof, including the number of outstanding shares of this
Series and the Conversion Price in effect at such time; and (13) that a holder
of shares of this Series shall be entitled to receive such dividend in lieu of
the Redemption Price only if such holder properly converts such shares on or
prior to the record date referred to in clause (7) of this sentence and that
shares of this Series shall not be convertible after such record date.
(d) If the Corporation determines to effect a Media Group
Disposition Redemption following a Disposition of all (not merely substantially
all) of the properties and assets attributed to the Media Group (in accordance
with Section 2.4.1(A)(1)(b)(i) of Article V of the Certificate of
Incorporation), the Corporation shall, not later than the 35th Trading Day and
not earlier than the 45th Trading Day prior to the Redemption Date, cause notice
to be filed with the transfer agent or agents for this Series and given to each
record holder of shares of this Series, setting forth: (1) the Redemption Date
(which, pursuant to the penultimate sentence of Section 4.1(b), shall be the
same as the date specified in clause (8) below); (2) that all shares of this
Series outstanding on the Redemption Date shall be redeemed by the Corporation;
(3) the Redemption Price; (4) that the redemption of shares of this Series shall
be conditioned upon the consummation of the Media Group Disposition Redemption;
(5) the place or places where certificates for shares of this Series, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for payment of the Redemption Price; (6)
that dividends on the shares to be redeemed will cease to accrue on the
Redemption Date; (7) that all shares of Media Stock outstanding on the date of
such Media Group Disposition Redemption shall be redeemed; (8) the date of such
Media Group Disposition Redemption (which shall not be more than 85 Trading Days
following the consummation of such Disposition); (9) the type of property in
which the redemption price for the shares of Media Stock to be redeemed is to be
paid; (10) the Net Proceeds of such Disposition; (11) the Outstanding Media
Fraction on the date
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of such notice; (12) the place or places where certificates for shares of Media
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; (13) the number of outstanding shares of Media Stock and the
number of shares of Media Stock into or for which such outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof, including the number of outstanding shares
of this Series and the Conversion Price in effect at such time; (14) that a
holder of shares of this Series shall be entitled to participate in the Media
Group Disposition Redemption in lieu of participating in the redemption of the
shares of this Series only if such holder properly converts such shares of this
Series on or prior to the Redemption Date; and (15) that, except as otherwise
provided by Section 2.4.5(I) of Article V of the Certificate of Incorporation,
dividends on shares of Media Stock shall cease to be paid as of the Redemption
Date.
(e) If the Corporation determines to effect a Media Group
Disposition Redemption following a Disposition of substantially all (but not
all) of the properties and assets attributed to the Media Group (in accordance
with Section 2.4.1(A)(1)(b)(ii) of Article V of the Certificate of
Incorporation), the Corporation shall, not later than the 30th Trading Day
following the consummation of such Disposition, cause notice to be filed with
the transfer agent or agents for this Series and given to each record holder of
shares of this Series, setting forth: (1) the anticipated Redemption Date
(which, pursuant to the penultimate sentence of Section 4.1(b), shall be the
same as the date specified in clause (8) below); (2) that all shares of this
Series outstanding on the Redemption Date shall be redeemed by the Corporation;
(3) the Redemption Price; (4) that the redemption of shares of this Series shall
be conditioned upon the consummation of the Media Group Disposition Redemption;
(5) the place or places where certificates for shares of this Series, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for payment of the Redemption Price; (6)
that dividends on the shares to be redeemed will cease to accrue on the
Redemption Date; (7) a date not earlier than the 40th Trading Day and not later
than the 50th Trading Day following the consummation of such Disposition on
which shares of Media Stock shall be selected for redemption pursuant to such
Media Group Disposition
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Redemption; (8) the anticipated date of such Media Group Disposition Redemption
(which shall not be more than 85 Trading Days following the consummation of such
Disposition); (9) the type of property in which the redemption price for the
shares of Media Stock to be redeemed is to be paid; (10) the Net Proceeds of
such Disposition; (11) the Outstanding Media Fraction; (12) the number of shares
of Media Stock outstanding and the number of shares of Media Stock into or for
which outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price in
effect at such time; (13) that a holder of shares of this Series shall be
eligible to participate in such selection for redemption pursuant to such Media
Group Disposition Redemption in lieu of participating in the redemption of
shares of this Series only if such holder properly converts such shares of this
Series on or prior to the date referred to in clause (7) of this sentence and
that shares of this Series shall not be convertible after such date; and (14) a
statement that the Corporation will not be required to register a transfer of
any shares of Media Stock for a period of 15 Trading Days next preceding the
date referred to in clause (7) of this sentence.
(f) If the Corporation determines to effect a Media Group
Special Dividend, the Corporation shall, not later than the 45th Trading Day and
not earlier than the 60th Trading day prior to the date of payment of such
dividend, cause notice to be filed with transfer agent or agent for this Series
and given to each record holder of shares of this Series, setting forth: (1)
the anticipated Redemption Date (which, pursuant to the penultimate sentence of
Section 4.1(b), shall be the same as the date specified in clause (8) below);
(2) that all shares of this Series outstanding on the Redemption Date shall be
redeemed by the Corporation; (3) the Redemption Price; (4) that the redemption
of the shares of this Series shall be conditioned upon the payment of the Media
Group Special Dividend; (5) the place or places where certificates for shares of
this Series, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for payment of the Redemption
Price; (6) that dividends on the shares to be redeemed will cease to accrue on
the Redemption Date; (7) the record date for determining holders of Media Stock
entitled to receive the Media Group
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Special Dividend, which shall be not earlier than the 20th Trading Day prior to
the date of payment of such dividend; (8) the anticipated date of payment of the
Media Group Special Dividend; (9) the type of property to be paid as such
dividend in respect of the outstanding shares of Media Stock; (10) the
Outstanding Media Fraction on the date of such notice; (11) the number of
outstanding shares of Media Stock and the number of shares of Media Stock into
or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, including the number of outstanding shares of this Series and the
Conversion Price in effect at such time; and (12) that a holder of shares of
this Series shall be entitled to receive such dividend in lieu of the Redemption
Price only if such holder properly converts such shares on or prior to the
record date referred to in clause (7) of this sentence and that shares of this
Series shall not be convertible after such record date.
(g) If the Corporation or any of its subsidiaries determines to
effect a Media Group Tender or Exchange Offer, the Corporation shall, on the
date of the public announcement of such tender offer or exchange offer by the
Corporation or any of its subsidiaries but in any event not later than the 35th
Trading Day prior to such redemption, cause notice to be filed with the transfer
agent or agent for this Series and given to each record holder of shares of this
Series, setting forth: (1) the anticipated Redemption Date (which, pursuant to
the penultimate sentence of Section 4.1(b), shall be the same as the date
specified in clause (7) below); (2) that all shares of this Series outstanding
on the Redemption Date shall be redeemed by the Corporation; (3) the Redemption
Price; (4) that the redemption of shares of this Series shall be conditioned
upon the consummation of the Media Group Tender or Exchange Offer; (5) the place
or places where certificates for shares of this Series, properly endorsed or
assigned for transfer (unless the Corporation waives such requirement), are to
be surrendered for payment of the Redemption Price; (6) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (7) the
anticipated date of consummation of such Media Group Tender or Exchange Offer;
(8) the type of consideration to be paid by the Corporation or its subsidiary in
such Media Group Tender Offer or Exchange Offer for shares of Media Stock; (9)
the date on which such Media Group Tender or Exchange Offer commenced, the date
on which such Media Group Tender or Exchange Offer
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is scheduled to expire unless extended and any other material terms thereof (or
the material terms of any amendment thereto); (10) the Outstanding Media
Fraction on the date of such notice; (11) the number of outstanding shares of
Media Stock and the number of shares of Media Stock into or for which such
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price in
effect at such time; and (12) that a holder of shares of this Series shall be
entitled to participate in the Media Group Tender or Exchange Offer in lieu of
participating in the redemption of the shares of this Series only if such holder
properly converts such shares of this Series on or prior to the Redemption Date
and then complies with the terms and conditions of the Media Group Tender or
Exchange Offer and that such holder shall be permitted to tender or exchange
shares of Media Stock upon conversion of shares of this Series by notice of
guaranteed delivery so long as physical certificates are tendered as soon as
practicable after physical receipt thereof.
(h) In the event the Corporation shall redeem shares of this
Series pursuant to Section 4.1(d), notice of such redemption shall be given by
the Corporation at a time, and such notice shall contain information, comparable
to the time or information, as the case may be, specified in Sections 4.3(b)
through (g) with respect to a notice of a redemption pursuant to Section 4.1(b)
resulting from a substantially similar Media Group Special Event.
4.4 If notice of redemption or exchange shall have been given by
the Corporation as provided in Section 4.3, from and after the Redemption Date,
dividends on the shares of this Series so called for redemption or exchange
shall cease to accrue, such shares shall no longer be deemed to be outstanding,
and all rights of the holders thereof as stockholders of the Corporation with
respect to shares so called for redemption or exchange (except, in the case of a
redemption, the right to receive from the Corporation the Redemption Price
without interest and, in the case of an exchange, the right to receive from the
Corporation the Exchange Rate without interest) shall cease (including any right
to receive dividends otherwise payable on any Dividend Payment Date that would
have occurred after the Redemption Date), unless (a) the Corporation, in the
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case of a redemption, defaults in the payment of the Redemption Price and, in
the case of an exchange, the Corporation fails to exchange the shares of this
Series for the applicable number of shares of Media Stock, (b) in the case of a
redemption or exchange pursuant to Section 4.1(a), the Corporation exercises its
right to rescind such redemption or exchange pursuant to Section 4.5 or (c) in
the case of a redemption pursuant to Section 4.1(b) or 4.1(d), the conditions to
such redemption shall not have been satisfied, in which case such rights shall
not terminate at the close of business on such date. On or before the
Redemption Date, the Corporation shall deposit with a bank or trust company
doing business in New York, as paying agent, in the case of a redemption, money
sufficient to pay the Redemption Price on the Redemption Date, and in the case
of an exchange, certificates representing the shares of Media Stock to be
exchanged on the Redemption Date, in trust, with irrevocable instructions that
such money or shares be applied to the redemption or exchange of shares of this
Series so called for redemption or exchange. Any money or certificates so
deposited with any such paying agent which shall not be required for such
redemption or exchange because of the exercise of any right of conversion,
rescission or otherwise (including if the conditions to a redemption pursuant to
Section 4.1(b) or 4.1(d) are not satisfied) shall be returned to the Corporation
forthwith. Upon surrender (in accordance with the notice of redemption or
exchange) of the certificate or certificates for any shares of this Series to be
so redeemed or exchanged (properly endorsed or assigned for transfer, if the
Corporation shall so require and the notice of redemption or exchange shall so
state), such shares shall be redeemed by the Corporation at the Redemption Price
or exchanged by the Corporation at the Exchange Rate, as applicable (unless, in
the case of a redemption or exchange pursuant to Section 4.1(a), the Corporation
shall have exercised its right to rescind such redemption or exchange pursuant
to Section 4.5 or, in the case of a redemption pursuant to Section 4.1(b) or
4.1(d), the conditions to such redemption shall not have been satisfied). In
case fewer than all the shares represented by any such certificate are to be
redeemed or exchanged, a new certificate shall be issued representing the
unredeemed and unexchanged shares (or fractions thereof as provided in Section
7.4), without cost to the holder thereof. Subject to applicable escheat laws,
any moneys or shares so set aside by the Corporation and unclaimed at the end of
two years from the Redemption Date shall revert to
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the general funds of the Corporation, after which reversion the holders of such
shares so called for redemption or exchange shall look only to the Corporation
for the payment of the Redemption Price or the Exchange Rate, as the case may
be, without interest. Any interest accrued on any funds so deposited shall be
paid to the Corporation from time to time.
4.5 If notice of redemption or exchange pursuant to Section
4.1(a) shall have been given by the Corporation pursuant to Section 4.3(a), in
the event that a Redemption Rescission Event shall occur following the date of
such notice but at or prior to the Redemption Date, the Corporation may, at its
sole option, at any time prior to the earlier of (i) the close of business on
that day which is five (5) Trading Days following such Redemption Rescission
Event and (ii) the Redemption Date, rescind such redemption or exchange by
making a public announcement of such rescission (the date on which such public
announcement shall have been made being hereinafter referred to as the
"Rescission Date"). The Corporation shall be deemed to have made such
announcement if it shall issue a release to the Dow Jones News Service and
Reuters Information Services or any successor news wire service. From and after
the making of such announcement, the Corporation shall have no obligation to
effect such redemption or exchange or to pay the Redemption Price or Exchange
Rate therefor and all rights of holders of shares of this Series shall be
restored as if notice of redemption or exchange had not been given. The
Corporation shall give notice of any such rescission by first-class mail,
postage prepaid, mailed as promptly as practicable, but in no event later than
the close of business on that date which is five (5) Trading Days following the
Rescission Date to each record holder of shares of this Series at the close of
business on the Rescission Date and to any other Person or entity that was a
record holder of shares of this Series and that shall have surrendered shares of
this Series for conversion following the giving of notice of the subsequently
rescinded redemption or exchange. Each notice of rescission shall (w) state
that such redemption or exchange has been rescinded, (x) state that any
Converting Holder shall be entitled to rescind the conversion of shares of this
Series surrendered for conversion following the day on which notice of such
redemption or exchange was given but on or prior to the later of (I) the close
of business on the Trading Day next succeeding the date on which public
announcement of the
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rescission of such redemption or exchange shall have been made and (II) the date
which is three Trading Days following the mailing of the Corporation's notice of
rescission, (y) be accompanied by a form prescribed by the Corporation to be
used by any Converting Holder rescinding the conversion of shares so surrendered
for conversion (and instructions for the completion and delivery of such form,
including instructions with respect to payments that may be required to
accompany such delivery in accordance with Section 3.5) and (z) state that such
form must be properly completed and received by the Corporation no later than
the close of business on a date that shall be fifteen (15) Trading Days
following the date of the mailing of such notice of rescission.
5. VOTING. The shares of this Series shall have no voting rights
except as required by law or as set forth below.
5.1 (a) So long as any shares of this Series remain
outstanding, unless a greater percentage shall then be required by law, the
Corporation shall not, without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of shares of this Series
representing at least a majority of the shares of this Series then outstanding
(i) authorize any Senior Stock or reclassify any Junior Stock or Parity Stock as
Senior Stock, or (ii) amend, alter or repeal any of the provisions of the
Certificate or the Certificate of Incorporation, so as in any such case to
materially and adversely affect the voting powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of the shares of this Series; PROVIDED, HOWEVER,
that an amendment which effects a split of this Series or which effects a
combination of the shares of this Series into a fewer number of Shares shall not
be deemed to have any such material adverse effect.
(b) No vote or consent of holders of shares of this Series shall
be required for (i) the creation of any indebtedness of any kind of the
Corporation, (ii) the authorization or issuance of any class of Junior Stock
(including any class or series of common stock of the Corporation) or Parity
Stock, (iii) the authorization, designation or issuance of additional shares of
Series D
41
<PAGE>
Stock or (iv) subject to Section 5.1(a), the authorization or issuance of any
other shares of Preferred Stock.
5.2 (a) If and whenever at any time or times dividends payable
on shares of this Series shall have been in arrears and unpaid in an aggregate
amount equal to or exceeding the amount of dividends payable thereon for six
quarterly dividend periods, then the number of directors constituting the Board
of Directors shall be automatically increased by two and the holders of shares
of this Series, together with the holders of any shares of any Parity Stock as
to which in each case dividends are in arrears and unpaid in an aggregate amount
equal to or exceeding the amount of dividends payable thereon for six quarterly
dividend periods, shall have the exclusive right, voting separately as a class
with such other series, to elect two directors of the Corporation.
(b) Such voting right may be exercised initially either by
written consent or at a special meeting of the holders of the Preferred Stock
having such voting right, called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors, and
thereafter at each such annual meeting until such time as all dividends in
arrears on the shares of this Series shall have been paid in full and all
dividends payable on the shares of this Series on four subsequent consecutive
Dividend Payment Dates shall have been paid in full on such dates or funds shall
have been set aside for the payment thereof, at which time such voting right and
the term of the directors elected pursuant to Section 5.2(a) shall terminate.
(c) At any time when such voting right shall have vested in
holders of shares of such series of Preferred Stock described in Section 5.2(b),
and if such right shall not already have been exercised by written consent, a
proper officer of the Corporation may call, and, upon the written request,
addressed to the Secretary of the Corporation, of the record holders of either
(i) shares representing twenty-five percent (25%) of the voting power of the
shares then outstanding of the Series D Stock or (ii) shares representing
twenty-five percent (25%) of the voting power of shares of all series of
Preferred Stock having such voting right, shall call, a special meeting of the
holders of Preferred Stock having such voting right. Such meeting shall be held
at the earliest practicable date upon the
42
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notice required for annual meetings of stockholders at the place for holding
annual meetings of stockholders of the Corporation, or, if none, at a place
designated by the Board of Directors. Notwithstanding the provisions of this
Section 5.2(c), no such special meeting shall be called during a period within
60 days immediately preceding the date fixed for the next annual meeting of
stockholders.
(d) At any meeting held for the purpose of electing directors at
which the holders of such Preferred Stock shall have the right to elect
directors as provided herein, the presence in person or by proxy of the holders
of shares representing more than fifty percent (50%) in voting power of the then
outstanding shares of such Preferred Stock having such right shall be required
and shall be sufficient to constitute a quorum of such class for the election of
directors by such class.
(e) Any director elected by holders of Preferred Stock pursuant
to the voting right created under this Section 5.2 shall hold office until the
next annual meeting of stockholders (unless such term has previously terminated
pursuant to Section 5.2(b)) and any vacancy in respect of any such director
shall be filled only by vote of the remaining director so elected, or if there
be no such remaining director, by the holders of such Preferred Stock entitled
to elect such director or directors by written consent or at a special meeting
called in accordance with the procedures set forth in Section 5.2(c), or, if no
special meeting is called or written consent executed, at the next annual
meeting of stockholders.
(f) In exercising the voting rights set forth in this Section
5.2, each share of this Series shall have one vote per share.
6. LIQUIDATION RIGHTS.
6.1 Upon the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of this
Series shall be entitled to receive out of the assets of the Corporation
available for distribution to stockholders, in preference to the holders of, and
before any payment of distribution shall be made on, Junior Stock, the
Liquidation Value in effect at such time, plus an amount equal to all accrued
and unpaid dividends to the date of final distribution.
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<PAGE>
6.2 The Liquidation Value shall initially be equal to $50 per
share of Series D Stock. The Liquidation Value shall be subject to adjustment
from time to time to appropriately give effect to any split or combination of
the shares of this Series.
6.3 Neither the sale, exchange or other conveyance (for cash,
shares of stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation nor the merger or consolidation of
the Corporation into or with any other corporation, or the merger or
consolidation of any other corporation into or with the Corporation, shall be
deemed to be a dissolution, liquidation or winding up, voluntary or involuntary,
for the purposes of this Section 6.
6.4 After the payment to the holders of the shares of this
Series of full preferential amounts provided for in this Section 6, the holders
of this Series as such shall have no right or claim to any of the remaining
assets of the Corporation.
6.5 In the event the assets of the Corporation available for
distribution to the holders of shares of this Series upon any dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 6.1, no such distribution shall be made on account
of any shares of any Parity Stock upon such dissolution, liquidation or winding
up unless proportionate distributive amounts shall be paid on account of the
shares of this Series, ratably, in proportion to the full distributable amounts
for which holders of all Parity Stock are entitled upon such dissolution,
liquidation or winding up.
7. OTHER PROVISIONS.
7.1 All notices from the Corporation to the holders shall be
given by first class mail, postage prepaid, to the holders of shares of this
Series at their last address as it shall appear on the stock register. With
respect to any notice to a holder of Shares of this Series required to be
provided hereunder, neither failure to mail such notice, nor any defect therein
or in the mailing thereof, shall affect the sufficiency of the notice or the
validity of the proceedings referred to in such notice or
44
<PAGE>
affect the legality or validity of any distribution, right, warrant,
reclassification, consolidation, merger, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any such action. Any notice which
was mailed in the manner herein provided shall be conclusively presumed to have
been duly given whether or not the holder receives the notice.
7.2 All notices and other communications from a holder of shares
of this Series shall be deemed given if delivered personally or sent by
overnight courier (providing proof of delivery) to the Corporation at the
following address (or at such other address as the Corporation shall specify in
a notice pursuant to Section 7.1): U S WEST, Inc., 7800 East Orchard Road,
Englewood, Colorado 80111, Attention: General Counsel.
7.3 Any shares of this Series which have been converted,
redeemed, exchanged or otherwise acquired by the Corporation shall, after such
conversion, redemption, exchange or acquisition, as the case may be, be retired
and promptly cancelled and the Corporation shall take all appropriate action to
cause such shares to obtain the status of authorized but unissued shares of
Preferred Stock, without designation as to series, until such shares are once
more designated as part of a particular series by the Board of Directors. The
Corporation may cause a certificate setting forth a resolution adopted by the
Board of Directors that none of the authorized shares of this Series are
outstanding to be filed with the Secretary of State of the State of Delaware.
When such certificate becomes effective, all references to Series D Stock shall
be eliminated from the Certificate of Incorporation and the shares of Preferred
Stock designated hereby as Series D Stock shall have the status of authorized
and unissued shares of Preferred Stock and may be reissued as part of any new
series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors.
7.4 The shares of this Series shall be issuable in whole shares
or in any fraction of a whole share or any integral multiple of such fraction.
7.5 The Corporation shall, to the fullest extent permitted by
law, be entitled to recognize the exclusive right of a Person registered on its
records as the
45
<PAGE>
holder of shares of this Series, and such record holder shall be deemed the
holder of such shares for all purposes.
7.6 All notice periods referred to in the Certificate shall
commence on the date of the mailing of the applicable notice.
7.7 Subject to applicable law, any determinations made in the
exercise of the good faith business judgment of the Board of Directors under any
provision of the Certificate shall be final and binding on all stockholders of
the Corporation, including the holders of shares of this Series.
7.8 Certificates for shares of this Series shall bear such
legends as the Corporation shall from time to time deem appropriate.
IN WITNESS WHEREOF, U S WEST, INC. has caused this certificate to be
signed and attested this [ ] day of [ ], 1996.
U S WEST, INC.
By:
------------------------------------
Name:
Title:
46
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EXHIBIT D
[Form of Affiliate Letter]
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed
to be an "affiliate" of Continental Cablevision, Inc., a Delaware corporation
(the "Company"), as such term is (i) defined for purposes of paragraphs (c) and
(d) of Rule 145 of the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Securities Act"), or (ii) used in and for purposes
of Accounting Series Releases 130 and 135, as amended, of the Commission.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of February
27, 1996 (as amended from time to time, the "Merger Agreement"), between U S
WEST, Inc., a Delaware corporation ("Acquiror"), and the Company, the Company
will be merged with and into Acquiror (the "Merger"), with Acquiror continuing
as the surviving corporation.
Pursuant to the Merger, each share of Class A Common Stock, par value
$.01 per share, of the Company owned by me, if any, and each share of Class B
Common Stock, par value $.01 per share, of the Company ("Class B Common Stock")
owned by me will be converted into the right to receive, at my election, either
(i) cash (in the case of shares of Class B Common Stock only) or (ii) shares of
U S WEST Media Group Common Stock, par value $.01 per share, of Acquiror (the
"Media Stock") and shares of Series D Convertible Preferred Stock, par value
$1.00 per share, of Acquiror (the "Series D Preferred Stock").
<PAGE>
I represent, warrant and covenant to Acquiror that, with respect
to all Media Stock and Series D Preferred Stock received by me as a result of
the Merger:
1. I shall not make any sale, transfer or other disposition of Media
Stock or Series D Preferred Stock in violation of the Securities Act or the
Rules and Regulations.
2. I have carefully read this letter and the Merger Agreement and
discussed the requirements of such documents and any other applicable
limitations upon my ability to sell, transfer or otherwise dispose of Media
Stock or Series D Preferred Stock to the extent I felt necessary, with my
counsel or counsel for the Company.
3. I have been advised that the issuance of Media Stock and Series D
Preferred Stock to me pursuant to the Merger has been registered with the
Commission under the Securities Act. However, I have also been advised that,
since at the time the Merger Agreement was submitted for a vote of the
stockholders of the Company, I may be deemed to have been an "affiliate" of the
Company and the distribution by me of Media Stock and Series D Preferred Stock
has not been registered under the Act, I may not sell, transfer or otherwise
dispose of Media Stock and Series D Preferred Stock issued to me in the Merger
unless (i) such sale, transfer or other disposition has been registered under
the Securities Act or is made in conformity with Rule 145 under the Securities
Act, or (ii) in the opinion of counsel reasonably acceptable to Acquiror, or
pursuant to a "no action" letter obtained by me from the staff of the
Commission, such sale, transfer or other disposition is otherwise exempt from
registration under the Securities Act.
4. I understand, that, except as may be provided in a registration
rights agreement, if any, to be entered into by Acquiror and me as contemplated
by the Merger Agreement, Acquiror is under no obligation to register under the
Securities Act the sale, transfer or other disposition of Media Stock or
Series D Preferred Stock by me or on my behalf or to take any other action
necessary in order to make compliance with an exemption from such registration
available.
5. I understand that Acquiror will give stop transfer instructions
to Acquiror's transfer agents with respect to the Media Stock and Series D
Preferred Stock and
2
<PAGE>
that the certificates for the Media Stock and Series D Preferred Stock issued to
me, or any substitutions therefor, will bear a legend substantial to the
following effect:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A
TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933
APPLIES. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE
TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT, DATED _________
__, 1996, BETWEEN THE REGISTERED HOLDER HEREOF AND U S WEST, INC., A COPY
OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF U S WEST, INC."
6. I also understand that unless the transfer by me of my Media
Stock or Series D Preferred Stock has been registered under the Securities Act
or is a sale made in conformity with the provisions of Rule 145, Acquiror
reserves the right to place the following legend on the certificates issued to
any transferee:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO
RECEIVED SUCH SECURITIES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED
UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SECURITIES HAVE NOT BEEN
ACQUIRED BY THE HOLDER WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH,
ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT OR IN ACCORDANCE WITH AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs 5
and 6 above shall be removed by delivery of substitute certificates without such
legend if such legend is not required for purposes of the Securities Act. It is
understood and agreed that such legends and the stop orders referred to above
will be removed if (i) two years shall have elapsed from the date I acquired
Media Stock and Series D Preferred Stock received in the Merger and the
provisions of Rule 145(d)(2) are then available to me, (ii) three years shall
have elapsed from the date I acquired Media Stock and Series D Preferred Stock
received in the Merger and the provisions of Rule 145(d)(3) are then available
to me, or (iii) Acquiror has received either an
3
<PAGE>
opinion of counsel, which opinion and counsel shall be reasonably satisfactory
to Acquiror, or a "no-action" letter obtained by me from the staff of the
Commission, to the effect that the restrictions imposed by Rule 145 under the
Securities Act no longer apply to me.
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter or as a waiver of any rights that I may have to object to any
claim that I am such an affiliate on or after the date of this letter.
Sincerely,
______________________________
Name:
Accepted this __ day of
________ __, 1996:
U S WEST, INC.
By:___________________________
Name:
Title:
4
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EXHIBIT E
CONTINENTAL CABLEVISION, INC.
CERTIFICATE OF DESIGNATION
OF SERIES B CONVERTIBLE
PREFERRED STOCK SETTING FORTH THE POWERS,
PREFERENCES, RIGHTS, QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF
SUCH SERIES OF PREFERRED STOCK
Pursuant to Section 151 of the General Corporation Law of the State of
Delaware, Continental Cablevision, Inc. (the "Corporation"), a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DOES HEREBY
CERTIFY:
That pursuant to the authority conferred upon the Board of Directors
of the Corporation by Article FOURTH of the Restated Certificate of
Incorporation of the Corporation (as in effect on the date hereof and as amended
from time to time in accordance with its terms, the "Restated Certificate of
Incorporation"), and in accordance with the provisions of Section 151 of the
General Corporation Law of the State of Delaware, the Board of Directors of the
Corporation on______, 199_, adopted the following resolution creating a series
of Preferred Stock designated as Series B Convertible Preferred Stock:
RESOLVED that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of the Restated
Certificate of Incorporation, a series of the class of authorized Preferred
Stock, par value $.01 per share, of the Corporation is hereby created and that
the designation and number of shares thereof and the voting powers, preferences
and relative, participating, optional and other special rights of the shares of
such series, and the qualifications, limitations and restrictions thereof are as
follows:
Section 1. DESIGNATION AND NUMBER.
(a) The shares of such series shall be designated as "Series B Convertible
Preferred Stock" (the "Series B Preferred Stock" or "this Series"). The number
of shares initially constituting the Series B Preferred Stock shall be
5,650,000, which
<PAGE>
number may be decreased (but not increased) by the Board of Directors without a
vote of stockholders; PROVIDED, HOWEVER, that such number may not be decreased
below the number of then outstanding shares of Series B Preferred Stock.
Notwithstanding any other provision in this Certificate of Designation, the
Corporation shall not be required to issue fractional shares of the Series B
Preferred Stock.
Section 2. RANKING. The Series B Preferred Stock shall, with respect
to dividend rights and rights on liquidation, dissolution or winding up, rank
pari passu with the Series A Preferred Stock and prior to or pari passu with all
other classes and series of the Corporation's preferred stock (other than
preferred stock that is not convertible into or exchangeable for any class or
series of the Corporation's equity securities or for any other property,
including without limitation securities other than the Corporation's equity
securities referred to herein) and prior to all classes of the Common Stock, par
value $.01 per share, of the Corporation (the "Common Stock").
Section 3. DIVIDENDS AND DISTRIBUTIONS.
(a) The holders of shares of Series B Preferred Stock shall be entitled to
receive as and when declared by the Board of Directors out of funds legally
available therefor, cash dividends at the rate (the "Dividend Rate") of________
________ percent (_____%) per annum (1),____________________________.
(1) The Dividend Rate shall be subject to an adjustment such that the
final Dividend Rate equals the sum of 5.875%, (the "Based Dividend Rate") plus
the Adjustment Amount (as defined below).
The Base Dividend Rate shall be subject to adjustment in the following
manner:
(i) If the Adjustment Amount is less than seven basis points in
absolute terms, then the Adjustment Amount shall be deemed to be zero and the
Dividend Rate shall equal the Base Dividend Rate.
(Cont'd on following page)
2
<PAGE>
____________________________
(Cont'd from preceding page)
(ii) If the Adjustment Amount is greater than or equal to seven basis
points in absolute terms, then the Dividend Rate shall be equal to the Base
Dividend Rate plus the Adjustment Amount (whether positive or negative), rounded
to the nearest multiple of 0.125%.
"Adjustment Amount" shall be equal to the product of (x) the sum of
(1) the Change In Weighted Average Yield plus (2) the Credit Spread multiplied
by (y) the Discount Factor.
"Average Credit Spread" shall be equal to the average of the
difference between the closing bid-side yield of the Corporation's 8.30% senior
unsecured notes due 2006 and the 10-year Treasury yield, calculated for each of
the 10 Trading Days after announcement of the termination of the transactons
contemplated by the Merger Agreement (as defined in Section 12).
"Change in Weighted Average Yield" shall equal the sum (whether
positive or negitive) of the folowing, based upon the average market closing
levels of Treasury securities for the 10 Trading Days after announcement of the
termination of the transactons contemplated by the Merger Agreement:
(i) the change (whether positive or negative) since February 27, 1996
in basis points in 3-year Treasury yields x 0.25;
(ii) the change (whether positive or negative) since February 27, 1996
in basis points in 5-year Treasury yields x 0.25;
(iii) the change (whether positive or negative) since February 27,
1996 in basis points in 10-year Treasury yields x 0.25; and
(iv) the change (whether positive or negative) since February 27,
1996 in basis points in 20-year Treasury yields x 0.25.
(Cont'd on following page)
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through and including the date on which such Series B Preferred Stock is no
longer issued and outstanding, which dividends shall be payable in equal
quarterly installments on________,_________,________and_______each year (each
such date, regardless of whether any dividends have been paid or declared and
set aside for payment on such date, being a "Dividend Payment Date") to holders
of record as they appear on the stock books on such record dates as are fixed by
the Board of Directors, but only when, as and if declared by the Board of
Directors out of funds at the time legally available for the payment of
dividends. For purposes of calculation of such cash dividends, the Series B
Preferred Stock shall be valued at the Stated Value (as defined in Section 12).
Such dividends shall begin to accrue on outstanding shares of Series B Preferred
Stock from the date of issuance and shall be deemed to accrue from day to day
whether or not earned or declared until paid; PROVIDED, HOWEVER, that dividends
accrued or deemed to have accrued for any period shorter than the full three-
month period between Dividend Payment
____________________________
(Cont'd from preceding page)
"Credit Spread" shall equal the difference between (A) the product of
1.87234 multiplied by the Average Credit Spread minus (B) 440 basis points.
"Discount Factor" shall equal 0.55.
For example, if (i) the Base Dividend Rate is 5.875%, (ii) the average 3-year
Treasury, 5-Year Treasury, 10-year Treasury and 20-Year Treasury yields are each
20 basis points lower at closing than they are currently and (iii) the Average
Credit Spread is 260 basis points, the Credit Spread would be equal to 47 basis
points ((260 x 1.87234) - 440). The resulting Adjustment Amount would be equal
to 14.85 basis points ((-20 + 47) x 0.55). Because such Adjustment Amount is
greater than seven basis points, the Dividend Rate would be equal to the Base
Dividend Rate plus the Adjustment Amount of (6.0235%), rounded to the yield
which is at the nearest multiple of 0.125% (or 6.00%).
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Dates shall be computed based on the actual number of days elapsed in the three-
month period for which such dividends are payable. Dividends on the Series B
Preferred Stock shall be cumulative. The Dividend Rate per share of Series B
Preferred Stock shall be appropriately adjusted from time to time to reflect any
split or combination of the shares of the Series B Preferred Stock.
(b) No dividends or other distributions, other than dividends or
other distributions payable solely in shares of capital stock ranking junior
(both as to dividends and upon liquidation, dissolution or winding up) to the
Series B Preferred Stock (or cash in lieu of fractional shares with respect to
such dividends or distributions) and liquidating distributions which are subject
to the provisions of Section 8 hereof, shall be paid or set aside for payment
on, and no purchase, redemption or other acquisition shall be made of, any
shares of capital stock of the Corporation (other than any class or series of
Preferred Stock that, in accordance with Section 2 hereof, (i) ranks senior to
the Series B Preferred Stock or (ii) is Parity Stock (as defined in Section 12),
so long as any dividend payments per share on Parity Stock as a percentage of
accrued and unpaid dividends per share on Parity Stock do not exceed
contemporaneous dividend payments per share on the Series B Preferred Stock as a
percentage of accrued and unpaid dividends per share on the Series B Preferred
Stock), unless and until all accrued and unpaid dividends on the Series B
Preferred Stock for any prior quarterly dividend period shall have been declared
and paid or a sum sufficient for the payment thereof set aside for such
purposes. No interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on the Series B Preferred Stock
which may be in arrears.
(c) Any reference to "distribution" contained in this Section 3 shall
not be deemed to include any stock dividend or distributions made in connection
with any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary.
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(d) The holders of shares of Series B Preferred Stock shall not be
entitled to receive any dividends or other distributions with respect to such
shares except as provided herein.
Section 4. VOTING. (a) The holders of record of shares of Series B
Preferred Stock shall have no voting rights except as required by law or as set
forth below; PROVIDED, HOWEVER, that the rights set forth in Section 4(c) hereof
may be exercised only to the extent that such exercise would not result in a
Legal Prohibition or any violation of applicable law or regulation.
(b) (i) So long as any shares of Series B Preferred Stock
remain outstanding, unless a greater percentage shall then be required by law,
the Corporation shall not, without the affirmative vote at a meeting or the
written consent with or representing at least 51% of the shares of Series B
Preferred Stock then outstanding (A) authorize any Senior Stock or reclassify
any Junior Stock or Parity Stock as Senior Stock or (B) amend, alter or repeal
any of the provisions of the Certificate or the Restated Certificate of
Incorporation, so as in any such case to materially and adversely affect the
voting powers, designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions of the
Series B Preferred Stock; PROVIDED, HOWEVER, that an amendment which effects a
split of Series B Preferred Stock or which effects a combination of the shares
of Series B Preferred Stock into a fewer number of shares shall not be deemed to
have any such material adverse effect.
(ii) No vote or consent of holders of shares of Series B
Preferred Stock shall be required for (A) the creation of any indebtedness of
any kind of the Corporation, (B) the authorization or issuance of any class of
Junior Stock (including any class or series of common stock of the Corporation)
or Parity Stock, (C) the authorization, designation or issuance of additional
shares of Series B Preferred Stock or (D) subject to Section 4(b)(i), the
authorization or issuance of any other shares of Preferred Stock.
(c) (i) If and whenever at any time or times dividends payable
on shares of this Series shall have been in arrears and unpaid in an aggregate
amount equal to or exceeding the amount of dividends payable thereon for six
quarterly dividend periods, then the number of directors
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<PAGE>
constituting the Board of Directors shall be automatically increased by two and
the holders of shares of Series B Preferred Stock, together with the holders of
any shares of any Parity Stock as to which in each case dividends are in arrears
and unpaid in an aggregate amount equal to or exceeding the amount of dividends
payable thereon for six quarterly dividend periods, shall have the exclusive
right, voting separately as a class with the holders of any such Parity Stock,
to elect two directors of the Corporation.
(ii) Such voting right may be exercised initially either by
written consent or at a special meeting of the holders of Preferred Stock having
such voting right, called as hereinafter provided, or at any annual meeting of
stockholders held for the purpose of electing directors, and thereafter at each
such annual meeting until such time as all dividends in arrears on the shares of
this Series shall have been paid in full and all dividends payable on the shares
on this Series on four subsequent consecutive Dividend Payment Dates shall have
been paid in full on such dates or funds shall have been set aside for the
payment thereof, at which time such voting right and the term of the directors
elected pursuant to Section 4(c)(i) shall terminate.
(iii) At any time when such voting right shall have vested
in holders of shares of such series of Preferred Stock described in Section
4(c)(ii), and if such right shall not already have been exercised by written
consent, a proper officer of the Corporation may call, and, upon the written
request, addressed to the Secretary of the Corporation, of the record holders of
either (A) shares representing twenty-five percent (25%) of the voting power of
the shares then outstanding of Series B Preferred Stock or (B) shares
representing twenty-five percent (25%) of the voting power of shares of all
series of Preferred Stock having such voting right, shall call, a special
meeting of the holders of all such series of Preferred Stock having such voting
right. Such meeting shall be held at the earliest practicable date upon the
notice required for annual meetings of stockholders at the place for holding
annual meetings of stockholders of the Corporation, or, if none, at a place
designated by the Board of Directors. Notwithstanding the provisions of this
Section 4(c)(iii), no such special meeting shall be called during a period
within 60 days immediately preceding the date fixed for the next annual meeting
of stockholders.
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<PAGE>
(iv) At any meeting held for the purpose of electing
directors at which the holders of such Preferred Stock shall have the right to
elect directors as provided herein, the presence in person or by proxy of the
holders of shares representing more than fifty percent (50%) in voting power of
the then outstanding shares of such Preferred Stock having such right shall be
required and shall be sufficient to constitute a quorum of such class for the
election of directors by such class.
(v) Any director elected by holders of such Preferred Stock
pursuant to the voting right created under this Section 4(c) shall hold office
until the next annual meeting of stockholders (unless such term has previously
terminated pursuant to Section 4(c)(ii)) and any vacancy in respect of any such
director shall be filled only by vote of the remaining director so elected, or
if there be no such remaining director, by the holders of such Preferred Stock
entitled to elect such director or directors by written consent or at a special
meeting called in accordance with the procedures set forth in Section 4(c)(iii),
or, if no special meeting is called or written consent executed, at the next
annual meeting of stockholders.
(vi) In exercising the voting rights set forth in this
Section 4(c), each share of Series B Preferred Stock shall have one vote per
share.
Section 5. CERTAIN RESTRICTIONS.
(a) Whenever dividends or distributions payable on shares of Series B Preferred
Stock as provided in Section 3 for any prior quarterly dividend period are not
paid in full, thereafter and until all such unpaid dividends or distributions
payable, whether or not declared, on the outstanding shares of Series B
Preferred Stock shall have been paid in full or declared and set apart for
payment, the Corporation shall not: (i) redeem, purchase or otherwise acquire
for consideration any shares of Junior Stock or Parity Stock pursuant to any
mandatory redemption, put, sinking fund or other similar obligation; PROVIDED
that (A) the Corporation may at any time redeem, purchase or otherwise acquire
shares of Junior Stock or Parity Stock, in exchange for any shares of Common
Stock or for other capital stock of the Corporation ranking junior (both as to
dividends and upon liquidation, dissolution or winding up) to the Series B
Preferred Stock and (B) the Corporation
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<PAGE>
may accept shares of any Parity Stock for conversion; or (ii) redeem or purchase
or otherwise acquire for consideration any shares of Series B Preferred Stock;
PROVIDED that the Corporation may accept shares of Series B Preferred Stock
surrendered for conversion into shares of capital stock of the Corporation
pursuant to Section 9.
(b) The Corporation shall not permit any Subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
capital stock of the Corporation or to make or extend any loan or advance
specified in clause (iii) of Section 5(a) unless the Corporation could, pursuant
to paragraph (a) of this Section 5, purchase such shares at such time and in
such manner or make or extend such loan or advance at such time, as the case may
be.
Section 6. REDEMPTION OR EXCHANGE.
(a) The Corporation shall not have any right to redeem any shares of Series B
Preferred Stock prior to the third anniversary of the Issue Date (as defined in
Section 12). The Corporation may, at its sole option, subject to Section 3(b)
hereof, from time to time on and after the third anniversary of the Issue Date,
at its election either: (i) redeem, out of funds legally available therefor, all
or any part of the outstanding shares of the Series B Preferred Stock at the
Redemption Price (as defined in Section 12); (ii) subject to Section 6(f)
hereof, exchange shares of Class A Common Stock (or such other class or series
of common stock into which shares of this Series are then convertible) for all
or any part of the outstanding shares of this Series at the Exchange Price (as
defined in Section 12); or (iii) subject to Section 6(f) hereof, effect a
combination of the options described in the foregoing clauses (i) and (ii) (in
which event each holder of shares of this Series which are selected for
redemption and exchange pursuant to Section 6(e) shall receive the same
proportion of cash and shares of Class A Common Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
(except for cash paid in lieu of fractional shares) paid to other holders of
shares of this Series selected for redemption and exchange); PROVIDED, HOWEVER,
that shares of Series
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<PAGE>
B Preferred Stock shall not be redeemable by the Corporation prior to the fifth
anniversary of the Issue Date unless the Current Market Price (as defined in
Section 12) shall be greater than the product of (x) the Conversion Price (as
defined in Section 9) multiplied by (y) 1.35 , on at least 20 of the 30 Trading
Days immediately prior to the date of the notice delivered by the Corporation to
holders of shares of Series B Preferred Stock to be redeemed pursuant to
paragraph (d) of this Section 6.
(b) Not more than 60 nor less than 15 Trading Days prior to the
Redemption Date, the Corporation shall, if the Series B Preferred Stock is
listed on any national securities exchange or traded in the over-the-counter
market, give notice by publication in a newspaper of general circulation in the
Borough of Manhattan, The City of New York, that the Corporation has elected in
accordance with paragraph (a) of this Section 6 to redeem and/or exchange any or
all shares of the Series B Preferred Stock. The notice shall also specify (i)
the percentage of the Series B Preferred Stock to be redeemed and/or exchanged,
if less than all, (ii) if more than one form of consideration has been elected
by the Corporation, the portion of such shares to be redeemed and the portion of
such shares to be exchanged, (iii) the Redemption Price and the manner in which
the Exchange Price shall be calculated prior to the Redemption Date, and (iv)
the procedures to be followed to receive payment of the Redemption Price and/or
the Exchange Price, as the case may be; and, a similar notice shall be mailed
concurrently to each record holder of shares of Series B Preferred Stock, at
such holder's address as it appears on the transfer books of the Corporation;
PROVIDED, HOWEVER, that if the Series B Preferred Stock is owned of record by 50
or fewer holders or groups of affiliated holders, the Corporation shall publicly
announce the information contained in the notice by issuance of a press release
and such notice shall be mailed in not more than 60 or less than 15 Trading Days
prior to the Redemption Date, and shall set forth the information contained
above.
(c) On or before the Redemption Date, the Corporation shall deposit
for the benefit of the
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<PAGE>
holders of shares of Series B Preferred Stock, in the case of a redemption, the
funds necessary for such redemption and, in the case of an exchange,
certificates representing the shares of Class A Common Stock to be exchanged,
with a bank or trust company in the Borough of Manhattan, The City of New York,
or in the City of Boston, in either case having a capital and surplus of at
least $2,000,000,000. Any moneys or certificates so deposited by the
Corporation and unclaimed at the end of two years from the date designated for
such redemption or exchange shall be released from any such deposit and revert
to the general funds of the Corporation. After such conversion, any such bank
or trust company shall, upon demand, pay over to the Corporation such unclaimed
amounts or certificates, as the case may be, and thereupon such bank or trust
company shall be relieved of all responsibility in respect thereof and any
holder of shares of Series B Preferred Stock to be redeemed shall look only to
the Corporation for the payment of the Redemption Price. In the event that
moneys or certificates are deposited pursuant to this paragraph (c) in respect
of shares of Series B Preferred Stock that are converted in accordance with the
provisions of Section 9, such moneys or certificates, as the case may be, shall,
upon such conversion, be released from any such deposit and revert to the
Corporation. After such reversion, any such bank or trust company shall pay
over to the Corporation such moneys or certificates and shall be relieved of all
responsibility to the holders of such converted shares in respect thereof. Any
interest accrued on funds deposited pursuant to this paragraph (c) shall be paid
from time to time to the Corporation.
(d) Notice of redemption or exchange having been given as aforesaid,
upon the deposit of funds or certificates, as the case may be, pursuant to
paragraph (c) in respect of shares of Series B Preferred Stock to be redeemed or
exchanged pursuant to this Section 6, notwithstanding that any certificates for
such shares to be redeemed or exchanged shall not have been surrendered for
cancellation, from and after the Redemption Date (i) the shares represented
thereby shall no longer be deemed outstanding, (ii) the rights to receive
dividends thereon shall cease and terminate and
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<PAGE>
dividends on the Series B Preferred Stock shall cease to accrue and (iii) all
rights of the holders of shares of Series B Preferred Stock to be redeemed or
exchange shall cease and terminate, excepting only the right to receive the
Redemption Price and/or Exchange Price therefor, without any interest thereon.
(e) In the event that fewer than all of the outstanding shares of
this Series are to be redeemed and/or exchanged pursuant to Section 6(a),
subject to clause (iii) of the second sentence of section 6(a), the aggregate
number of shares of this Series held by each holder which will be redeemed
and/or exchanged shall be determined by the Corporation by lot or pro rata or by
any other method as may be determined by the Board of Directors in its sole
discretion to be equitable, and the certificate of the Corporation's Secretary
or an Assistant Secretary filed with the transfer agent or transfer agents for
this Series in respect of such determination by the Board of Directors shall be
conclusive.
(f) Notwithstanding anything contained herein to the contrary, the
Corporation shall not be permitted to exchange any shares of Class A Common
Stock (or such other class or series of common stock into which shares of this
Series are convertible) for all or any part of the outstanding shares of this
Series if such stock which the Corporation seeks to exchange for shares of this
Series is not listed or admitted for trading on any national securities exchange
or the Nasdaq National Market. In connection with the exchange of any shares of
this Series, the Corporation may, but shall not be required to, issue a fraction
of a share of Class A Common Stock (or such other class or series of common
stock into which shares of this Series are then convertible) and, if the
Corporation shall determine not to issue such fraction, the Corporation shall
pay a cash payment (rounded to the nearest cent) equal to such fraction
multiplied by the Current Market Price per share of Class A Common Stock (or
such other class or series of common stock into which shares of this Series are
then convertible) on the last Trading Day prior to the Redemption Date.
Notwithstanding the foregoing, this Section 6(f) shall in no way
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<PAGE>
restrict or limit the Corporation's right to redeem all or any part of the
outstanding shares of this Series for cash at the Redemption Price.
Section 7. REACQUIRED SHARES. Any shares of Series B Preferred Stock
converted, redeemed, purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares of Series B Preferred Stock shall upon their
cancellation, and upon the filing of an appropriate certificate with the
Secretary of State of the State of Delaware, become authorized but unissued
shares of Preferred Stock, par value $.01 per share, of the Corporation and may
be reissued as part of another series of Preferred Stock, par value $.01 per
share, of the Corporation subject to the conditions or restrictions on issuance
set forth herein.
Section 8. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon the
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, no distribution shall be made (i) to the holders of shares of
Junior Stock upon liquidation, dissolution or winding up unless, prior thereto,
the holders of shares of Series B Preferred Stock, subject to Section 9, shall
have received the Liquidation Preference (as defined in Section 12 with respect
to each share, or (ii) to the holders of shares of Parity Stock upon
liquidation, dissolution or winding up, except distributions made ratably on all
such Parity Stock and the Series B Preferred Stock in proportion to the total
amounts to which the holders of all shares of such Parity Stock and the Series B
Preferred Stock are entitled upon such liquidation, dissolution or winding up.
(b) Neither the consolidation, merger or other business combination
of the Corporation with or into any other Person or Persons nor the sale of all
or substantially all the assets of the Corporation shall be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 8.
Section 9. CONVERSION. (a) Each holder of shares of Series B
Preferred Stock may, at its
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<PAGE>
option at any time and from time to time, upon surrender of the certificates
therefor, convert any or all of its shares of Series B Preferred Stock into
Common Stock as follows. The number of fully paid and nonassessable shares of
Class A Common Stock deliverable on conversion of a share of Series B Preferred
Stock is referred to as the "Conversion Ratio". The Conversion Ratio shall
initially be equal to the quotient of $50 per share divided by the Conversion
Price and shall be subject to adjustment from time to time pursuant to paragraph
(f) of this Section 9. The "Conversion Price" shall be equal to the product of
1.25 multiplied by the greater of: (i) $20 per share, (ii) if shares of Class A
Common Stock are publicly traded on the New York Stock Exchange, then over the
fifteen Trading Days beginning the first Trading Day after the announcement of
the termination of the Merger Agreement (the "Measurement Period"), (a) if the
average of the daily volume of Class A Common Stock traded during the
Measurement Period exceeds or is equal to 100,000 shares per day, the average of
the Current Market Price of Class A Common Stock over the Measurement Period, or
(b) if the average of the daily volume of Class A Common Stock traded during the
Measurement Period is less than 100,000 shares per day, the product of .925
multiplied by the average of the Current Market Price of Class A Common Stock
over the Measurement Period, or (iii) if shares of Class A Common Stock are
publicly traded on the Nasdaq National Market, over the Measurement Period, (a)
if the average of the daily volume of Class A Common Stock traded during the
Measurement Period exceeds or is equal to 200,000 shares per day, the average of
the Current Market Price of Class A Common Stock over the Measurement Period, or
(b) if the average of the daily volume of Class A Common Stock traded during the
Measurement Period is less than 200,000 shares per day, the product of .925
multiplied by the average of the Current Market Price of Class A Common Stock
over the Measurement Period.
(b) Conversion of the Series B Preferred Stock may be effected by any
such holder upon the surrender to the Corporation at the principal office of the
Corporation in the Commonwealth of Massachusetts (the "Transfer Agent") or at
the
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<PAGE>
office of any agent or agents of the Corporation, as may be designated by the
Board of Directors of the Corporation, of the certificate for such Series B
Preferred Stock to be converted at any time after the Issue Date accompanied by
a written notice stating that such holder elects to convert all or a specified
whole number of such shares in accordance with the provisions of this Section 9
and specifying the name or names in which such holder wishes the certificate or
certificates for shares of Common Stock to be issued. In case such notice shall
specify a name or names other than that of such holder, such notice shall be
accompanied by payment of all issue, stamp, documentation and transfer taxes
payable upon the issuance of shares of Common Stock in such name or names.
Other than such taxes, the Corporation will pay any and all issue, stamp,
documentation, transfer and other taxes (other than taxes based on gross or net
income) that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series B Preferred Stock pursuant hereto. As
promptly as practicable, and in any event within five Business Days after the
surrender of such certificate or certificates and the receipt of such notice
relating thereto and, if such notice shall specify a name or names other than
that of such holder, (a) payment of all transfer taxes (or the demonstration to
the satisfaction of the Corporation that such taxes have been paid), and (b)
unless such issuance is registered under the Securities Act and all applicable
state securities laws, the holder of the applicable shares of Series B Preferred
Stock which are to be converted into Class A Common Stock hereunder shall have
furnished to the Corporation evidence satisfactory to it that such issuance is
exempt from registration under the Securities Act and all applicable state
securities laws, the Corporation shall deliver or cause to be delivered (i)
certificates representing the number of validly issued, fully paid and non
assessable full shares of Class A Common Stock to which the holder of shares of
Series B Preferred Stock being converted shall be entitled and (ii) if less than
the full number of shares of Series B Preferred Stock evidenced by the
surrendered certificate or certificates is being converted, a new certificate or
certificates, of like tenor, for the number of shares evidenced by such
surrendered certificate or
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<PAGE>
certificates less the number of shares being converted. Such conversion shall
be deemed to have been made at the close of business on the date of receipt of
such notice and of such surrender of the certificate or certificates
representing the shares of Series B Preferred Stock to be converted so that the
rights of the holder thereof as to the shares being converted shall cease except
for the right to receive shares of Class A Common Stock in accordance herewith,
and the person entitled to receive the shares of Class A Common Stock shall be
treated for all purposes as having become the record holder of such shares of
Class A Common Stock at such time. The Corporation shall not be required to
convert, and no surrender of shares of Series B Preferred Stock shall be
effective for that purpose, while the transfer books of the Corporation for the
Common Stock are closed for any purpose (but not for any period in excess of 2
days); but the surrender of shares of Series B Preferred Stock for conversion
during any period while such books are so closed shall become effective for
conversion immediately upon the reopening of such books, as if the conversion
had been made on the date such shares of Series B Preferred Stock were
surrendered, and at the Conversion Ratio in effect at the date of such
surrender.
(c) In case any shares of Series B Preferred Stock are to be redeemed
pursuant to Section 6, the right of conversion under this Section 9 shall cease
and terminate as to the shares of Series B Preferred Stock to be redeemed at the
close of business on the second Business Day next preceding the Redemption Date
unless the Corporation shall default in the payment of the Redemption Price.
(d) In connection with the conversion of any shares of Series B
Preferred Stock, no fractions of shares of Class A Common Stock shall be issued,
but in lieu thereof the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to such fractional interest
multiplied by the Current Market Price per share of Class A Common Stock on the
Trading Day on which such shares of Series B Preferred Stock are deemed to have
been converted.
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If more than one share of Series B Preferred Stock shall be surrendered for
conversion by the same holder at the same time, the number of full shares of
Class A Common Stock issuable on conversion thereof shall be computed on the
basis of the total number of shares of Series B Preferred Stock so surrendered.
(e) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series B Preferred Stock, such number of its
authorized but unissued shares of Class A Common Stock as will from time to time
be sufficient to permit the conversion of all outstanding shares of Series B
Preferred Stock, and shall take all action required to increase the authorized
number of shares of Class A Common Stock if necessary to permit the conversion
of all outstanding shares of Series B Preferred Stock.
(f) The Conversion Ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall (i) declare a dividend or make a
distribution on the outstanding shares of its Common Stock in shares of its
Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares, or (iii) combine its outstanding shares of Common
Stock into a smaller number of shares, the Conversion Price in effect at the
time of the record date for such dividend or distribution or the effective
date of such subdivision or combination shall be proportionately adjusted so
that the holder of any shares of Series B Preferred Stock surrendered for
conversion after such time shall be entitled to receive the aggregate number
of shares of Class A Common Stock which the holder would have owned or been
entitled to receive had such shares of Series B Preferred Stock been
converted immediately prior to such record date or effective date and the
resulting Common Stock had been subject to such dividend, distribution,
subdivision or combination. An adjustment made pursuant to this clause (i)
shall become effective (x) in the case of any such dividend or distribution,
immediately after the close of business on the record date
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<PAGE>
for the determination of holders of shares of Common Stock entitled to
receive such dividend or distribution, or (y) in the case of any such
subdivision, combination, consolidation or reclassification, at the close
of business on the day upon which such corporate action becomes effective.
(ii) If the Corporation shall issue rights, warrants or options to all
holders of Class A Common Stock entitling them (for a period not exceeding
45 days from the record date referred to below) to subscribe for or
purchase shares of Class A Common Stock at a price per share less than the
Current Market Price (determined over the Value Period (as defined in
Section 12) as of the date of determination of stockholders entitled to
receive such rights, warrants or options), then, in any such event, the
Conversion Ratio shall be adjusted by multiplying the Conversion Ratio in
effect immediately prior to the opening of business on such record date by
a fraction, the numerator of which shall be the number of shares of Class A
Common Stock outstanding on such record date plus the maximum number of
additional shares of Class A Common Stock offered for subscription pursuant
to such rights, warrants or options, and the denominator of which shall be
the number of shares of Class A Common Stock outstanding on such record
date plus the maximum number of additional shares of Class A Common Stock
which the aggregate offering price of the maximum number of shares of Class
A Common Stock so offered for subscription or purchase pursuant to such
rights, warrants or options would purchase at such Current Market Price
(determined by multiplying such maximum number of shares by the exercise
price of such rights, warrants or options (plus any other consideration
received by the Corporation upon the issuance or exercise of such rights,
warrants or options) and dividing the product so obtained by such Current
Market Price). Such adjustment shall become effective at the opening of
business on the day next following the record date for the determination of
stockholders entitled to receive such rights, warrants or options. To the
extent that shares
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of Class A Common Stock are not delivered after the expiration of such
rights, warrants or options, the Conversion Ratio shall be readjusted to
the Conversion Ratio which would then be in effect had the adjustments made
upon the record date for the determination of stockholders entitled to
receive such rights, warrants or options been made upon the basis of
delivery of only the number of shares of Class A Common Stock actually
delivered and the amount actually paid therefor. In determining whether
any rights, warrants or options entitle the holders to subscribe for or
purchase shares of Class A Common Stock at a price per share less than such
Current Market Price, there shall be taken into account any consideration
received by the Corporation upon issuance and upon exercise of such rights,
warrants or options. The value of such consideration, if other than cash,
shall be determined by the good faith business judgment of the Board of
Directors, whose determination shall be conclusive.
(iii) If the Corporation shall pay a dividend or make a distribution
to all holders of outstanding shares of Class A Common Stock, of capital
stock, cash, evidences of its indebtedness or other assets of the
Corporation (but excluding (x) any cash dividends or distributions (other
than Extraordinary Cash Distributions) and (y) dividends or distributions
referred to in Section 9(f)(i)), then the Conversion Ratio shall be
adjusted by multiplying the Conversion Ratio in effect immediately prior to
the opening of business on the record date for the determination of
stockholders entitled to receive such dividend or distribution by a
fraction, the numerator of which shall be the Current Market Price
(determined over the Value Period as of such record date), and the
denominator of which shall be such Current Market Price less either (A) the
fair market value (as determined by the good faith business judgment of the
Board of Directors, whose determination shall be conclusive), as of such
record date, of the portion of the capital stock assets or evidences of
indebtedness to be so distributed
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applicable to one share of Class A Common Stock or (B), if applicable, the
amount of the Extraordinary Cash Distribution to be distributed per share
of Class A Common Stock. The adjustment pursuant to the foregoing
provisions of this Section 9(f)(iii) shall become effective at the opening
of business on the day next following the record date for the determination
of stockholders entitled to receive such dividend or distribution.
(iv) In lieu of making an adjustment to the Conversion Ratio pursuant
to Sections 9(f)(i), 9(f)(ii) or 9(f)(iii) above for a dividend or
distribution or an issue or rights, warrants or options, the Corporation
may distribute to the holders of shares of Series B Preferred Stock, or
reserve for distribution with each share of Class A Common Stock delivered
to a person converting a share of Series B Preferred Stock pursuant to this
Section 9, such dividend or distribution or such rights, warrants or
options; PROVIDED, HOWEVER, that in the case of such a reservation, on the
date, if any, on which a person converting a share of Series B Preferred
Stock would no longer be entitled to receive such dividend or distribution
or to receive or exercise such rights, warrants or options, such dividend
or distribution shall be deemed to have occurred, or such rights, warrants
or options shall be deemed to have issued, and the Conversion Ratio shall
be adjusted as provided in Section 9(f)(i), 9(f)(ii) or 9(f)(iii), as the
case may be (with such termination date being the relevant date of
determination for purposes of determining the Current Market Price).
(v) The Corporation shall be entitled to make such additional
increases in the Conversion Ratio, in addition to those required by
subsections 9(f)(i) thorough 9(f)(iii), as shall be determined by the Board
of Directors to be necessary in order that any dividend or distribution in
Class A Common Stock, any subdivision, reclassification or combination of
shares of Class A Common Stock or any issuance of rights or warrants
referred to above, shall not be taxable to the holders of Class A Common
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Stock for United States Federal income tax purposes.
(vi) To the extent permitted by applicable law, the Corporation may
from time to time increase the Conversion Ratio by any amount for any
period of time if the period is at least 20 Trading Days, the increase is
irrevocable during such period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the
Corporation, which determination shall be conclusive.
(vii) In any case in which this Section 9(f) shall require that any
adjustment be made effective as of or immediately following a record date,
the Corporation may elect to defer (but only for five (5) Trading Days
following the occurrence of the event which necessitates the filing of the
statement referred to in Section 10) issuing to the holder of any shares of
this Series converted after such record date (i) the shares of Class A
Common Stock and other capital stock of the Corporation issuable upon such
conversion over and above the shares of Class A Common Stock and other
capital stock of the Corporation issuable upon such conversion on the basis
of the Conversion Ratio prior to adjustment and (ii) paying to such holder
any amount in cash in lieu of any fraction thereof pursuant to Section
9(d); PROVIDED, HOWEVER, that the Corporation shall deliver to such holder
a due bill or other appropriate instrument evidencing such holder's right
to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(viii) For purposes of this paragraph (f), the number of shares of
Common Stock at any time outstanding shall not include any shares of Common
Stock then owned or held by or for the account of the Corporation or a
Subsidiary of the Corporation.
(xi) The certificate of any firm of independent public accountants of
recognized standing selected by the Board of Directors of
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the Corporation (which may be the firm of independent public accountants
regularly employed by the Corporation) shall be presumptively correct for
any computation made under this paragraph (f).
(x) If the Corporation shall take a record of the holders of its
Common Stock for the purpose of entitling them to receive a dividend or
other distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment in the number of
shares of Common Stock issuable upon exercise of the right of conversion
granted by this paragraph (f) or in the Conversion Ratio then in effect
shall be required by reason of the taking of such record.
(g) In case of any capital reorganization or reclassification of
outstanding shares of Common Stock (other than a reclassification covered by
paragraph (f)(i) of this Section 9), or in case of any consolidation or merger
of the Corporation with or into another corporation, or in case of any sale or
conveyance to another corporation of the property of the Corporation as an
entirety or substantially as an entirety (each of the foregoing being referred
to as a "Transaction"), each share of Series B Preferred Stock then outstanding
shall thereafter be convertible into, in lieu of the Class A Common Stock
issuable upon such conversion prior to the consummation of such Transaction, the
kind and amount of shares of stock and other securities and property (including
cash) receivable upon the consummation of such Transaction by a holder of that
number of shares of Class A Common Stock into which one share of Series B
Preferred Stock was convertible immediately prior to such Transaction
(including, on a pro rata basis, the cash, securities or property received by
holders of Class A Common Stock in any tender or exchange offer that is a step
in such Transaction). In any such case, if necessary, appropriate adjustment
(as determined by the Board of Directors) shall be made in the application of
the provisions set forth in this Section 9 with respect to rights and interests
thereafter of the holders of shares of Series B
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Preferred Stock to the end that the provisions set forth herein for the
protection of the conversion rights of the Series B Preferred Stock shall
thereafter be applicable, as nearly as reasonably may be, to any such other
shares of stock and other securities and property deliverable upon conversion of
the shares of Series B Preferred Stock remaining outstanding. In case
securities or property other than Class A Common Stock shall be issuable or
deliverable upon conversion as aforesaid, then all references in this Section 9
shall be deemed to apply, so far as appropriate and as nearly as may be, to such
other securities or property.
Notwithstanding anything contained herein to the contrary, the
Corporation will not effect any Transaction unless, prior to the consummation
thereof, the Surviving Person (as defined in Section 12) thereof shall assume,
by written instrument mailed to each record holder of shares of Series B
Preferred Stock at the addresses of each as shown on the books of the
Corporation maintained by the Transfer Agent thereof if such shares are held by
50 or fewer holders or groups of affiliated holders or to each Transfer Agent
for the shares of Series B Preferred Stock at the addresses of each as shown on
the books of the Corporation maintained by the Transfer Agent thereof, if such
shares are held by a greater number of holders, the obligation to deliver to
such holder such cash and such securities to which, in accordance with the
foregoing provisions, such holder is entitled and such Surviving Person shall
have mailed to each record holder of shares of Series B Preferred Stock at the
addresses of each as shown on the books of the Corporation maintained by the
Transfer Agent thereof, if such shares are held by 50 or fewer holders or groups
of affiliated holders, or to each Transfer Agent for the shares of Series B
Preferred Stock, if such shares are held by a greater number of holders, an
opinion of independent counsel for such Person stating that such assumption
agreement is a valid, binding and enforceable agreement of the Surviving Person
(subject to customary exceptions).
(h) In case at any time or from time to time the Corporation shall
pay any dividend or make any other distribution to the holders of its Common
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Stock, or shall offer for subscription pro rata to the holders of its Common
Stock any additional shares of stock of any class or any other right, or there
shall be any capital reorganization or reclassification of the Common Stock of
the Corporation or consolidation or merger of the Corporation with or into
another corporation, or any sale or conveyance to another corporation of the
property of the Corporation as an entirety or substantially as an entirety, or
there shall be a voluntary or involuntary dissolution, liquidation or winding up
of the Corporation, then, in any one or more of said cases the Corporation shall
give at least 10 days' prior written notice (the time of mailing of such notice
shall be deemed to be the time of giving thereof) to the record holders of the
Series B Preferred Stock at the addresses of each as shown on the books of the
Corporation maintained by the Transfer Agent thereof of the date on which (i)
the books of the Corporation shall close or a record shall be taken for such
stock dividend, distribution or subscription rights or (ii) such reorganization,
reclassification, consolidation, merger, sale or conveyance, dissolution,
liquidation or winding up shall take place, as the case may be, provided that in
the case of any Transaction to which paragraph (g) of this Section 9 applies the
Corporation shall give at least 30 days' prior written notice as aforesaid.
Such notice shall also specify the date as of which the holders of the Common
Stock and of the Series B Preferred Stock of record shall participate in said
dividend, distribution or subscription rights or shall be entitled to exchange
their Common Stock or Series B Preferred Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale or conveyance or participate in such dissolution, liquidation or winding
up, as the case may be. Failure to give such notice shall not invalidate any
action so taken.
(i) The Corporation will at no time effect conversion of any Series B
Preferred Stock pursuant to this Section 9, and any purported conversion of any
Series B Preferred Stock shall be null and void, if such conversion would result
in
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<PAGE>
the violation of a Legal Prohibition (as defined in Section 12).
(j) All calculations under this Section 9 shall be made to the
nearest cent or to the nearest one one-hundredth of a share of Common Stock as
the case may be. Notwithstanding any other provision of this Section 9, the
Corporation shall not be required to make any adjustment of the Conversion Ratio
unless such adjustment would require an increase or decrease of at least 1.00%
of such Conversion Ratio. Any lesser adjustment shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any adjustment or adjustments so carried forward, shall
amount to an increase or decrease of at least 1.00% in the Conversion Ratio.
Any adjustments under this Section 9 shall be made successively whenever an
event requiring such an adjustment occurs.
(k) Upon the surrender of certificates representing shares of Series
B Preferred Stock in accordance with the terms hereof, the Person converting or
exchanging shall be deemed to be the holder of record at such time of the shares
of Class A Common Stock and other securities or property issuable on such
conversion or exchange and all rights with respect to the shares of Series B
Preferred Stock surrendered shall forthwith terminate except the right to
receive the shares of Class A Common Stock or other securities or property
issuable on such conversion or exchange, as the case may be. If any shares of
Series B Preferred Stock are surrendered for conversion or exchange subsequent
to the record date preceding a Dividend Payment Date but on or prior to such
Dividend Payment Date (except shares called for redemption or exchange on a
Redemption Date between such record date and Dividend Payment Date), the
registered holder of such shares at the closed of business on such record date
shall be entitled to receive the dividend, if any, payable on such shares on
such Dividend Payment Date notwithstanding the conversion thereof. Except as
provided in this Section 9, no adjustments in respect of payments of dividends
on shares surrendered for conversion or exchange or any dividend on the Common
Stock issued upon conversion
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or exchange shall be made upon the conversion or exchange of any shares of this
Series.
(l) The Corporation will endeavor to list the shares of (or
depositary shares representing fractional interests in) Class A Common Stock
required to be delivered upon conversion of shares of Series B Preferred Stock
prior to such delivery upon the principal national securities exchange upon
which the outstanding Class A Common Stock is listed at the time of such
delivery.
Section 10. REPORTS AS TO ADJUSTMENTS. Upon any adjustment of the
Conversion Ratio then in effect and any increase or decrease in the number of
shares of Common Stock issuable upon the operation of the conversion set forth
in Section 9, then, and in each such case, the Corporation shall promptly
deliver to the Transfer Agent of the Series B Preferred Stock and Common Stock a
certificate signed by the President or a Vice President and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated and specifying
the Conversion Ratio then in effect following such adjustment and the increased
or decreased number of shares issuable upon the conversion set forth in Section
9. The Corporation shall also promptly after the making of such adjustment give
written notice to the record holders of the Series B Preferred Stock at the
address of each holder as shown on the books of the Corporation maintained by
the Transfer Agent thereof, which notice shall state the Conversion Ratio then
in effect, as adjusted, and the increased or decreased number of shares issuable
upon the exercise of the right of conversion granted by Section 9, and shall set
forth in reasonable detail the method of calculation of each and a brief
statement of the facts requiring such adjustment. Where appropriate, such
notice to record holders of the Series B Preferred Stock may be given in advance
and included as part of the notice required under the provisions of Section
9(h).
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<PAGE>
Section 11. CERTAIN COVENANTS. Any record holder of Series B
Preferred Stock may proceed to protect and enforce its rights and the rights of
such holders by any available remedy by proceeding at law or in equity to
protect and enforce any such rights, whether for the specific enforcement of any
provision in this Certificate of Designation or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
Section 12. DEFINITIONS. For the purposes of this Certificate of
Designation of Series B Convertible Preferred Stock, the following terms shall
have the meanings indicated:
"Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banking institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Certificate" shall mean the certificate of the voting powers,
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, of Series B
Preferred Stock filed with respect to this Certificate of Designation with the
Secretary of State of the State of Delaware pursuant to Section 151 of the
General Corporation Law of the State of Delaware.
"Class A Common Stock" and "Class B Common Stock" each shall have the
meaning assigned to such term in the Corporation's Restated Certificate of
Incorporation. "Common Stock" shall mean either the Class A Common Stock or the
Class B Common Stock.
"Current Market Price", when used with reference to shares of Common
Stock or other securities on any date, shall mean the closing price per share of
Common Stock or such other securities on such date and, when used with reference
to shares of Common Stock or other securities for any period shall mean the
average of
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<PAGE>
the daily closing prices per share of Common Stock or such other securities for
such period. The closing price for each day shall be the last sale price,
regular way, 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 the Common
Stock or such other securities are not listed or admitted to trading on the New
York Stock Exchange, as reported in the principal consolidated transaction
reporting systems with respect to securities listed on the principal national
securities exchange on which the Common Stock or such other securities are
listed or admitted to trading or, if the Common Stock or such other securities
are not listed or admitted to trading on any national securities exchange, the
last quoted sale price or, if not so quoted, the average of the high bid and low
asked prices, as reported by the Nasdaq National Market or such other system
then in use, or, if on any such date the Common Stock or such other securities
are not quoted by any such organization, the average of the closing bid and
asked prices as furnished by the primary professional market maker making a
market in the Common Stock or such other securities as selected by the Board of
Directors of the Corporation. If the Common Stock is not publicly held or so
listed or publicly traded, "Current Market Price" shall mean the amount as
determined by investment bankers mutually agreeable to the Corporation and the
holders of a majority of the outstanding shares of Series B Preferred Stock (the
fees and expenses of which shall be paid by the Corporation) equal to the net
proceeds that would be expected to be received by a stockholder of the
Corporation from the sale of such shares of Common Stock in an underwritten
public offering after being reduced by pro forma expenses and underwriting
discounts and commissions. If securities other than Common Stock are not
publicly held or so listed or publicly traded, "Current Market Price" shall mean
the Fair Market Value per share of such other securities as determined by an
independent investment banking firm mutually agreeable to the Corporation and
the holders of a majority of the outstanding shares of Series B
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<PAGE>
Preferred Stock (the fees and expenses of which shall be paid by the
Corporation).
"Dividend Payment Date" shall have the meaning set forth in Section
3(a) hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
"Exchange Price" for each share of this Series called for exchange
shall be a number of shares of Class A Common Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
equal to the quotient of (x) the sum of (I) the Stated Value plus (II) the
amount of accrued or unpaid dividends on this Series to the Redemption Date
divided by (y) the product of (I) .95 multiplied by (II) the Current Market
Price determined over the Value Period as of the Redemption Date.
"Extraordinary Cash Distributions" shall mean, with respect to any
consecutive 12-month period, all cash dividends and cash distributions on the
outstanding shares of Series B Preferred Stock during such period (other than
cash dividends or cash distributions for which a prior adjustment to the
Conversion Ratio was previously made) to the extent such cash dividends and cash
distributions exceed, on a per share of Series B Preferred Stock basis, 10% of
the average daily Closing Price of the Series B Preferred Stock over such
period.
"Fair Market Value" shall mean the amount which a willing buyer would
pay a willing seller in an arm's-length transaction.
"Issue Date" shall mean the date on which shares of Series B Preferred
Stock are issued.
"Junior Stock" shall mean any capital stock of the Corporation ranking
junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series B Preferred Stock.
"Legal Prohibition" shall mean any law, statute, rule, regulation or
judicial or administrative decision which would prohibit a
29
<PAGE>
holder of Series B Preferred Stock from owning such number of shares of Common
Stock which such holder would receive upon converting the Series B Preferred
Stock or which would require the Corporation to dispose of any assets or
terminate any business activity as a result of a holder of the Series B
Preferred Stock owning such number of shares of Common Stock which such holder
would receive upon converting the Series B Preferred Stock.
"Liquidation Preference" with respect to a share of the Series B
Preferred Stock shall mean an amount equal to the Stated Value plus an amount
per share equal to all unpaid dividends accrued thereon to the date of final
distribution to the holder thereof (without interest).
"Merger Agreement" shall mean the Agreement and Plan of Merger, dated
as of February 27, 1996, between the Corporation and U S WEST, Inc., a Delaware
Corporation.
"Parity Stock" shall mean the Series A Participating Convertible
Preferred Stock and any other capital stock of the Corporation (other than
Junior Stock) ranking on a parity (either as to dividends or upon liquidation,
dissolution or winding up) with the Series B Preferred Stock.
"Person" shall mean any individual, firm, trust, partnership,
corporation or other entity, and shall include any successor (by merger or
otherwise) of such entity.
"Preferred Stock" shall mean the class of Preferred Stock, par value
$0.01 per share, of the Corporation authorized at the date of the Certificate,
including any shares thereof authorized after the date of the Certificate.
"Redemption Date" shall mean the date on which the Corporation shall
effect the redemption or exchange, as the case may be, of all or any part of the
outstanding shares of the Series B Preferred Stock pursuant to Section 6 hereof.
"Redemption Price" in respect of a share of Series B Preferred Stock
shall mean the Stated Value as of the Redemption Date, plus an amount per share
equal to all
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unpaid dividends thereon, whether or not declared, to the date of redemption
(without interest).
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Senior Stock" shall mean the shares of any class or series of stock
of the Corporation which, by the terms of the Restated Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Restated Certificate of Incorporation,
shall fix the relative rights, preferences and limitations thereof, shall be
senior to the Series B Preferred Stock in respect of the right to receive
dividends or to participate in any distribution of assets other than by way of
dividends.
"Stated Value" in respect of the Series B Preferred Stock shall
initially be $50 per share, as appropriately adjusted from time to time to
reflect any split or combination of the shares of the Series B Preferred Stock.
"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
"Surviving Person" shall mean the continuing or surviving Person of a
merger, consolidation or other corporate combination, the Person receiving a
transfer of all or a substantial part of the properties and assets of the
Corporation, or the Person consolidating with or merging into the Corporation in
a merger, consolidation or other corporate combination in which the Corporation
is the continuing or surviving person, but in connection with which the Series B
Preferred Stock or Common Stock of the Corporation is exchanged, converted or
reinstated into the securities of any other Person or cash or other property;
PROVIDED, HOWEVER, if such Surviving Person is a direct or indirect Subsidiary
of a Person, the parent entity also shall be deemed to be a Surviving Person.
"Trading Day" means a day on which the principal national securities
exchange on which the Common Stock is listed or admitted to trading is open for
the transaction of
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business or, if the Common Stock is not listed or admitted to trading on any
national securities exchange, a Business Day.
"Transaction" has the meaning specified in Section 9(g).
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"Value Period" shall mean the ten (10) consecutive Trading Days ending
on the third Trading Day immediately preceding the applicable date.
IN WITNESS WHEREOF, Continental Cablevision, Inc. has caused this
Certificate to be duly executed in its corporate name as of the th day of
[ ]
CONTINENTAL CABLEVISION, INC.
By___________________________
Attest:
_________________________
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EXHIBIT F
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made and entered
into as of _________ __, 199_ among Continental Cablevision, Inc., a Delaware
corporation (the "COMPANY"), and U S WEST, Inc., a Delaware corporation (the
"HOLDER").
RECITALS
A. This Agreement is being entered into in connection with, and pursuant
to section [_.__] of, the Agreement and Plan of Merger, dated as of February 27,
1996, between the Company and the Holder (the "MERGER AGREEMENT").
B. The Company has heretofore entered into (i) a Registration Rights
Agreement dated as of June 22, 1992 with Corporate Partners, L.P. and certain
other signatories thereto and (ii) an amendment thereto dated as of July 15,
1992 (said Registration Rights Agreement and amendment are hereinafter referred
to as the "CP AGREEMENT").
C. The Company has heretofore entered into a Registration Rights
Agreement dated as of July 15, 1992 with Boston Ventures Limited Partnership III
and certain other signatories thereto (said Registration Rights Agreement is
hereinafter referred to as the "BV AGREEMENT").
D. The Company has heretofore entered into a Registration Rights
Agreement dated as of October 5, 1995 with The Providence Journal Company, as
Representative, and certain other signatories thereto (said Registration Rights
Agreement is hereinafter referred to as the "PROJO AGREEMENT").
E. It is intended by the Company and the Holder that this Agreement shall
become effective immediately upon the issuance to the Holder of the [_________]
shares of Series D Convertible Preferred Stock, par value $.01 per share, of the
Company to be issued pursuant to Section [_.__] of the Merger Agreement (the
"PREFERRED SECURITIES").
<PAGE>
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants contained herein, and of other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Holder, intending to be legally bound, each hereby agrees as follows:
ARTICLE 1
REGISTRATION UNDER SECURITIES ACT
Section 1.01 REGISTRATION UPON REQUEST. (a) REQUEST. Subject to
the provisions of this Agreement (including Section 4.11 hereof), upon the
written request of the Holder requesting that the Company effect the
registration under the Securities Act of Registrable Securities (as hereinafter
defined), which request shall specify in reasonable detail the number of
Registrable Securities to be registered and the intended method of distribution
thereof, the Company shall use its best efforts to register under the Securities
Act (a "DEMAND REGISTRATION"), including by means of a shelf registration
pursuant to Rule 415 under the Securities Act if so requested in such request
and if the Company is then eligible to use such a registration, as expeditiously
as may be practicable, the Registrable Securities which the Company has been
requested to register by the Holder, all to the extent requisite to permit the
disposition of such Registrable Securities in accordance with the plan of
distribution set forth in the applicable registration statement. In the case of
such Demand Registration, the Holder must request registration of Registrable
Securities representing not less than such number of Registrable Securities the
Expected Proceeds of which, on the date of the aforementioned written request,
would equal at least $100 million unless such registration request is for all
remaining Registrable Securities.
(b) REGISTRATION OF OTHER SECURITIES. Whenever the Company shall
effect a registration pursuant to this Section 1.01 in connection with an
underwritten offering by the Holder of Registrable Securities, no securities
(other than Registrable Securities) shall be included among the securities
covered by such registration if the managing underwriter, if any, of such
offering shall have advised the Holder and the Company in writing
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of its belief that the inclusion of such other securities would substantially
interfere with such offering.
(c) REGISTRATION STATEMENT FORM. Registrations under this Section
1.01 shall be on such appropriate registration form of the Commission as shall
be selected by the Company and available to it under the Securities Act. The
Company agrees to include in any such registration statement all information
which, in the opinion of counsel to the Holder and counsel to the Company, is
reasonably required to be included therein under the Securities Act.
(d) LIMITATIONS ON REGISTRATION; EXPENSES. The Company will not be
required to effect more than two (2) Demand Registrations pursuant to this
Section 1.01. Subject to the provisions of Sections 1.01(h) and 1.02(b) hereof,
the Company shall pay the Registration Expenses in connection with such Demand
Registration.
(e) EFFECTIVE REGISTRATION STATEMENT. Subject to the provisions of
Section 1.01(i) hereof, a registration requested pursuant to this Section 1.01
shall not be deemed to have been effected (i) unless a registration statement
with respect thereto has become effective, (ii) if after it has become
effective, such registration is materially interfered with by any stop order,
injunction or similar order or requirement of the Commission or other
governmental agency or court for any reason not attributable to any of the
Holder and has not thereafter become effective, or (iii) if the conditions to
closing specified in the underwriting agreement, if any, entered into in
connection with such registration are not satisfied or waived, other than by
reason of a failure on the part of the Holder.
(f) SELECTION OF UNDERWRITERS. In the case of such Demand
Registration, the selection of any managing underwriter(s) shall be made by the
Company (with the consent of the Holder, which consent shall not be unreasonably
withheld), PROVIDED, HOWEVER, that (i) the Holder shall be entitled to select
(with the consent of the Company, which consent shall not be unreasonably
withheld) one (1) managing underwriter other than the lead managing underwriter,
and (ii) the selection of the underwriters (other than the managing
underwriter(s)) shall be made by the mutual agreement of the Company and the
Holder.
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(g) CERTAIN REQUIREMENTS IN CONNECTION WITH REGISTRATION RIGHTS. In
the case of such Demand Registration, if the Holder has determined to enter into
one or more underwriting agreements in connection therewith, no Person may
participate in such Demand Registration unless such Person agrees to sell his or
its securities on the basis provided in the underwriting arrangements and
completes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents which are reasonable and customary under the
circumstances.
(h) PRIORITY IN DEMAND REGISTRATION. If the managing underwriter of
any underwritten offering shall advise the Company in writing (with a copy to
the Holder) that, in its opinion, the number of Registrable Securities requested
to be included in such registration exceeds the number which can be sold in such
offering within a price range acceptable to the Holder, the Company will reduce
to the number which the Company is so advised can be sold in such offering
within such price range (the "Actual Number of Securities to be Registered"),
the Registrable Securities requested to be included in such registration. If,
as a result of any such reduction, the number of Registrable Securities
requested to be included in such registration by the Holder of the Registrable
Securities is reduced by twenty-five percent (25%) or more, then notwithstanding
anything to the contrary contained in this Agreement, a Demand Registration in
connection with such registration will not be deemed to have been effected under
Section 1.01(e) hereof; PROVIDED, HOWEVER, that the provisions of this sentence
shall apply to and be operative in respect of only the first request in writing
made by the Holder under this Section 1.01 for the registration of Registrable
Securities. In the case of such a registration which would have been deemed to
be a Demand Registration under Section 1.01(e) hereof but for the application of
the immediately preceding sentence of this Section 1.01(h), (i) the Company
nonetheless shall pay the Registration Expenses of the Holder in connection with
such registration, and (ii) no securities other than Registrable Securities
shall be covered by such registration.
(i) CERTAIN OTHER MATTERS. For purposes of Section 1.01(e)(i)
hereof, should a Demand Registration not become effective due to the failure of
the Holder to perform its obligations under this Agreement or the inability of
the Holder to reach agreement with the underwriters on price or other
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customary terms for such transaction, or in the event the Holder withdraws or
does not pursue the request for the Demand Registration (in each of the
foregoing cases, provided that at such time the Company is in compliance in all
material respects with its obligations under this Agreement), then, except as
otherwise provided in the last sentence of this Section 1.01(i), such Demand
Registration shall be deemed to have been effected. In such event, the Holder
shall reimburse the Company for all of the Registration Expenses (other than the
Registration Expenses referred to in clause (a) of the definition of
Registration Expenses) incurred by the Company in the preparation, filing and
processing of such registration. If such reimbursement is made within thirty
(30) business days following a request therefor, a Demand Registration shall not
be deemed to have been effected for purposes of this Section 1.01.
Section 1.02 INCIDENTAL REGISTRATION. (a) RIGHTS TO INCLUDE. Subject to
the provisions of this Agreement (including Section 4.11 hereof)and the rights
of the holders of the CP/BV Registrable Securities under the BV Agreement or the
CP Agreement, if at any time the Company proposes to register the offering for
cash of any shares of Class A Common Stock under the Securities Act on Form S-1,
S-2 or S-3 (or any successor or similar form thereto) for the account of the
Company, the Company shall furnish prompt written notice to the Holder of its
intention to effect such registration and the intended method of distribution in
connection therewith. Upon the written request of the Holder made to the
Company within fifteen (15) business days after the delivery of the
aforementioned notice by the Company, which request shall specify the number of
shares of Registrable Securities intended to be registered, the Company shall
include such Registrable Securities in such registration, subject however to the
following sentence of this Section 1.02(a) and to the provisions of Section
1.02(c) hereof. If the Company shall thereafter determine in its sole
discretion not to register or to delay the registration of such securities, the
Company may, at its election, provide written notice of such determination to
the Holder and, (i) in the case of a determination not to effect a registration,
shall thereupon be relieved of the obligation to register such Registrable
Securities (but, under such circumstances, the Company shall pay any
Registration Expenses reasonably incurred by the Holder until such time as the
Holder received the Company's written notice) and, (ii) in the case of a
determination to delay a registration, shall thereupon be permitted to delay
registering any Registrable Securities for the
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same period as the delay in respect of securities being registered for the
Company's own account. No incidental registration effected pursuant to this
Section 1.02 shall be deemed to have been effected or otherwise relieve the
Company of any of its obligations to the Holder pursuant to Section 1.01 hereof.
(b) In connection with any incidental registration as provided in
Section 1.02(a) hereof, the Company shall pay the Registration Expenses for the
registration in question.
(c) PRIORITY IN INCIDENTAL REGISTRATIONS. If the lead managing
underwriter of any underwritten offering shall inform the Company by letter of
its belief that the number of Registrable Securities requested to be included in
such registration would substantially interfere with (including without
limitation adversely affect the pricing of) such offering, then the Company will
include in such registration, to the extent of the number and type which the
Company is so advised can be sold in (or during the time of) such offering
without such substantial interference, FIRST, all securities proposed by the
Company to be sold for its own account, SECOND, subject to the provisions of
Section 4.11 hereof, all securities of the Company ranking senior to or on a
parity with (as to rights to dividends and upon liquidation) the Company's
Series A Participating Convertible Preferred Stock ("Senior Securities") and
CP/BV Registrable Securities requested to be included in such registration (such
securities to be included in such registration pro rata on the basis of the
Expected Proceeds from the sale thereof), and THIRD, any other securities of the
Company requested to be included in such registration.
Section 1.03 REGISTRATION PROCEDURES. If and whenever the Company is
required by the provisions of this Agreement to effect or cause the registration
of any Registrable Securities under the Securities Act as provided in this
Agreement, the Company shall, as expeditiously as practicable:
(a) In the case of a Demand Registration, use its best efforts to
prepare and file with the Commission and obtain the effectiveness of a
registration statement on such form as is available for the sale of Registrable
Securities by the Holder in accordance with the plan of distribution set forth
in such registration statement; PROVIDED, HOWEVER, if a request for
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registration pursuant to Section 1.01 hereof is made within sixty (60) days
before the end of the Company's fiscal year and the Company is not then eligible
to effect a registration under the Securities Act by use of Form S-3 (or other
comparable short-form registration statement), the Company shall be entitled to
delay the filing of such registration statement until the earlier of (i) such
time as the Company receives audited financial statements for such fiscal year
and (ii) the expiration of 90 days after the last day of such fiscal year; and
PROVIDED, FURTHER, that if the Company shall furnish to the Holder a certificate
signed by the President of the Company stating that, in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its stockholders for such registration statement to be filed on
the date filing would be required under this Agreement because such registration
would require premature disclosure of any acquisition, corporate reorganization
or other material transaction involving the Company and that it is therefore
essential to defer taking action with respect to the filing of such registration
statement, then the Company may direct that such request for registration be
delayed for a period not to exceed ninety (90) days, such right to delay a
request to be exercised by the Company not more than once in any 12-month
period.
(b) Prepare and file with the Commission such amendments, post-
effective amendments and supplements to such registration statement and the
prospectus used in connection therewith as may be necessary to keep such
registration statement effective for up to ninety (90) days (unless the
Registrable Securities registered thereunder have been sold or disposed of prior
to the expiration of such 90-day period); and to comply with the provisions of
the Securities Act applicable to the Company with respect to the disposition of
all securities covered by such registration statement during such time as such
registration statement is effective.
(c) Furnish to the Holder and each underwriter of the Registrable
Securities being sold, as the Holder and such underwriter may reasonably request
in order to facilitate the disposition of Registrable Securities in accordance
with the plan of distribution set forth in such registration statement, (i) such
number of copies (including manually executed and conformed copies) of such
registration statement and of each such amendment thereof and supplement thereto
(including all annexes,
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appendices, schedules and exhibits), (ii) such number of copies of the
prospectus used in connection with such registration statement (including each
preliminary prospectus and the final prospectus filed pursuant to Rule 424(b)
under the Securities Act), and (iii) such other documents incident thereto.
(d) Use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under the securities or "blue
sky" laws of such jurisdictions in which an exemption is not available as the
Holder and the managing underwriter shall reasonably request, and do any and all
other reasonable acts and things which may be necessary or advisable to permit
the offering and disposition of Registrable Securities in such jurisdictions in
accordance with the plan of distribution set forth in the registration
statement; PROVIDED, HOWEVER, the Company shall not be required to qualify
generally to do business as a foreign corporation, subject itself to taxation,
or consent to general service of process, in any jurisdiction wherein it would
not, but for the requirements of this Section 1.03, be obligated to do so.
(e) Use its best efforts to cause the Registrable Securities covered
by such registration statement to be registered with, or approved by, such other
public, governmental or regulatory authorities as may be necessary in the
reasonable judgment of counsel for the Holder and the Company to facilitate the
disposition of such Registrable Securities in accordance with the plan of
distribution set forth in such registration statement.
(f) Notify the Holder and the managing underwriter, if any, promptly
and, if requested by any such Person, confirm such notification in writing, (i)
when a prospectus or any prospectus supplement has been filed with the
Commission, and, with respect to such registration statement or any post-
effective amendment thereto, when the same has been declared effective by the
Commission, (ii) of any request by the Commission for amendments or supplements
to such registration statement or related prospectus, or any written request by
the Commission for additional information, (iii) of the issuance by the
Commission of any stop order or the receipt of notice of the initiation of any
proceedings for such or a similar purpose (and the Company shall make every
reasonable effort to obtain the withdrawal of any such order at the earliest
possible moment and the Holder shall cooperate in all reasonable respects in
such efforts), (iv)
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of the receipt by the Company of any notification with respect to the suspension
of the qualification of any of the Registrable Securities for sale in any
jurisdiction or the receipt of notice of the initiation or threatening of any
proceeding for such purpose (and the Company shall make every reasonable effort
to obtain the withdrawal of any such suspension at the earliest possible moment
and the Holder shall cooperate in all reasonable respects in such efforts), (v)
of the occurrence of any event during the period when a prospectus with respect
to the Registrable Securities is required to be delivered under the Securities
Act which requires the making of any changes to such registration statement or
related prospectus so that such documents will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (and the Company shall
promptly prepare and furnish to the Holder and any managing underwriter a
reasonable number of copies of a supplemented or amended prospectus or
preliminary prospectus such that, as thereafter delivered to the purchasers of
such Registrable Securities, such prospectus or preliminary prospectus shall not
include an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading), and (vi)
of the Company's determination that the filing of a post-effective amendment to
such registration statement shall be necessary or appropriate. The Holder shall
be deemed to have agreed by its acquisition of Registrable Securities that upon
the receipt of any notice from the Company of the occurrence of any event of the
kind described in clause (v) of this Section 1.03(f), the Holder shall forthwith
discontinue the Holder's offer and disposition of Registrable Securities until
the Holder shall have received copies of an appropriately supplemented or
amended prospectus or preliminary prospectus and, if so directed by the Company,
shall deliver to the Company, at its expense, all copies (other than permanent
file copies) of the prospectus or preliminary prospectus covering such
Registrable Securities which are then in the Holder's possession. In the event
the Company shall provide any notice of the type referred to in the preceding
sentence, the 90-day period mentioned in Section 1.03(b) hereof shall be
extended by the number of days from and including the date such notice is
provided to and including the date when each seller of any Registrable
Securities covered by such registration statement and the managing underwriter
shall have received copies
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of the corrected prospectus contemplated by clause (v) of this Section 1.03(f),
plus an additional seven (7) days. The underwriters or, if there are no
underwriters, the Holder shall deliver such supplemented or amended prospectus
or preliminary prospectus to all purchasers or offerees of the Registrable
Securities sold by it to which such delivery may be required or advisable under
the Securities Act and any applicable state securities or "blue sky" laws.
(g) Otherwise use its best efforts in connection with each
registration and offering of Registrable Securities hereunder to comply with all
applicable rules and regulations of the Commission, as the same may hereafter be
amended, including section 11(a) of the Securities Act and Rule 158 thereunder.
(h) Use its best efforts to cause all such Registrable Securities
covered by such registration statement to be listed on each securities exchange
on which the same class of securities issued by the Company are then listed, if
the listing of such Registrable Securities is then permitted under the rules and
regulations of such exchange and, if requested by the Holder, cause all such
Registrable Securities that are of a different class or series than those
Company securities already listed or traded to be listed on one (but not more
than one) securities exchange reasonably requested by the Holder.
(i) Engage and provide a transfer agent and registrar for all
Registrable Securities covered by such registration statement not later than the
effective date of such registration statement.
(j) Furnish to the Holder a signed counterpart of an opinion from
counsel to the Company, and a "cold comfort" letter from the Company's
independent certified public accounting firm covering such matters of the type
customarily covered by such opinions and "cold comfort" letters as any managing
underwriter and the Holder shall reasonably request.
(k) Subject to confidentiality restrictions reasonably required by
the Company, at reasonable times and upon reasonable notice, and as necessary to
permit a reasonable investigation with respect to the Company and its business
in connection with the preparation and filing of such registration statement,
make available for inspection by the Holder, by any managing underwriter or
other underwriters participating in any
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disposition of Registrable Securities, and by any attorney, accountant or other
agent, representative or advisor retained by any such seller or underwriters,
all pertinent financial and other records and corporate documents of the
Company; and cause all of the Company's officers, directors and employees to
discuss pertinent aspects of the Company's business with the Holder and any such
underwriter, accountant, agent, representative or advisor in connection with
such registration statement; PROVIDED, HOWEVER, that the Company shall not be
obligated pursuant to this Section 1.03(k) to provide access to any information
which it reasonably considers to be a trade secret or similar confidential
information.
(l) Permit the Holder, if the Holder, in the judgment of its counsel,
might be deemed to be a "control person" of the Company (within the meaning of
section 15 of the Securities Act or section 20 of the Exchange Act), to
participate in the preparation of such registration statement and include
therein material, furnished to the Company in writing which, in the reasonable
judgment of the Holder and its counsel, is required to be included therein; and
(m) If any registration statement refers to the Holder by name or
otherwise as the holder of any securities of the Company, and if the Holder
reasonably believes it is or may be deemed to be a control person in relation
to, or an Affiliate of, the Company, then the Holder shall have the right to
require (i) the insertion in such registration statement of language, in form
and substance reasonably satisfactory to the Holder, to the effect that the
ownership by the Holder of such securities is not to be construed as and is not
intended to be a recommendation by the Holder of the investment quality of, or
the relative merits and risks attendant to the purchase of, the Company's
securities covered thereby, and that such ownership does not imply that the
Holder will assist in meeting any future financial or operating requirements of
the Company, or (ii) in the case where the reference to the Holder by name or
otherwise is not required by the Securities Act or any similar federal or state
statute then in effect, the deletion of the reference to the Holder.
Section 1.04 UNDERWRITTEN OFFERINGS. (a) REQUESTED UNDERWRITTEN
OFFERINGS. If requested by the underwriters for any underwritten offering by
the Holder of Registrable Securities pursuant to a Demand Registration, the
Company and the Holder will use their best efforts to enter into an underwriting
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agreement with such underwriters for such offering, such agreement (i) to be
reasonably satisfactory in substance and form to the Company, the Holder and the
underwriters and (ii) to contain such representations and warranties by the
Company and such other terms as are reasonable and customary in the
circumstances on the part of an issuer in agreements of that type, including,
without limitation, indemnities to the effect and to the extent provided in
Article 2 hereof. The Holder shall cooperate with the Company in the
negotiation of the underwriting agreement, and shall be party to such
underwriting agreement and may, at its option, require that any or all of the
representations and warranties by, and the other agreements on the part of, the
Company to and for the benefit of such underwriters shall also be made to and
for the benefit of the Holder and that any or all of the conditions precedent to
the obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of the Holder. The Company shall notify
the Holder if at any time the representations and warranties contemplated by
such underwriting agreement cease to be true and correct in all material
respects. The Holder shall not be required to make any representations or
warranties to or agreements with the Company other than representations,
warranties or agreements regarding the Holder, the Holder's Registrable
Securities and the Holder's intended method of distribution as otherwise
required by law.
(b) INCIDENTAL UNDERWRITTEN OFFERINGS. If the Company proposes to
register any of its securities under the Securities Act as contemplated by
Section 1.02 hereof and such securities are distributed by or through one or
more underwriters, the Holder of Registrable Securities to be distributed by
such underwriters shall be party to the underwriting agreement between the
Company and such underwriters and may, at its option, require that any or all of
the representations and warranties by, and the other agreements on the part of,
the Company to and for the benefit of such underwriters shall also be made to
and for the benefit of the Holder and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of the Holder. The Company
shall notify the Holder if at any time the representations and warranties
contemplated by such underwriting agreement cease to be true and correct in all
material respects. The Holder shall not be required to make any representations
or warranties to or agreements with the Company or the underwriters other than
representations, warranties or
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agreements regarding the Holder, the Holder's Registrable Securities and the
Holder's intended method of distribution or as otherwise required by law.
(c) LIMITATIONS ON SALE OR DISTRIBUTION OF OTHER SECURITIES.
Anything herein to the contrary notwithstanding (including Section 1.01(a)
hereof), if the Company shall file a registration statement with respect to any
of the Company's securities, whether or not for its own account, by means of an
underwritten offering, the Holder agrees not to effect any public sale or
distribution of any Registrable Securities, including any resale pursuant to
Rule 144 under the Securities Act, and to use the Holder's best efforts not to
effect any such public sale or distribution (other than as part of such
underwritten offering) of any other securities which, with notice, lapse of time
and/or payment of monies, are exchangeable or exercisable for or convertible
into any Registrable Securities, during the 15-day period prior to, and during
the 120-day period (or such longer period as shall have been requested by the
managing underwriters) commencing on, the effective date of the registration
statement filed with the Commission in connection with such underwritten
offering.
(d) In order to ensure compliance with the provisions of Section
1.04(c) hereof, the Company hereby agrees to notify the Holder as to the status
and proposed effective date of any registration statement of the Company which
is filed with the Commission.
(e) The Company hereby agrees not to effect, except pursuant to
employee benefit plans, any public sale or distribution of any securities of the
same class as (or otherwise similar to) the Registrable Securities, or any
securities which, with notice, lapse of time and/or payment of monies, are
exchangeable or exercisable for or convertible into any such securities during
the 15-day period prior to, and during the 90-day period commencing on, the
effective date of a registration statement filed with the Commission in
connection with an underwritten offering effected pursuant to Section 1.01 of
this Agreement, except to the extent otherwise required by the CP Agreement, the
BV Agreement or the ProJo Agreement.
(f) Without limiting the generality of the foregoing, the provisions
of Section 1.04(c) hereof shall not apply to the
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Holder if the Holder is prevented by statute or other applicable regulation from
agreeing to such provisions.
Section 1.05 CERTAIN AGREEMENTS OF THE COMPANY AND HOLDER. (a) The
Holder, in connection with any registration of Registrable Securities, shall
furnish to the Company such information regarding the Holder and the plan of
distribution proposed by the Holder as the Company may reasonably request and as
shall reasonably be required in connection with any registration, qualification
or compliance referred to in this Agreement. In the case of a Demand
Registration, the Company agrees that any plan of distribution included in the
registration statement (which plan relates to the Holder) shall be as reasonably
specified by the Holder.
If requested by the Company, information with respect to the Holder
required, in the opinion of counsel for the Company, to be included pursuant to
the Securities Act in any registration statement or prospectus for an offering
of Registrable Securities shall be furnished to the Company promptly by the
Holder in writing in a form specifically and expressly for use in such
registration statement or prospectus.
(b) If at the time of any transfer of any Registrable Securities,
such Registrable Securities shall not have been theretofore registered under the
Securities Act, the Company may require, as a condition of allowing such
transfer, that the Holder or the Holder's transferee furnish to the Company (i)
such information as is necessary in order to establish that such transfer may be
made without registration under the Securities Act; and (ii) at the expense of
the Holder or the Holder's transferee, an opinion of legal counsel designated by
the Holder or the Holder's transferee to the effect that such transfer may be
made without registration under the Securities Act, except that nothing
contained in this Section 1.05(b) shall relieve the Company from complying with
any request for registration, qualification or compliance made pursuant to the
other provisions of this Agreement.
(c) The Holder agrees that it will keep confidential and will not
disclose or divulge any confidential, proprietary or secret information that the
Holder may obtain from the Company, and that the Company has marked
"Confidential", "Proprietary" or "Secret" or has otherwise identified as being
such, pursuant to financial information, reports and other materials and
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discussions with officers, directors, employees or agents made available by the
Company as required hereunder unless such information is or becomes known to the
Holder from a Person other than the Company (other than as a result of a breach
of a duty of confidentiality owed to the Company by such Person) or is or
becomes publicly known other than as a result of a breach of this provision, or
unless the Company gives its written consent to the Holder's release of such
information, except that no such written consent shall be required (and the
Holder shall be free to release such information) if such information is to be
provided to the Holder's counsel or accountant, or to an officer, director,
employee, advisor or partner of the Holder, PROVIDED that the Holder shall
inform the recipient of the confidential nature of such information, and shall
require the recipient to treat the information as confidential to the same
extent as the Holder.
(d) The Holder agrees to perform any further acts and to execute and
deliver any further documents that may reasonably be requested or necessary to
confirm, or to carry out, the provisions of this Agreement (including the
provisions of Article 2 of this Agreement).
ARTICLE 2
INDEMNIFICATION
Section 2.01 INDEMNIFICATION. (a) With respect to each registration of
Registrable Securities pursuant to this Agreement, the Company hereby
indemnifies, to the fullest extent permitted by law, the Holder, its officers
and directors, if any, and each Person, if any, who controls the Holder within
the meaning of section 15 of the Securities Act and section 20 of the Exchange
Act, against all losses, claims, damages, liabilities (or proceedings in respect
thereof) and reasonable expenses (under the Securities Act, common law and
otherwise), joint or several, caused by (i) any untrue statement or alleged
untrue statement of a material fact contained in the applicable registration
statement or prospectus or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light (in the case of a prospectus) of the circumstances under which
they were made, not misleading, or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus or any
omission or alleged omission to
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state therein a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading if used
prior to the effective date of such registration statement (unless such
statement or omission is corrected in the final prospectus and the Company has
previously furnished copies thereof to the Holder included in such registration
which is seeking such indemnification and to the underwriters of the
registration in question); PROVIDED, HOWEVER, that such indemnification shall
not extend to any such losses, claims, damages, liabilities (or proceedings in
respect thereof) or expenses which are caused (x) by any untrue statement or
alleged untrue statement contained in, or by any omission or alleged omission
from, information furnished in writing to the Company by the Holder or any
underwriter thereof specifically and expressly for use in any such registration
statement or prospectus or (y) any failure by the Holder or any underwriter to
deliver a prospectus or preliminary prospectus (or amendment or supplement
thereto) as and when required under the Securities Act after such prospectus has
been timely furnished by the Company.
(b) In the case of an underwritten offering in which the registration
statement covers Registrable Securities, the Company agrees to indemnify the
underwriters, their officers and directors, if any, and each Person, if any, who
controls such underwriters within the meaning of section 15 of the Securities
Act and section 20 of the Exchange Act, to the extent customary in the
circumstances for an issuer in an underwritten public offering.
(c) In connection with any written information furnished to the
Company or any underwriter of any underwritten offering specifically and
expressly for use in a registration statement with respect to the Holder, the
Holder hereby indemnifies severally (but not jointly), to the fullest extent
permitted by law, the Company, its officers and directors and each Person, if
any, who controls the Company within the meaning of section 15 of the Securities
Act and section 20 of the Exchange Act, against any losses, claims, damages,
liabilities (or proceedings in respect thereof) and expenses caused by (i) any
untrue statement or alleged untrue statement of a material fact contained in the
applicable registration statement, prospectus or preliminary prospectus or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light (in the
case of a prospectus) of the circumstances under which they
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were made, not misleading; PROVIDED, HOWEVER, that the indemnification set forth
in this Section 2.01(c) shall only apply if, and the Holder shall be liable
hereunder if and only to the extent that, any such loss, claim, damage or
liability arises solely out of or is based solely upon an untrue statement or
alleged untrue statement or omission or alleged omission, made in reliance upon
and in conformity with information pertaining to the Holder, which is furnished
in writing to the Company or any underwriter of any underwritten offering by the
Holder expressly for use in any such registration statement or prospectus.
(d) In the case of an underwritten offering of Registrable
Securities, the Holder shall agree to indemnify such underwriters, their
officers and directors, if any, and each Person, if any, who controls such
underwriters within the meaning of section 15 of the Securities Act and section
20 of the Exchange Act, to the extent customary in the circumstances for a
selling stockholder in an underwritten public offering.
Section 2.02 NOTICES OF CLAIMS. (a) Any Person seeking indemnification
under the provisions of this Article 2 shall, promptly after receipt by such
Person of notice of the existence of such claim or of the commencement of any
action, suit, claim or proceeding, notify each party against whom
indemnification is to be sought in writing of the existence or commencement
thereof; PROVIDED, HOWEVER, the failure so to notify an indemnifying party shall
not relieve the indemnifying party from any liability which it may have under
this Article 2 or from any liability which the indemnifying party may otherwise
have (except if and to the extent that it has been prejudiced in any material
respect by such failure). In case any such action, suit, claim or proceeding is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party, except as otherwise provided in Section
2.02(c) hereof. Upon delivery of such notice by the Company (if it is the
indemnifying party) to such indemnified party and approval of such counsel by
such indemnified party, the Company will not be liable under this Article 2 for
any legal or other expenses subsequently incurred by the Holder in connection
with the defense of such action,
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suit, claim or proceeding, except as otherwise provided in Section 2.02(b)
hereof.
(b) Notwithstanding the foregoing, the indemnified party shall have
the right to employ its own counsel in any such case, but the fees and expenses
of such counsel shall be at the expense of such indemnified party unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying party in connection with the defense of such suit, action, claim or
proceeding, (ii) the indemnifying party shall not have employed counsel
(reasonably satisfactory to the indemnified party) to take charge of the defense
of such action, suit, claim or proceeding within a reasonable time after notice
of commencement of the action, suit, claim or proceeding, or (iii) such
indemnified party shall have reasonably concluded that there may be defenses
available to it which are different from or additional to those available to the
indemnifying party which, if the indemnifying party and the indemnified party
were to be represented by the same counsel, could result in a conflict of
interest for such counsel or materially prejudice the prosecution of the
defenses available to such indemnified party. If any of the events specified in
clauses (ii) or (iii) of the preceding sentence shall have occurred or such
clauses shall otherwise be applicable, then the fees and expenses of one counsel
or firm of counsel, plus one local or regulatory counsel or firm of counsel,
selected by a majority in interest of the indemnified parties shall be borne by
the indemnifying party.
(c) If, in any case, the indemnified party employs separate counsel,
the indemnifying party shall not have the right to direct the defense of such
action, suit, claim or proceeding on behalf of the indemnified party.
(d) Anything in this Article 2 to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement or compromise of, or
consent to entry of any judgment with respect to, any action, suit, claim or
proceeding effected without its prior written consent (which consent in the case
of an action, suit, claim or proceeding exclusively seeking monetary relief
shall not be unreasonably withheld). Such indemnification shall remain in full
force and effect irrespective of any investigation made by or on behalf of an
indemnified party.
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Section 2.03 CONTRIBUTION. (a) If the indemnification from the
indemnifying party as provided in this Article 2 is unavailable or is otherwise
insufficient to hold harmless an indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then the
indemnifying party shall, to the fullest extent permitted by law, contribute to
the amount paid or payable by such indemnified party as a result of such losses,
claims, damages, liabilities or expenses in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and indemnified parties in
connection with the actions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations,
subject to the provisions of Section 2.03(b) hereof. The relative fault of such
indemnifying party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made, or relates to information supplied by such indemnifying party, and
the parties, relative intent, knowledge, access to information and opportunity
to correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
Section 2.02 hereof, any legal or other fees or expenses reasonably incurred by
such party in connection with any investigation or proceeding. The parties
hereto agree that it would not be just and equitable if contribution pursuant to
this Article 2 were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section 2.03(a). Notwithstanding the provisions of this Section
2.03, no underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Registrable Securities underwritten
by it and offered to the public exceeds the amount of any damages for which such
underwriter has otherwise been held liable by reason of such untrue statement or
alleged untrue statement or omission or alleged omission; and the Holder shall
not be required to contribute any amount in excess of the amount by which the
total price at which the Registrable Securities offered to the public exceeds
the amount of any damages for which the Holder has otherwise been held liable by
reason of such untrue statement or alleged untrue statement or omission or
alleged omission.
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(b) No Person guilty of fraudulent misrepresentation (within the
meaning of section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
(c) If indemnification is available under this Article 2, the
indemnifying parties shall indemnify each indemnified party to the fullest
extent provided in Section 2.01 and Section 2.02 hereof without regard to the
relative fault of said indemnifying party or indemnified party or any other
equitable consideration provided for in this Section 2.03.
Section 2.04 INDEMNIFICATION PAYMENTS. The indemnification and
contribution required by this Article 2 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as and
when bills are received or expense, loss, damage or liability is incurred.
ARTICLE 3
CERTAIN DEFINITIONS
As used herein, the following terms have the following respective meanings:
"Affiliate" shall have the meaning specified for "affiliate" in Rule 12b-2
under the Exchange Act.
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Class A Common Stock" shall mean Class A Common Stock, par value $.01 per
share, of the Company.
"CP/BV Registrable Securities" shall mean the securities of the Company
which are defined as "Registrable Securities" under either the CP Agreement or
the BV Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission thereunder, all as the same
shall be in effect at the time.
"Expected Proceeds" shall mean, as of any date, the aggregate proceeds that
would be expected to be received by a
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holder of securities from the sale of such securities in an offering made on
such date (without being reduced by any pro forma expenses or underwriting
discounts). The determination of Expected Proceeds shall be made (a) if the
offering is intended to be made in an underwritten public offering, then by the
intended managing underwriter of such offering or (b) if the offering is not
intended to be made in an underwritten public offering, then by investment
bankers mutually agreeable to the Company and the Holder, the fees and expenses
of which shall be paid by the Company.
"Person" shall mean a corporation, an association, a partnership, an
organization, a business, an individual, a governmental or political subdivision
thereof or a governmental agency.
"Register", "registered" and "registration" shall mean a registration
effected by preparing and filing a registration statement in compliance with the
Securities Act and the declaration or ordering of the effectiveness of such
registration statement.
"Registrable Securities" shall mean, subject to the provisions of Sections
4.02(b) and 4.11 hereof, any and all shares of Class A Common Stock issued or
issuable upon conversion of the Preferred Securities. As to any particular
Registrable Securities, such securities shall cease to constitute Registrable
Securities when (i) a registration statement with respect to the sale of such
securities shall have been declared effective under the Securities Act and such
securities shall have been disposed of in accordance with the methods
contemplated by the registration statement, (ii) such securities (or the
Preferred Securities that are convertible into such securities) shall have been
sold in satisfaction of all applicable conditions to the resale provisions of
Rule 144 under the Securities Act (or any successor provision thereto), (iii)
such securities (or the Preferred Securities that are convertible into such
securities) shall have been otherwise transferred except to a permitted assignee
pursuant to Section 4.02(b) hereof, or (iv) such securities shall have been
issued upon conversion of the Preferred Securities and thereafter shall have
ceased to be issued and outstanding.
"Registration Expenses" shall mean all expenses incident to the Company's
performance of or compliance with Article 1,
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including, without limitation, (a) any allocation of salaries and expenses of
Company personnel or other general overhead expenses of the Company, or other
expenses for the preparation of historical and pro forma financial statements or
other data normally prepared by the Company in the ordinary course of business;
(b) all registration, application, filing, listing, transfer and registrar fees;
(c) all NASD fees and fees and expenses of registration or qualification of
Registrable Securities under state securities or "blue sky" laws pursuant to
Section 1.03(d) hereof; (d) all word processing, duplicating and printing
expenses, messenger and delivery expenses; (e) the fees and disbursements of
counsel for the Company and of its independent public accountants, including the
expenses of customary "cold comfort" letters required by or incident to such
performance and compliance; and (f) any fees and disbursements of underwriters
and broker-dealers customarily paid by issuers or sellers of securities;
PROVIDED, HOWEVER, Registration Expenses shall exclude, and the sellers of the
Registrable Securities being registered shall pay, the fees and disbursements of
counsel to such sellers, and underwriting discounts and commissions and transfer
taxes in respect of the Registrable Securities being registered and, to the
extent such laws prohibit the Company from paying such expenses on behalf of the
Holder, expenses of registering or qualifying Registrable Securities under state
securities or blue sky laws.
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect at the time.
ARTICLE 4
MISCELLANEOUS
Section 4.01 RULE 144. If the Company shall have filed with the
Commission and obtained the effectiveness of a registration statement covering
the Company's equity securities pursuant to the requirements of section 12 of
the Exchange Act or pursuant to the requirements of the Securities Act, the
Company agrees that it shall timely file the reports required to be filed by it
under the Securities Act or the Exchange Act (including, without limitation, the
reports under sections 13 and 15(d) of the Exchange Act referred to in paragraph
(c)(1) of Rule 144 under the Securities Act), and shall take such further
actions as the Holder may reasonably request, all to the extent necessary to
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enable the Holder to sell Registrable Securities, from time to time, pursuant to
the resale limitations of (a) Rule 144 under the Securities Act, as such rule
may be hereafter amended, or (b) any similar rules or regulations hereafter
adopted by the Commission. Upon the written request of the Holder, the Company
shall deliver to the Holder a written statement verifying that it has complied
with such requirements.
Section 4.02 ASSIGNMENT. (a) This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the Company and the Holder and,
with respect to the Company, its respective successors and assigns.
(b) The rights of the Holder to cause the Company to register
Registrable Securities under Sections 1.01 and 1.02 hereof may not be assigned
or otherwise conveyed, whether directly or indirectly or by operation of law or
otherwise, to any Person, including any transferee or assignee of any of the
Preferred Securities or the Registrable Securities; PROVIDED, HOWEVER, that the
Holder shall have the right to assign, on one and only one occasion (whether by
instrument of assignment, operation of law or otherwise), to a third party any
of its rights to require the Company to register Registrable Securities under
Section 1.01 or 1.02 hereof in connection with a transfer by the Holder of more
than fifty percent (50%) of the aggregate number of Registrable Securities
(adjusted appropriately to reflect any stock dividends, splits, combinations,
exchange, reorganization, recapitalization or reclassification involving the
Class A Common Stock or resulting from a merger or consolidation or similar
business combination transaction involving the Company after the date hereof)
issuable at the date hereof upon conversion of the Preferred Securities,
provided that such third party shall have executed and delivered to the Company
a written agreement, in form and substance reasonably satisfactory to the
Company, by which such third party shall have agreed to become party to and
bound by the terms and conditions of this Agreement as though it were the
Holder.
Section 4.03 NOTICES. Except as otherwise provided below, whenever it is
provided in this Agreement that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon the
Company, the Holder, or whenever the Company or the Holder desires to provide to
or serve upon any Person any other communication with respect to this Agreement,
each such notice,
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demand, request, consent, approval, declaration or other communication shall be
in writing and either shall be delivered in person with receipt acknowledged or
sent by registered or certified mail (return receipt requested, postage
prepaid), or by overnight mail, courier, or delivery service or by telecopy and
confirmed by telecopy answerback, addressed as follows:
(a) IF TO THE COMPANY, TO:
ATTENTION: Vice President and Treasurer
- With a copy to -
Sullivan & Worcester
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 338-2800
Telecopy: (617) 338-2880
ATTENTION: Patrick K. Miehe, Esq.
(b) IF TO THE HOLDER, to:
- With a copy to -
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
ATTENTION: Dennis J. Block, Esq.
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or at such other address as may be substituted by it by notice delivered as
provided herein. The furnishing of any notice required hereunder may be waived
in writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration or other communication hereunder shall
be deemed to have been duly delivered, furnished or served on (i) the date on
which personally delivered, with receipt acknowledged, (ii) the date on which
telecopied and confirmed by telecopy answerback, (iii) the next business day if
delivered by overnight or express mail, courier or delivery service, or (iv)
three business days after the same shall have been deposited in the United
States mail, as the case may be. Failure or delay in delivering copies of any
notice, demand, request, consent, approval, declaration or other communication
to the persons designated above to receive copies shall in no way adversely
affect the effectiveness of such notice, demand, request, consent, approval,
declaration or other communication.
Section 4.04 ENTIRE AGREEMENT; AMENDMENT. This Agreement represents the
entire agreement and understanding among the parties hereto with respect to the
subject matter hereof and supersedes any and all prior oral and written
agreements, arrangements and understandings among the parties hereto with
respect to such subject matter; and can be amended, supplemented or changed, and
any provision hereof can be waived, only by a written instrument making specific
reference to this Agreement signed by the Company and the Holder.
Section 4.05 PARAGRAPH HEADINGS, ETC. The paragraph headings contained in
this Agreement are for general reference purposes only and shall not affect in
any manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement. The terms "including", "includes" and "included"
shall not be limiting.
Section 4.06 APPLICABLE LAW. This Agreement shall be governed by,
construed and enforced in accordance with the laws of The Commonwealth of
Massachusetts, applicable to contracts to be made, executed, delivered and
performed wholly within such state and, in any case, without regard to the
conflicts of law principles of such state.
Section 4.07 SEVERABILITY. If at any time subsequent to the date hereof,
any provision of this Agreement shall be held by any court of competent
jurisdiction to be illegal, void or
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unenforceable, such provision shall be of no force and effect, but the
illegality or unenforceability of such provision shall have no effect upon and
shall not impair the enforceability of any other provision of this Agreement.
Section 4.08 EQUITABLE REMEDIES. The parties hereto agree that
irreparable harm would occur in the event that any of the agreements and
provisions of this Agreement were not performed fully by the parties hereto in
accordance with their specific terms or conditions or were otherwise breached,
and that money damages are an inadequate remedy for breach of this Agreement
because of the difficulty of ascertaining and quantifying the amount of damage
that will be suffered by the parties hereto in the event that this Agreement is
not performed in accordance with its terms or conditions or is otherwise
breached. It is accordingly hereby agreed that the parties hereto shall be
entitled to an injunction or injunctions to restrain, enjoin and prevent
breaches of this Agreement by the other parties and to enforce specifically the
terms and provisions hereof in any court of the United States or any state
having jurisdiction, such remedy being in addition to and not in lieu of, any
other rights and remedies to which the other parties are entitled to at law or
in equity.
Section 4.09 NO WAIVER. The failure of any party at any time or times to
require performance of any provision hereof shall not affect the right at a
later time to enforce the same. No waiver by any party of any condition, and no
breach of any provision, term, covenant, representation or warranty contained in
this Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be construed as a further or continuing waiver of any such
condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 4.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same original instrument.
Section 4.11 SPECIAL LIMITATION AND TERMINATION OF REGISTRATION RIGHTS.
Anything in this Agreement to the contrary notwithstanding:
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(a) The obligations of the Company to the Holder with respect to its
rights of registration provided for in Sections 1.01 and 1.02 hereof shall cease
and terminate upon the earlier of (i) six (6) years after the date hereof and
(ii) the date on which the aggregate number of Registrable Securities issued and
outstanding (or issuable and which would be outstanding upon conversion of the
Preferred Securities) shall no longer exceed one third (1/3) of the aggregate
number of shares (adjusted appropriately downward or upward to reflect any stock
dividends, splits, combinations, exchange, reorganization, recapitalization or
reclassification involving Class A Common Stock of the Company or pursuant to a
merger or consolidation or similar transaction involving the Company or the like
after the date hereof) of Registrable Securities issuable at the date hereof
upon conversion of the Preferred Securities.
(b) The rights of registration provided for in Sections 1.01 and 1.02
hereof are subject to and limited by the terms and provisions of Article XIII of
the Restated By-Laws of the Company effective as of May 14, 1992, as amended
through the date hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their respective officers thereunto duly authorized as of the
date first above written.
CONTINENTAL CABLEVISION, INC.
By:________________________________
Name:
Title:
U S WEST, INC.
By:________________________________
Name:
Title:
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<PAGE>
STOCKHOLDERS' AGREEMENT
AGREEMENT, dated as of February 27, 1996, among Amos B. Hostetter,
Jr. ("Hostetter"), the Amos B. Hostetter, Jr. 1989 Trust (the "Hostetter
Trust"), Timothy P. Neher ("Neher"), Corporate Advisors, L.P., a Delaware
limited partnership ("Corporate Advisors"), the stockholders set forth on
Schedule A-1 (collectively, the "Boston Ventures Stockholders"), the
stockholders set forth on Schedule A-2 (collectively, the "Other Stockholders"),
and U S WEST, INC., a Delaware corporation ("Acquiror"). Hostetter, the
Hostetter Trust, Neher, the Boston Ventures Stockholders, and the Other
Stockholders sometimes are referred to herein collectively as the "Stockholders"
and individually as a "Stockholder."
W I T N E S S E T H :
WHEREAS, each of the Stockholders is the beneficial and record owner
of the shares of capital stock of CONTINENTAL CABLEVISION, INC., a Delaware
corporation (the "Company"), set forth opposite each such Stockholder's name on
Schedule B-1;
WHEREAS, Corporate Advisors possesses certain rights with respect to
the shares of capital stock of the Company owned by the entities listed on
Schedule A-3 (the "CP Entities");
WHEREAS, concurrently with the execution of this Agreement, Acquiror
and the Company are entering into an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which the Company will be merged with and into Acquiror
(the "Merger"), with Acquiror continuing as the Surviving Corporation; and
WHEREAS, in order to induce Acquiror to enter into the Merger
Agreement, the Stockholders and Corporate Advisors wish to make certain
representations, warranties, covenants and agreements in connection with the
Merger.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
<PAGE>
ARTICLE
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used herein but not
otherwise defined herein shall have the respective meanings ascribed thereto in
the Merger Agreement and the following terms shall have the following meanings:
"BENEFICIALLY OWN" shall have the meaning set forth in Rule 13d-3
under the Exchange Act.
"CONTROL" shall mean, as to any person, the power to direct or
cause the direction of the management and policies of such person, whether
through the ownership of voting securities, by contract or otherwise. The term
"Controlling Person" shall have a correlative meaning.
"CP SHARES" shall mean the shares of Company Preferred Stock owned
by the CP Entities set forth on Schedule B-2.
"EQUITY SECURITIES" shall have the meaning set forth in Rule 405
under the Securities Act.
"PERMITTED ASSIGNEE" shall mean (i) with respect to Hostetter and
the Hostetter Trust, (w) Hostetter, (x) Hostetter's lineal descendants, (y) a
trust for the benefit of, the estate of, executors, personal representatives,
administrators, guardians or conservators of, any of the individuals referred to
in the foregoing clauses (w) and (x) (but only in their capacity as such) and
(z) charitable trusts and charitable foundations formed by Hostetter (including,
without limitation, the Hostetter Foundation); (ii) with respect to Neher, (w)
Neher, (x) Neher's lineal descendants, (y) a trust for the benefit of, the
estate of, executors, personal representatives, administrators, guardians or
conservators of, any of the individuals referred to in the foregoing clauses (w)
and (x) (but only in their capacity as such) and (z) charitable trusts and
charitable foundations formed by Neher and (iii) with respect to the CP
Entities, the Boston Ventures Stockholders and the Other Stockholders, (x) any
Person Controlled by such Stockholder or CP Entity and (y) its respective
partners, members, stockholders or other holders of equity interests in such
Stockholder or CP Entity.
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"REPRESENTATIVES" shall have the meaning set forth in Section 3.4.
"RESTRICTED STOCKHOLDER" shall mean any Stockholder that,
individually or together with its Affiliates, beneficially owns, or is a member
of a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) that
beneficially owns, 5% or more of Media Stock.
"STOCKHOLDER DISCLOSURE LETTER" shall have the meaning set forth
in Section 2.1.
"VOTING SECURITIES" shall have the meaning set forth in Rule 405
under the Securities Act.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
OF THE STOCKHOLDERS
2.1 REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each
Stockholder represents and warrants, severally but not jointly, to Acquiror as
follows:
(a) OWNERSHIP OF COMPANY SHARES. Except as disclosed in Section
2.1(a) of the letter from the Stockholders to Acquiror, dated the date hereof
(the "Stockholder Disclosure Letter"), such Stockholder is the beneficial owner
of the shares of Company Capital Stock set forth opposite such Stockholder's
name on Schedule B-1, free and clear of all liens, claims, charges, security
interests or other encumbrances and, except for this Agreement and the Merger
Agreement, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character to which such Stockholder is a
party relating to the pledge, disposition or voting of any shares of capital
stock of the Company or any of its Subsidiaries that are owned by such
Stockholder, and there are no voting trusts or voting agreements with respect to
such shares. The shares of Company Capital Stock set forth opposite such
Stockholder's name on Schedule B-1 constitute all of the outstanding shares of
capital stock of the Company owned beneficially or of record by such Stockholder
and such Stockholder does not have any options, warrants or other rights to
acquire any additional shares of capital stock of the Company or any security
exercisable or exchangeable for, or convertible into, shares of capital stock of
the Company.
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(b) AUTHORITY TO EXECUTE AND PERFORM AGREEMENTS. Such
Stockholder has the full legal right and power and all authority required to
enter into, execute and deliver this Agreement and to perform fully such
Stockholder's obligations hereunder. The execution and delivery of this
Agreement by such Stockholder have been duly authorized by all requisite
organizational action, if any, on the part of such Stockholder. This Agreement
has been duly executed and delivered and constitutes the legal, valid and
binding obligation of such Stockholder enforceable against such Stockholder in
accordance with its terms, except as the enforceability may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
similar laws now or hereafter in effect generally affecting creditors' rights or
by general principles of equity, regardless of whether such enforceability is
considered in a proceeding in equity or at law.
(c) NO CONFLICTS; CONSENTS. (i) Except as set forth in
Section 2.1(c) of the Stockholder Disclosure Letter, the execution and delivery
by such Stockholder of this Agreement do not, and the consummation of the
transactions contemplated hereby will not, conflict with or result in any
violation of or default (with or without notice or lapse of time, or both) under
(A) any contract, agreement or other binding arrangement to which such
Stockholder is a party or (B) any judgment, order, writ, injunction or decree of
any court, governmental body, administrative agency or arbitrator applicable to
such Stockholder.
(ii) Except as set forth in Section 2.1(c) of the Stockholder
Disclosure Letter, no consents, approvals or authorizations of, or notices or
filings with, any Governmental Authority or any Third Party are required to be
obtained or made by such Stockholder in connection with the execution and
delivery by such Stockholder of this Agreement and the consummation of the
transactions contemplated hereby.
(d) OWNERSHIP OF ACQUIROR COMMON STOCK. As of the date hereof,
except as disclosed in Section 2.1(d) of the Stockholder Disclosure Letter or
provided for in this Agreement, (i) such Stockholder does not, and, to its best
knowledge, its Affiliates do not, beneficially own, directly or indirectly,
shares of Communications Stock or Media Stock (or securities convertible into or
exchangeable for any shares of Communications Stock or Media Stock) and (ii)
such
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Stockholder is not, and, to its best knowledge, its Affiliates are not, parties
to any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of, shares of Communications Stock or Media Stock
(or securities convertible into or exchangeable for any shares of Communications
Stock or Media Stock).
(e) INFORMATION SUPPLIED. None of the information specifically
supplied or to be supplied by such Stockholder with respect to such Stockholder
for inclusion or incorporation by reference in (i) the Form S-4 will, at the
time the Form S-4 is filed with the SEC and at the time it becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading and (ii) the Proxy Statement will, at
the date the Proxy Statement is first mailed to Stockholders and at the time of
the Stockholders' Meeting, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading.
2.2 AUTHORITY OF CORPORATE ADVISORS TO ACT. (a) Corporate
Advisors represents and warrants that it has full power and authority: (i)
pursuant to the provisions of an Investment Management Agreement dated as of
June 17, 1988, between the State Board of Administration of Florida (the "SBA")
and Corporate Advisors, as amended (the "Management Agreement"), to act on
behalf of the SBA in connection with the transactions contemplated by this
Agreement, (ii) pursuant to the provisions of an Amended and Restated Limited
Partnership Agreement dated as of June 20, 1988, to act on behalf of each of
Corporate Partners, L.P. and Corporate Offshore Partners, L.P. in connection
with the transactions contemplated by this Agreement, and (iii) pursuant to the
provisions of a Co-Investment Agreement dated as of April 27, 1992 (the
"Co-Investment Agreement") to control the voting and, except as set forth in
Section 2.2 of the letter from Corporate Advisors to Acquiror, dated the date
hereof (the "Corporate Partners Disclosure Letter"), the disposition of the
securities of the Company owned by Vencap Holdings (1992) Pte Ltd. and Contcable
Co-Investors, L.P. (the "Co-Investors") identified on Schedule B-2 hereto.
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(b) Corporate Advisors also represents and warrants that it has
been granted irrevocable proxies to vote all shares of Company Preferred Stock
indicated as owned by the SBA and the Co-Investors on Schedule B-2 hereto as
well as any shares of Company Common Stock issued upon the conversion or
redemption of such shares of Company Preferred Stock and all other equity
securities of the Company having voting rights obtained by it pursuant to
ownership of the shares of Company Preferred Stock.
ARTICLE III
COVENANTS
3.1 NO DISPOSITION OR ACQUISITION OF SHARES. Subject to
Section 3.5 hereof, each of the Stockholders agrees that, except as set forth in
Section 3.1 of the Stockholder Disclosure Letter, such Stockholder shall not,
and, except as set forth in Section 3.1 of the Corporate Partners Disclosure
Letter, Corporate Advisors agrees, with respect to the CP Shares, to cause the
CP Entities not to, sell, transfer, pledge, hypothecate, encumber or otherwise
dispose of (except upon such Stockholder's death), or enter into any contract,
option or other arrangement or understanding with respect to the sale, transfer,
pledge, hypothecation, encumbrance or other disposition of, any of the shares of
Company Capital Stock set forth opposite such Stockholder's name on Schedule B-1
or the CP Shares, as applicable; PROVIDED, HOWEVER, that such Stockholder or
CP Entity shall have the right to transfer such shares to a Permitted Assignee
if such Permitted Assignee becomes a party to this Agreement and agrees to be
bound by the terms hereof. Each Stockholder and Corporate Advisors agrees that
the certificates representing the shares of Company Capital Stock owned by such
Stockholder or the CP Entities, as applicable, shall bear a legend indicating
that such shares are subject to this Agreement, which legend may be removed upon
termination of this Agreement. Except as specifically set forth herein, each
Stockholder and Corporate Advisors agrees, with respect to the CP Shares to
cause the CP Entity, not to exchange or convert any shares of Class B Common
Stock for or into shares of Class A Common Stock. Each Stockholder agrees that,
during the Measurement Period (as such term is defined in the Certificate of
Designation of Series B Convertible Preferred Stock of the Company attached as
Exhibit E to the Merger Agreement), such Stockholder shall not, and shall use
its best efforts to
6
<PAGE>
cause its Affiliates not to, purchase or otherwise acquire (including through
any derivative transactions) any shares of Company Capital Stock.
3.2 VOTING ARRANGEMENTS. Each of the Stockholders agrees, and
Corporate Advisors agrees with respect to the CP Shares, that, except pursuant
to this Agreement, it shall not grant any proxies, deposit any shares of Company
Capital Stock into a voting trust or enter into any voting agreement with
respect to any shares of Company Capital Stock now or hereafter owned by such
Stockholder or now owned by the CP Entities, as applicable, other than proxies
to vote such shares at any annual or special meeting of stockholders of the
Company on matters unrelated to the matters set forth in Section 4.1 hereof.
3.3 SATISFACTION OF CONDITIONS TO THE MERGER. Each of the
Stockholders agrees and Corporate Advisors agrees with respect to the CP Shares
that such Stockholder, in its capacity as such, and Corporate Advisors, acting
on behalf of the CP Entities, shall assist and cooperate with the parties to the
Merger Agreement in doing all things necessary, proper or advisable under
Applicable Laws as promptly as practicable to consummate and make effective the
Merger and the other transactions contemplated by the Merger Agreement and the
Transaction Documents and such Stockholder and Corporate Advisors shall not take
any action that would or is reasonably likely to result in any of its
representations and warranties set forth in this Agreement being untrue as of
the date made or in any of the conditions set forth in Article VIII of the
Merger Agreement not being satisfied.
3.4 NO SOLICITATION. Each of the Stockholders agrees that such
Stockholder shall not, and, except as set forth in Section 3.4 of the Corporate
Partners Disclosure Letter, Corporate Advisors agrees that it shall not, nor
shall it permit any of its Subsidiaries or Affiliates to, nor shall it authorize
or permit any of its officers, directors, employees, agents, investment bankers,
attorneys, financial advisors or other representatives (collectively,
"Representatives") to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing information or assistance) or take other action
to facilitate any inquiries or the making of any proposal that constitutes or
may reasonably be expected to lead to, an Acquisition Proposal from any Third
Party, or engage in any discussions or negotiations relating thereto or in
furtherance thereof
7
<PAGE>
or accept or enter into any agreement with respect to any Acquisition Proposal;
PROVIDED, HOWEVER, that, notwithstanding any other provision of this
Agreement, if such Stockholder or any representative of Corporate Advisors is a
member of the Board of Directors, such Stockholder or representative may take
any action in such Person's capacity as a director that the Board of Directors
would be permitted to take in accordance with Section 7.10 of the Merger
Agreement. Such Stockholder and Corporate Advisors shall immediately cease and
cause to be terminated any existing solicitation, initiation, encouragement,
activity, discussion or negotiation with any parties conducted heretofore by
such Stockholder or Corporate Advisors, as the case may be, or any of its
Representatives with respect to any of the foregoing. Each such Stockholder and
Corporate Advisors shall promptly (but in any event within 24 hours thereafter)
notify Acquiror orally and in writing of any Acquisition Proposal or any inquiry
which could lead to an Acquisition Proposal, within 24 hours of the receipt
thereof, including the identity of the Third Party making any such Acquisition
Proposal or inquiry and the material terms and conditions of any Acquisition
Proposal, and if such inquiry or proposal is in writing, such Stockholder shall
deliver to Acquiror a copy of such inquiry or proposal.
3.5 STANDSTILL; TRANSFER RESTRICTIONS. (a) Each of Hostetter and
the Hostetter Trust agrees that, (i) from the date hereof until the Closing Date
and (ii) from and after the Closing Date for so long as such Stockholder shall
be a Restricted Stockholder, such Stockholder shall not, and shall use its best
efforts to cause its Affiliates not to, without the prior written consent of the
board of directors of Acquiror, (A) in any manner acquire, agree to acquire or
make any proposal to acquire, directly or indirectly, any Equity Securities of
Acquiror, or any rights or options to acquire such Equity Securities (other than
the shares of Media Stock and Series D Preferred Stock received by such
Stockholder in the Merger or acquisitions of Equity Securities of Acquiror in
aggregate amounts not to exceed $20 million), (B) propose to enter into,
directly or indirectly, a merger or other business combination involving
Acquiror or propose to purchase, directly or indirectly, a material portion of
the assets of Acquiror, (C) make, or in any way participate, directly or
indirectly, in, any "solicitation" of "proxies" (as such terms are used in
Regulation 14A under the Exchange Act) to vote or consent or seek to advise or
influence any Person with respect to the
8
<PAGE>
voting of, or granting of a consent with respect to, any Voting Securities of
Acquiror, (D) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) for the purpose of acquiring,
holding, voting or disposing of any Equity Securities of Acquiror (other than
any such group consisting solely of Hostetter, the Hostetter Trust and their
Permitted Assignees), (E) otherwise act, alone or in concert with others, to
seek to control or influence in any public manner or public forum the management
or policies of Acquiror; PROVIDED, HOWEVER, that the foregoing shall not
limit the ability to vote any shares of any Equity Securities of Acquiror, (F)
disclose any intention, plan or arrangement inconsistent with the foregoing, (G)
advise, assist (including by knowingly providing or arranging financing for that
purpose) or encourage any other Person in connection with any of the foregoing,
(H) request Acquiror or any agent of Acquiror, directly or indirectly, to amend
or waive any provision of this Section 3.5(a) (including this sentence) or (I)
take any action which might require Acquiror to make a public announcement
regarding the possibility of a transaction between such Stockholder and Acquiror
(including any of their respective Affiliates).
(b) Hostetter, the Hostetter Trust and, subject to Section 3.5 of
the Corporate Partners Disclosure Letter, Corporate Advisors agree that, from
the date hereof until the Closing Date, such Stockholder and Corporate Advisors
shall not, and shall use its best efforts to cause its Affiliates not to,
without the prior written consent of the board of directors of Acquiror, sell,
transfer, pledge, encumber or otherwise dispose of, or agree to sell, transfer,
pledge, encumber or otherwise dispose of (including through any "short sales" or
derivative transactions), any Equity Securities of Acquiror or any of its
Subsidiaries or any rights or options to acquire such Equity Securities.
(c) Each of Hostetter and the Hostetter Trust agrees that, from
and after the Closing Date, for so long as such Stockholder shall be a
Restricted Stockholder, such Stockholder shall not, and shall use its best
efforts to cause its Affiliates not to, without the prior written consent of the
board of directors of Acquiror, sell, transfer, pledge, encumber or otherwise
dispose of, or agree to sell, transfer, pledge, encumber or otherwise dispose of
(including through any "short sales" or derivative transactions), any Equity
Securities of Acquiror, or any
9
<PAGE>
rights or options to acquire such Equity Securities, except (i) to the
underwriters in connection with an underwritten public offering of shares of
such securities on a firm commitment basis registered under the Securities Act
in accordance with the terms of the Registration Rights Agreement, pursuant to
which the sale of such securities is in a manner that will effect a broad
distribution, (ii) to any Permitted Assignee, provided that such Permitted
Assignee becomes a party to this Agreement and agrees to be bound by the terms
of this Section 3.5(c), (iii) to a Third Party in a transaction that complies
with the volume and manner of sale provisions contained in Rule 144(e) and (f)
as in effect on the date hereof under the Securities Act, (iv) to any Third
Party in a transaction or series of related transactions (other than "short
sales" or derivative transactions) whenever occurring, provided that this clause
(iv) shall be unavailable in any case where such Stockholder sells more than 3%
of any class or series of Equity Securities of Acquiror to a Person or "group"
(within the meaning of Section 13(d)(3) of the Exchange Act), (v) a bona fide
pledge of shares of Equity Securities of Acquiror to a financial institution to
secure borrowings of such Stockholder as permitted by Applicable Laws, and (vi)
pursuant to the terms of any tender or exchange offer for Equity Securities of
Acquiror made in compliance with the applicable provisions of the Exchange Act
(but only so long as such Stockholder is at the time in compliance with the
provisions of Section 3.5(a) hereof and such tender or exchange offer does not
involve any past violation of such provisions by such Stockholder).
(d) Each of Hostetter and the Hostetter Trust agree that from and
after the Closing Date until the one-year anniversary thereof, such Stockholder
shall not sell, transfer, pledge, encumber or otherwise dispose of (including
through any "short sales" or derivative transactions) any equity securities of
Acquiror received by such Stockholder pursuant to the Merger; PROVIDED,
HOWEVER, that such Stockholder shall have the right to transfer such shares to
a Permitted Assignee if such Permitted Assignee becomes a party to this
Agreement and agrees to be bound by the terms hereof.
(e) For the purposes of this Section 3.5, the term Acquiror shall
include any successor, by operation of law or otherwise, or any Person that
acquires or succeeds to all or substantially all of the assets of the Media
Group. In the event of any such succession or acquisition, notwith-
10
<PAGE>
standing anything to the contrary contained herein, the provisions of Section
3.5(a) hereof shall continue for a period of five years from the consummation
of such event.
3.6 NON-COMPETITION. (a) Except as otherwise provided in Section
3.6(b), (1) Hostetter shall not, until the first anniversary of the date (the
"Termination Date") Hostetter ceases to be an employee of the Company or
Acquiror or their respective Subsidiaries or Affiliates or, if the Termination
Date is after December 31, 2001, the six month anniversary of the Termination
Date and (2) Neher shall not, until the later of (x) the first anniversary of
the date Neher ceases to be an employee of the Company or Acquiror or their
respective Subsidiaries or Affiliates and (y) December 31, 1998, directly or
indirectly:
(i) engage in any activity in the telecommunications business
(which shall include, but not be limited to, the provision of video, voice and
data services), directly or indirectly (whether as an employee, officer,
director, agent, consultant, proprietor, partner, principal stockholder or
otherwise), other than as required for the performance of his employment by the
Company or by a Subsidiary. For the purposes of this Section 3.6, the
telecommunications business shall include the acquisition of existing
telecommunications systems and the obtaining of franchises (or the renewal of
existing franchises) for the construction and operation of telecommunications
systems to provide voice, data and video services in communities throughout the
United States of America and in certain foreign countries and the investment in
and participation in the operating of other telecommunications and cable
programming ventures; or
(ii) engage in any action, activity or course of conduct which is
detrimental to the business or business reputation of the Company or any of its
Subsidiaries, including (A) soliciting, recruiting or hiring any employees of
the Company or any of its Subsidiaries and (B) soliciting or encouraging any
employee of the Company or any of its Subsidiaries to leave the employment of
the Company or any of its Subsidiaries and (C) disclosing or furnishing to
anyone any confidential information relating to the Company or any of its
Subsidiaries or otherwise using such confidential information for its own
benefit or the benefit of any other person.
(b) Nothing contained in Section 3.6(a) shall prohibit or
otherwise restrict Hostetter from acquiring or
11
<PAGE>
owning, directly or indirectly, for investment or other legitimate business
purposes not intended to circumvent this Agreement, securities of any entity
engaged, directly or indirectly, in a business engaged in the telecommunications
business if either (i) such entity is a public entity and Hostetter (A) is not a
Controlling Person of, or a member of a group which Controls, such entity and
(B) owns, directly or indirectly, no more than 5% of any class of Equity
Securities of such entity or (ii) such entity is not a public entity and
Hostetter (A) is not a Controlling Person of, or a member of a group that
Controls, such entity and (b) owns, directly or indirectly, no more than 10% of
any class of Equity Securities of such entity.
(c) Hostetter and Neher acknowledge and agree that the covenants
and restrictions contained in this Section 3.6 are reasonable and that they
shall not in any way challenge the reasonableness or the enforceability of this
Section 3.6 or any covenant or restriction contained herein.
3.7 CONVERSION OF CLASS B COMMON STOCK. In the event the Charter
Amendment is not approved at the Initial Stockholders' Meeting, then promptly
thereafter, but in any event prior to the record date established by the Company
for the Additional Stockholders' Meeting, Hostetter and the Hostetter Trust
agree to convert a number of shares of Class B Common Stock into Class A Common
Stock in an amount equal to the lesser of (i) all of their respective shares of
Class B Common Stock or (ii) that number of shares of Class B Common Stock such
that Hostetter will beneficially own at least a majority of the outstanding
shares of Class A Common Stock as of such record date. Hostetter and the
Hostetter Trust agree to comply with the provisions of Section 4.1 hereof with
respect to such shares including, without limitation, voting all of such shares
of Class B Common Stock in favor of the Charter Amendment. The number of shares
of Class B Common Stock to be converted by Hostetter and the Hostetter Trust
shall be reduced by the number of shares of Class A Common Stock beneficially
owned by Persons other than Hostetter for which an irrevocable voting agreement
or proxy has been submitted to Acquiror to vote such shares in favor of the
Charter Amendment and the Merger Agreement.
12
<PAGE>
ARTICLE IV
PROXY; CONVERSION;
ELECTIONS; WAIVER OF RIGHTS
4.1 PROXY. Each Stockholder hereby agrees and Corporate Advisors
agrees with respect to the CP Shares that, at any meeting of the stockholders of
the Company, however called, including any Stockholders' Meeting, and at every
adjournment thereof, and in any action by written consent of the stockholders of
the Company, to (a) vote all of the shares of Company Capital Stock then owned
by such Stockholder or the CP Shares, as applicable, in favor of the adoption of
the Merger Agreement as in effect on the date hereof (as such agreement may be
amended (1) as contemplated by Section 7.16(b) of the Merger Agreement or (2)
with the consent of such Stockholder or Corporate Advisors, as the case may be)
and each of the other transactions contemplated thereby and any action required
in furtherance thereof, (b) vote such shares in favor of adoption of the Charter
Amendment, (c) vote such shares against any action or agreement that would
result in a breach in any material respect of any covenant, representation or
warranty or any other obligation of the Company under the Merger Agreement, and
(d) vote such shares against any Acquisition Proposal or any other action or
agreement that, directly or indirectly, is inconsistent with or that would, or
is reasonably likely to, directly or indirectly, impede, interfere with or
attempt to discourage the Merger or any other transaction contemplated by the
Merger Agreement, including, but not limited to (i) any extraordinary corporate
transaction (other than the Merger on the terms set forth in the Merger
Agreement), such as a merger, consolidation, business combination,
reorganization, recapitalization or liquidation involving the Company or any of
its Subsidiaries, (ii) a sale or transfer of a material amount of assets of the
Company or any of its Subsidiaries, or (iii) any material change in the
Company's corporate structure or business; PROVIDED, HOWEVER, that, if such
Stockholder or any representative of Corporate Advisors is a member of the Board
of Directors of the Company, nothing herein shall be construed to obligate such
Stockholder or representative to act in such Stockholder's or representative's
capacity as a director in any manner which may conflict with such Person's
fiduciary duties as a director of the Company.
In furtherance of the foregoing, (i) each Stockholder hereby
appoints Acquiror and the proper officers
13
<PAGE>
of Acquiror, and each of them, with full power of substitution in the premises,
its proxies to vote all such Stockholder's shares of Company Capital Stock at
any meeting, general or special, of the stockholders of the Company, and to
execute one or more written consents or other instruments from time to time in
order to take such action without the necessity of a meeting of the stockholders
of the Company, in accordance with the provisions of the preceding paragraph and
(ii) Acquiror hereby agrees to vote such shares or execute written consents or
other instruments in accordance with the provisions of the preceding paragraph.
The proxy and power of attorney granted herein shall be irrevocable
during the term of this Agreement, shall be deemed to be coupled with an
interest and shall revoke all prior proxies granted by such Stockholder. Such
Stockholder shall not grant any proxy to any person which conflicts with the
proxy granted herein, and any attempt to do so shall be void. The power of
attorney granted herein is a durable power of attorney and shall survive the
disability or incompetence of such Stockholder.
4.2 CONVERSION. Immediately prior to the Effective Time,
Corporate Advisors agrees to cause the conversion of all of the CP Shares into
shares of Company Common Stock.
4.3 WAIVER OF APPRAISAL RIGHTS. Each Stockholder and Corporate
Advisors, with respect to the CP Shares, hereby waives its rights to appraisal
under Section 262 of the DGCL with respect to any shares of Company Capital
Stock owned by it or the CP Shares, as applicable, in connection with the
transactions contemplated by the Merger Agreement.
4.4 WAIVER OF CERTAIN RIGHTS. Each Stockholder hereby waives and
agrees not to assert any claims or rights it may have against any director of
the Company in respect of approval or adoption of the Merger Agreement or the
consummation of the Merger or the other transactions contemplated thereby.
14
<PAGE>
ARTICLE V
MISCELLANEOUS
5.1 TERMINATION. This Agreement shall terminate upon the earlier
to occur of (i) the mutual consent of Acquiror, all of the Stockholders and
Corporate Advisors, (ii) the termination of the Merger Agreement prior to the
consummation of the Merger (except that if the Merger Agreement is terminated
pursuant to Section 9.1(h) thereof, the last sentence of Section 3.1 of this
Agreement shall not terminate), and (iii) the tenth anniversary of the Closing
Date.
5.2 AMENDMENT. This Agreement may be amended only by a written
instrument executed by the parties or their respective successors or assigns.
5.3 NOTICES. Notices, requests, permissions, waivers and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if signed by the respective persons giving them (in the case of any
corporation the signature shall be by an officer thereof) and delivered by hand,
deposited in the United States mail (registered or certified, return receipt
requested), properly addressed and postage prepaid, or delivered by telecopy:
If to Acquiror, to:
U S WEST, INC.
7800 East Orchard Road
Englewood, Colorado 80111
Telephone: (303) 793-6500
Telecopy: (303) 793-6654
Attention: General Counsel
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Telephone: (212) 310-8000
Telecopy: (212) 310-8007
Attention: Dennis J. Block, Esq.
15
<PAGE>
If to Amos B. Hostetter, Jr., the Hostetter Trust or to Timothy P.
Neher, to:
c/o Continental Cablevision, Inc.
The Pilot House
Lewis Wharf
Boston, Massachusetts 02110
with a copy to:
Sullivan & Worcester LLP
One Post Office Square
Boston, Massachusetts 02109
Telephone: (617) 338-2800
Telecopy: (617) 338-2880
Attention: Patrick K. Miehe, Esq.
If to Corporate Advisors, the Boston Ventures Stockholders or to the
Other Stockholders, at such address as may be furnished to Acquiror
from time to time.
5.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts and each counterpart shall be deemed to be an original, but all of
which shall constitute one and the same original.
5.5 APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware without
reference to choice of law principles, including all matters of construction,
validity and performance.
5.6 SEVERABILITY; ENFORCEMENT. The invalidity of any portion
hereof shall not affect the validity, force or effect of the remaining portions
hereof. If it is ever held that any restriction hereunder is too broad to
permit enforcement of such restriction to its fullest extent, each party agrees
that a court of competent jurisdiction may enforce such restriction to the
maximum extent permitted by law, and each party hereby consents and agrees that
such scope may be judicially modified accordingly in any proceeding brought to
enforce such restriction. In furtherance of the foregoing, if any court
construes any of the provisions of Section 3.6, or any part thereof, to be
unreasonable because of the duration of such provision or the geographic scope
thereof, such court shall have the power to reduce the duration or restrict the
geographic
16
<PAGE>
scope of such provision and to enforce such provision as so reduced or
restricted.
5.7 FURTHER ASSURANCES. Each party hereto shall execute and
deliver such additional documents as may be necessary or desirable to consummate
the transactions contemplated by this Agreement.
5.8 PARTIES IN INTEREST; ASSIGNMENT. Neither this Agreement nor
any of the rights, interest or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties.
5.9 ENTIRE AGREEMENT. This Agreement and the Merger Agreement
and the Transaction Documents contain the entire understanding of the parties
hereto and thereto with respect to the subject matter contained herein and
therein, and supersede and cancel all prior agreements, negotiations,
correspondence, undertakings and communications of the parties, oral or written,
respecting such subject matter. There are no restrictions, promises,
representations, warranties, agreements or undertakings of any party hereto or
to the Merger Agreement or any of the Transaction Documents with respect to the
transactions contemplated by this Agreement and the Merger Agreement and the
Transaction Documents other than those set forth herein or therein or made
hereunder or thereunder.
5.10 SPECIFIC PERFORMANCE. The parties hereto agree that the
remedy at law for any breach of this Agreement will be inadequate and that any
party by whom this Agreement is enforceable shall be entitled to specific
performance in addition to any other appropriate relief or remedy. Such party
may, in its sole discretion, apply to a court of competent jurisdiction for
specific performance or injunctive or such other relief as such court may deem
just and proper in order to enforce this Agreement or prevent any violation
hereof and, to the extent permitted by applicable law, each party waives any
objection to the imposition of such relief.
5.11 HEADINGS; REFERENCES. The section and paragraph headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. All references
herein to "Sections" or "Exhibits" shall be deemed to be
17
<PAGE>
references to Articles or Sections hereof or Exhibits hereto unless otherwise
indicated.
18
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto had caused this
Agreement to be duly executed and delivered as of the day and year first above
written.
U S WEST, INC.
By: /s/ Charles M. Lillis
--------------------------------------------
Charles M. Lillis
Title: Executive Vice President;
President and Chief Executive
Officer of U S WEST Media Group
/s/ Amos B. Hostetter, Jr.
---------------------------
Amos B. Hostetter, Jr.
THE AMOS B. HOSTETTER, JR. 1989 TRUST
By: /s/ Amos B. Hostetter, Jr.
--------------------------------------
Name: Amos B. Hostetter, Jr.
Title: Trustee
By: /s/ Timothy P Neher
---------------------------------------
Name: Timothy P. Neher
Title: Trustee
/s/ Timothy P Nehr
----------------------------
Timothy P. Neher
SCHOONER CAPITAL CORPORATION
By: /s/ Vincent J. Ryan
--------------------------------------
Name: Vincent J. Ryan
Title: Chairman and
Chief Executive Officer
19
<PAGE>
BOSTON VENTURES LIMITED PARTNERSHIP III
By: BOSTON VENTURES COMPANY LIMITED
PARTNERSHIP III
By: /s/Roy F. Coppedge III
---------------------------------------------
Name:Roy F. Coppedge III
Title: General Partner
BOSTON VENTURES LIMITED PARTNERSHIP IIIA
By: BOSTON VENTURES COMPANY LIMITED
PARTNERSHIP III
By: /s/Roy F. Copped
------------------------------------------------
Name: Roy F. Coppedge III
Title: General Partner
BOSTON VENTURES LIMITED PARTNERSHIP IV
By: BOSTON VENTURES COMPANY LIMITED
PARTNERSHIP IV
By: /s/Roy F. Coppedge III
---------------------------------------------------
Name: Roy F. Coppedge III
Title: General Partner
BOSTON VENTURES LIMITED PARTNERSHIP IVA
By: BOSTON VENTURES COMPANY LIMITED
PARTNERSHIP IV
By: /s/Roy F. Coppedge III
---------------------------------------------------
Name: Roy F. Coppedge III
Title: General Partner
20
<PAGE>
CORPORATE ADVISORS, L.P.
By: LFCP CORP.
By: /s/ Jonathan Kagan
---------------------------------------
Name: Jonathan Kagan
Title: President
21
<PAGE>
SCHEDULE A-1
Boston Ventures Limited Partnership III
Boston Ventures Limited Partnership IIIA
Boston Ventures Limited Partnership IV
Boston Ventures Limited Partnership IVA
A-1
<PAGE>
SCHEDULE A-2
Schooner Capital Corporation
A-2
<PAGE>
SCHEDULE A-3
Corporate Partners, L.P.
The State Board of Administration of Florida
Vencap Holdings (1992) Pte Ltd
Corporate Offshore Partners, L.P.
ContCable Co-Investors, L.P.
A-3
<PAGE>
SCHEDULE B-1
Stockholder Shares Class
- ----------- ------ -----
Amos B. Hostetter, Jr. 1,266,025 Class B Common Stock
The Amos B. Hostetter, Jr.
1989 Trust 42,843,550 Class B Common Stock
Barbara W. Hostetter 10,375 Class B Common Stock
Amos B. Hostetter & Janet
Wilson FBO Amos B. Hostetter 223,200 Class B Common Stock
Amos B. Hostetter & Janet
Wilson FBO Janet H. Wilson 223,200 Class B Common Stock
Amos B. Hostetter, Jr. Cust.
for Caroline Hostetter 28,625 Class B Common Stock
Amos B. Hostetter, Jr. Cust.
for Elisabeth Hostetter 11,375 Class B Common Stock
Amos B. Hostetter, Jr. Cust.
for Amos B. Hostetter III 2,025 Class B Common Stock
Amos B. Hostetter, Jr. Cust.
for Bennett E. Rathburn 4,025 Class B Common Stock
Amos B. Hostetter, Jr. Cust.
for Samuel S. Rathburn 3,025 Class B Common Stock
Barbara W. Hostetter &
Timothy P. Neher, Trustees
for the Puddleduck Trust 550,000 Class B Common Stock
The Hostetter Foundation 40,000 Class B Common Stock
----------------
Total beneficially owned
by Amos B. Hostetter, Jr. 45,205,425
B-1
<PAGE>
Timothy P. Neher (1) 1,451,725 Class B Common Stock
Mary Ann Neher as Custodian
for Amy Neher 27,500 Class B Common Stock
Timothy P. Neher Childrens'
Trust FBO Amy Neher 82,500 Class B Common Stock
Mary Ann Neher as Custodian
for Victoria Neher 27,500 Class B Common Stock
Timothy P. Neher Childrens'
Trust FBO Victoria Neher 82,500 Class B Common Stock
-------------
Total benficially owned by
Timothy P. Neher 1,671,725
Schooner Capital
Corporation 5,558,700 Class B Common Stock
Boston Ventures Limited
Partnership III 3,034,525 Class B Common Stock
Boston Ventures Limited
Partnership IIIA 799,825 Class B Common Stock
Boston Ventures Limited
Partnership IV 2,381,725 Class B Common Stock
Boston Ventures Limited
Partnership IVA 1,298,000 Class B Common Stock
- --------------------
1. Mr. Neher has shared voting and investment power as to 550,000 shares with
respect to which he acts as a trustee with Mrs. Hostetter, and as to 42,843,550
shares with respect to which he acts as a trustee with Mr. Hostetter, which
shares are shown as beneficially owned by Mr. Hostetter.
B-1
<PAGE>
SCHEDULE B-2
CP Enity CP Shares
--------- ---------
Corporate Partners, L.P. 728,953
The State Board of Administration
of Florida 76,084
Vencap Holdings (1992) Pte Ltd 71,428
Corporate Offshore Partners, L.P. 52,107
ContCable Co-Investors, L.P. 42,857
B-2
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
EARNINGS PER COMMON SHARE: (1) Three Months Ended Twelve Months Ended
Dec 31, Dec 31,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item - $409,523 - $1,426,505
Extraordinary item (net of tax):
Early extinguishment of debt - - - -
---------- ---------- ---------- ----------
Net income - 409,523 - 1,426,505
Less preferred dividends - 875 - 1,167
Net income available for ---------- ---------- ---------- ----------
common share calculation - $408,648 - $1,425,338
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares - 460,079 - 453,316
outstanding ---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income available for common before
extraordinary item - $0.89 - $3.14
Extraordinary item (net of tax):
Early extinguishment of debt - - - -
---------- ---------- ---------- ----------
Earnings per common share - $0.89 - $3.14
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior
to the recapitalization, the average common shares outstanding are assumed
to be equal to the average common shares outstanding for U S WEST, Inc.
1
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
EARNINGS PER COMMON AND COMMON Three Months Ended Twelve Months Ended
EQUIVALENT SHARE: (1) Dec 31, Dec 31,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item - $409,523 - $1,426,505
Extraordinary item (net of tax):
Early extinguishment of debt - - - -
---------- ---------- ---------- ----------
Net income - 409,523 - 1,426,505
Less preferred dividends - 875 - 1,167
Net income available for ---------- ---------- ---------- ----------
common share calculation - $408,648 - $1,425,338
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares - 460,079 - 453,316
outstanding
Incremental shares from assumed
exercise of stock options - 344 - 469
---------- ---------- ---------- ----------
Total common shares - 460,423 - 453,785
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income available for common before
extraordinary item - $0.89 - $3.14
Extraordinary item (net of tax):
Early extinguishment of debt - - - -
---------- ---------- ---------- ----------
Earnings per common and - $0.89 - $3.14
common equivalent share ---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common
stock and U S WEST Media Group common stock. Earnings per common share
for 1995 has been presented on a pro forma basis to reflect the two classes
of stock as if they had been outstanding since January 1, 1995. For
periods prior to the recapitalization, the average common shares
outstanding are assumed to be equal to the average common shares
outstanding for U S WEST, Inc.
2
<PAGE>
EXHIBIT 11
U S WEST, Inc.
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
EARNINGS PER COMMON SHARE - ASSUMING Three Months Ended Twelve Months Ended
FULL DILUTION: (1) Dec 31, Dec 31,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item - $409,523 - $1,426,505
Interest on Convertible Liquid Yield
Option Notes (LYONS) - 5,635 - 21,872
---------- ---------- ---------- ----------
Adjusted income before
extraordinary item - 415,158 - 1,448,377
Extraordinary item (net of tax):
Early extinguishment of debt - - - -
---------- ---------- ---------- ----------
Adjusted net income - 415,158 - 1,448,377
Less preferred dividends - 875 - 1,167
---------- ---------- ---------- ----------
Adjusted net income available for
common share calculation - $414,283 - $1,447,210
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - 460,079 - 453,316
Incremental shares from assumed
exercise of stock options - 344 - 469
Shares issued upon conversion of LYONS - 9,894 - 10,057
---------- ---------- ---------- ----------
Total common shares - 470,317 - 463,842
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Adjusted income available for common
before extraordinary item - $0.88 - $3.12
Extraordinary item (net of tax):
Early extinguishment of debt - - - -
---------- ---------- ---------- ----------
Earnings per common share - $0.88 - $3.12
assuming full dilution ---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior
to the recapitalization, the average common shares outstanding are assumed
to be equal to the average common shares outstanding for U S WEST, Inc.
3
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PRO FORMA EARNINGS PER COMMON Three Months Ended Twelve Months Ended
SHARE: (1) Dec 31, Dec 31,
1995 1994 1995 1994
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Income before extraordinary item $284,242 - $1,184,138 -
Extraordinary item (net of tax):
Early extinguishment of debt (3,079) - (7,988) -
--------- ---------- --------- --------
Net income for per share calculation $281,163 - $1,176,150 -
--------- ---------- --------- --------
--------- ---------- --------- --------
Pro forma weighted average common 472,614 - 470,716 -
shares outstanding --------- ---------- --------- --------
--------- ---------- --------- --------
Income before extraordinary item $0.60 - $2.52 -
Extraordinary item (net of tax):
Early extinguishment of debt (0.01) - (0.02) -
--------- ---------- --------- --------
Pro forma earnings per common share $0.59 - $2.50 -
--------- ---------- --------- --------
--------- ---------- --------- --------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common
stock was converted into one share each of U S WEST Communications Group
common stock and U S WEST Media Group common stock. Earnings per common
share for 1995 has been presented on a pro forma basis to reflect the two
classes of stock as if they had been outstanding since January 1, 1995.
For periods prior to the recapitalization, the average common shares
outstanding are assumed to be equal to the average common shares
outstanding for U S WEST, Inc.
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts
<TABLE>
<CAPTION>
PRO FORMA EARNINGS PER COMMON AND Three Months Ended Twelve Months Ended
COMMON EQUIVALENT SHARE: (1) Dec 31, Dec 31,
1995 1994 1995 1994
-------- ---------- --------- --------
<S> <C> <C> <C> <C>
Income before extraordinary item $284,242 - $1,184,138 -
Extraordinary item (net of tax):
Early extinguishment of debt (3,079) - (7,988) -
--------- ---------- --------- --------
Net income for per share calculation $281,163 - $1,176,150 -
--------- ---------- --------- --------
--------- ---------- --------- --------
Pro forma weighted average common 472,614 - 470,716 -
shares outstanding
Incremental shares from assumed
exercise of stock options 1,702 - 1,459 -
--------- ---------- --------- --------
Total common shares 474,316 - 472,175 -
--------- ---------- --------- --------
--------- ---------- --------- --------
Income before extraordinary item $0.60 - $2.51 -
Extraordinary item (net of tax):
Early extinguishment of debt (0.01) - (0.02) -
Pro forma earnings per common and --------- ---------- --------- --------
common equivalent share $0.59 - $2.49 -
--------- ---------- --------- --------
--------- ---------- --------- --------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common
stock and U S WEST Media Group common stock. Earnings per common share
for 1995 has been presented on a pro forma basis to reflect the two classes
of stock as if they had been outstanding since January 1, 1995. For
periods prior to the recapitalization, the average common shares
outstanding are assumed to be equal to the average common shares
outstanding for U S WEST, Inc.
2
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PRO FORMA EARNINGS PER COMMON SHARE Three Months Ended Twelve Months Ended
ASSUMING FULL DILUTION: (1) Dec 31, Dec 31,
1995 1994 1995 1994
--------- ---------- --------- --------
<S> <C> <C> <C> <C>
Income before extraordinary item $284,242 - $1,184,138 -
Interest on Convertible Liquid Yield
Option Notes (LYONS) 3,220 - 12,366 -
--------- ---------- --------- --------
Adjusted income before
extraordinary item 287,462 - 1,196,504 -
Extraordinary item (net of tax):
Early extinguishment of debt (3,079) - (7,988) -
--------- ---------- --------- --------
Adjusted net income for per
share calculation $284,383 - $1,188,516 -
--------- ---------- --------- --------
--------- ---------- --------- --------
Pro forma weighted average common
shares outstanding 472,614 - 470,716 -
Incremental shares from assumed
exercise of stock options 2,188 - 1,780 -
Shares issued upon conversion of LYONS 9,634 - 9,758 -
--------- ---------- --------- --------
Total common shares 484,436 - 482,254 -
--------- ---------- --------- --------
--------- ---------- --------- --------
Adjusted income before
extraordinary item $0.59 - $2.48 -
Extraordinary item (net of tax):
Early extinguishment of debt (0.01) - (0.02) -
Pro forma earnings per common share --------- ---------- --------- --------
assuming full dilution $0.58 - $2.46 -
--------- ---------- --------- --------
--------- ---------- --------- --------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common
stock and U S WEST Media Group common stock. Earnings per common share
for 1995 has been presented on a pro forma basis to reflect the two classes
of stock as if they had been outstanding since January 1, 1995. For
periods prior to the recapitalization, the average common shares
outstanding are assumed to be equal to the average common shares
outstanding for U S WEST, Inc.
3
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PRO FORMA EARNINGS PER Three Months Ended Twelve Months Ended
COMMON SHARE: (1) Dec 31, Dec 31,
1995 1994 1995 1994
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item $72,025 - $144,570 -
Extraordinary item (net of tax):
Early extinguishment of debt (1) - (3,742) -
---------- ---------- ---------- ----------
Net income 72,024 - 140,828 -
Less preferred dividends 854 - 3,390 -
Net income available for ---------- ---------- ---------- ----------
common share calculation $71,170 - $137,438 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma weighted average common 471,953 - 470,549 -
shares outstanding ---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income available for common before
extraordinary item $0.15 - $0.30 -
Extraordinary item (net of tax):
Early extinguishment of debt (0.00) - (0.01) -
---------- ---------- ---------- ----------
Pro forma earnings per common share $0.15 - $0.29 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior
to the recapitalization, the average common shares outstanding are assumed
to be equal to the average common shares outstanding for U S WEST, Inc.
1
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PRO FORMA EARNINGS PER COMMON AND Three Months Ended Twelve Months Ended
COMMON EQUIVALENT SHARE: (1) Dec 31, Dec 31,
1995 1994 1995 1994
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item $72,025 - $144,570 -
Extraordinary item (net of tax):
Early extinguishment of debt (1) - (3,742) -
---------- ---------- ---------- ----------
Net income 72,024 - 140,828 -
Less preferred dividends 854 - 3,390 -
Net income available for ---------- ---------- ---------- ----------
common share calculation $71,170 - $137,438 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma weighted average common 471,953 - 470,549 -
shares outstanding
Incremental shares from assumed
exercise of stock options 1,102 - 1,063 -
---------- ---------- ---------- ----------
Total common shares 473,055 - 471,612 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Income available for common before
extraordinary item $0.15 - $0.30 -
Extraordinary item (net of tax):
Early extinguishment of debt (0.00) - (0.01) -
---------- ---------- ---------- ----------
Pro forma earnings per common and $0.15 - $0.29 -
common equivalent share ---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior
to the recapitalization, the average common shares outstanding are assumed
to be equal to the average common shares outstanding for U S WEST, Inc.
2
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
PRO FORMA EARNINGS PER COMMON SHARE - Three Months Ended Twelve Months Ended
ASSUMING - FULL DILUTION: (1) Dec 31, Dec 31,
1995 1994 1995 1994
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Income before extraordinary item $72,025 - $144,570 -
Interest on Convertible Liquid Yield
Option Notes (LYONS) 2,351 - 8,033 -
---------- ---------- ---------- ----------
Adjusted income before
extraordinary item 74,376 - 152,603 -
Extraordinary item (net of tax):
Early extinguishment of debt (1) - (3,742) -
---------- ---------- ---------- ----------
Adjusted net income 74,375 - 148,861 -
Less preferred dividends 854 - 3,390 -
---------- ---------- ---------- ----------
Adjusted net income available for
common share calculation $73,521 - $145,471 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro forma weighted average common
shares outstanding 471,953 - 470,549 -
Incremental shares from assumed
exercise of stock options 1,221 - 1,127 -
Shares issued upon conversion of LYONS 9,634 - 9,758 -
---------- ---------- ---------- ----------
Total common shares 482,808 - 481,434 -
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Adjusted income available for common
before extraordinary item $0.15 - $0.31 -
Extraordinary item (net of tax):
Early extinguishment of debt (0.00) - (0.01) -
---------- ---------- ---------- ----------
Earnings per common share - $0.15 - $0.30 -
assuming full dilution ---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior
to the recapitalization, the average common shares outstanding are assumed
to be equal to the average common shares outstanding for U S WEST, Inc.
3
<PAGE>
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Quarter Ended
12/31/95 12/31/94
- ----------------------------------------------------- ---------- ---------
<S> <C> <C>
Income before income taxes $564 $638
Interest expense (net of amounts capitalized) 123 119
Interest factor on rentals (1/3) 24 26
Equity losses in unconsolidated ventures 25 -
Guaranteed minority interest expense 12 -
---------- ---------
Earnings $748 $783
Interest expense 151 138
Interest factor on rentals (1/3) 24 26
Guaranteed minority interest expense 12 -
---------- ---------
Fixed charge $187 $164
Ratio of earnings to fixed charges 4.00 4.77
- ----------------------------------------------------- ---------- ---------
Year-to-Date
12/31/95 12/31/94
- ----------------------------------------------------- ---------- ---------
Income before income taxes $2,154 $2,283
Interest expense (net of amounts capitalized) 527 442
Interest factor on rentals (1/3) 95 96
Equity losses in unconsolidated ventures 66 -
Guaranteed minority interest expense 14 -
---------- ---------
Earnings $2,856 $2,821
Interest expense 599 486
Interest factor on rentals (1/3) 95 96
Guaranteed minority interest expense 14 -
---------- ---------
Fixed charges $708 $582
Ratio of earnings to fixed charges 4.03 4.85
- ----------------------------------------------------- ---------- ---------
</TABLE>
<PAGE>
U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Quarter Ended
12/31/95 12/31/94
- ---------------------------------------------------- ---------- -------------
<S> <C> <C>
Income before income taxes $1,448 $7,578
Interest expense 5,409 8,388
Interest factor on rentals (1/3) 20 25
---------- ----------
Earnings $6,877 $15,991
Interest expense 5,409 8,388
Interest factor on rentals (1/3) 20 25
---------- ----------
Fixed charges $5,429 $8,413
Ratio of earnings to fixed charges 1.27 1.90
- ---------------------------------------------------- ---------- -------------
</TABLE>
<TABLE>
<CAPTION>
Year-to-Date
12/31/95 12/31/94
- ---------------------------------------------------- ---------- -------------
<S> <C> <C>
Income before income taxes $9,125 $12,217
Interest expense 29,091 40,816
Interest factor on rentals (1/3) 56 123
---------- ----------
Earnings $38,272 $53,156
Interest expense 29,091 40,816
Interest factor on rentals (1/3) 56 123
---------- ----------
Fixed charges $29,147 $40,939
---------- ----------
Ratio of earnings to fixed charges 1.31 1.30
- ---------------------------------------------------- ---------- -------------
</TABLE>
<PAGE>
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Ended
1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income from continuing operations $2,154 $2,283 $745 $1,569 $1,209
before income taxes
Interest expense (net of capitalized amounts 527 442 439 453 482
Interest factor on rentals (1/3) 95 96 102 98 90
Equity losses in unconsolidated ventures 66 - - - -
Guaranteed minority interest expense 14 - - - -
-------------------------------------------------------
Earnings $2,856 $2,821 $1,286 $2,120 $1,781
Interest expense 599 486 439 453 482
Interest factor on rentals (1/3) 95 96 102 98 90
Guaranteed minority interest expense 14 - - - -
-------------------------------------------------------
Fixed charges $708 $582 $541 $551 $572
Ratio of earnings to fixed charges 4.03 4.85 2.38 3.85 3.11
- ------------------------------------------------------------------------------------------------------
</TABLE>
All years have been restated to exclude the Capital Assets segment which was
discontinued as of June 1, 1993.
The 1993 ratio is based on earnings from continuing operations before
extraordinary charges associated with the decision to discontinue accounting for
the operations of the Company in accordance with SFAS No. 71 of $3,123 and the
early extinguishment of debt of $77. The 1993 and 1991 ratios include
restructuring charges of $1,000 and $364, respectively. Excluding the
restructuring charges the 1993 and 1991 ratios of earnings to fixed charges
would have been 4.22 and 3.75, respectively.
The 1992 ratio is based on earnings before the cummulative effect of change in
accounting principles which reduced net income by $1,793.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF U S WEST, INC.
A DELAWARE CORPORATION
U S WEST Communications Group, Inc., A Colorado corporation
U S WEST Advanced Technologies, Inc., a Colorado corporation
U S WEST Business Resources, Inc., a Colorado corporation
U S WEST Communications, Inc., a Colorado corporation
El Paso County Telephone Company, a Colorado corporation
Malheur Home Telephone Company, an Oregon corporation
U S WEST Communications Federal Services, Inc., a Colorado corporation
U S WEST Communications Services, Inc., a Colorado corporation
U S WEST Interprise America, Inc., a Colorado corporation
(d/b/a !nterprise America, Inc.)
U S WEST Communications Systems Corporation, a Colorado corporation
U S WEST Enhanced Services, Inc., a Washington corporation
U S WEST Capital Funding, Inc., a Colorado corporation
U S WEST Enterprises, Inc., a Minnesota corporation
U S WEST Federal Relations, Inc., a Delaware corporation
U S WEST Investment Management Company, a Colorado corporation
U S WEST Media Group, Inc., a Delaware corporation
U S WEST Capital Corporation, a Colorado corporation
U S WEST Capital (America) Inc., a Colorado corporation
U S WEST Financial Services, Inc., a Colorado corporation
Commercial Funding, Inc., a New York corporation
U S WEST Delta, Inc., a Colorado corporation
USW Finance Corporation, a Colorado corporation
U S WEST Financial Services Foreign Sales, Inc., a Virgin
Islands corp.
USWFS Leasing 1995, Inc., a Colorado corporation
New York Cogenco, Inc., a Delaware corporation
USW Shacres, Inc., a California corporation
SIFD ONE, LTD., a Delaware corporation
<PAGE>
USW FSC ONE, LTD., a Bermuda corporation
SIFD TWO, LTD., a Delaware corporation
USW FSC TWO, LTD., a Bermuda corporation
USW FSC THREE, LTD., a Bermuda corporation
Valertex, Inc., a Texas corporation
U S WEST Services (America) Inc., a Colorado corporation
U S WEST Cellular Holdings, Inc., a Delaware corporation
U S WEST Interactive Services, Inc., a Colorado corporation
U S WEST International Holdings, Inc., a Delaware corporation
U S WEST Cable Europe, Inc., a Colorado corporation
U S WEST Cable Partnership Holdings, Inc., a Colorado corporation
U S WEST Cable Programming Corporation, a Colorado corporation
U S WEST Czech Cable Company, a Delaware corporation
U S WEST Espana Telecommunications, Inc., a Delaware corporation
U S WEST Europe, Inc., a Colorado corporation
U S WEST Far East Telecommunications, Inc., a Delaware corporationU
U S WEST Foreign Investments, Inc., a Colorado corporation
U S WEST International, Inc., a Colorado corporation
U S WEST International Systems Group, Inc., a Colorado corporation
U S WEST ISG Technologies, Inc., a Colorado corporation
U S WEST Overseas Operations, Inc., a Colorado corporation
USW PCN, Inc., a Colorado corporation
RTDC Holdings, Inc., a Delaware corporation
U S WEST U.K. Cable, Inc., a Colorado corporation
U S WEST India B.V., a Netherland corporation
U S WEST International B.V., a Netherlands corporation
U S WEST Deutschland GmbH, a German corporation
U S WEST Polska Sp. z. o.o., a Polish corporation
U S WEST U.K. Limited, a U.K. corporation
U S WEST International Systems Group Limited, a U.K.corporation
U S WEST ISG Installation Services Limited, a U.K. corporation
U S WEST Marketing Resources (U.K.) Limited, a U.K. corporation
U S Westelcom B.V., a Netherlands corporation
U S WEST Investments, Inc., a Colorado corporation
U S WEST Real Estate, Inc., a Colorado corporation
USW Cardinal I, Inc., an Ohio corporation
USW Cardinal II, Inc., an Ohio corporation
USW Fresno, Inc., a Colorado corporation
USW Lodging, Inc., a Delaware corporation
NP, Inc., a Colorado corporation
USW Sarasota, Inc., a Delaware corporation
<PAGE>
Taurus Laurel, Inc., a Colorado corporation
Taurus Properties, Inc., a Colorado corporation
Verend, Inc., a Texas corporation
U S WEST Marketing Resources Group, Inc., a Colorado corporation
U S WEST ITP Holding Co., a Colorado corporation
Interactive Video Enterprises, Inc., a Colorado corporation
LOCALTouch Holdings, Inc., a Colorado corporation
LOCALTouch Directory Services, Inc., a Colorado corporation
Please Hold Promotions, Inc., an Arizona corporation
WEST Multimedia Communications, Inc., a Colorado corporation
MediaOne, Inc., a Georgia corporation
MediaOne Business Services, Inc., a Colorado corporation
MediaOne of Clayton County, Inc., a Georgia corporation
MediaOne of Cobb County, Inc., a Georgia corporation
MediaOne of Conyers-Rockdale, Inc., a Georgia corporation
MediaOne of Fayette County, Inc., a Georgia corporation
MediaOne of Fulton County, Inc., a Georgia corporation
MediaOne of Georgia, Inc., a Georgia corporation
MediaOne of Henry County, Inc., a Georgia corporation
Peachtree SMATV Corp, a Georgia corporation
The Classified Channel, Inc., a Georgia corporation
U S WEST NewVector Group, Inc., a Colorado corporation (d/b/a U S WEST
Cellular)
Ardael, Inc., a Washington corporation
Monroe Cellular Telephone, Inc., a Delaware corporation
NewVector Communications, Inc., a Delaware corporation
U S WEST NewVector Materials, Inc., a Colorado corporation
Pacific Cellular, Inc., a Washington corporation
Pacific Telecom Cellular of Colorado, Inc., a Colorado
corporation
Pacific Telecom Cellular of Whitman, Inc., a Washington
corporation
U S WEST Paging, Inc., a Minnesota corporation
Scio Cellular, Inc., a Delaware corporation
Western Cellular, Inc., an Oregon corporation
U S WEST PCS Holdings, Inc., a Delaware corporation
U S WEST PCS Services, Inc., a Colorado corporation
U S WEST SPF Co., a Colorado corporation
Western Range Insurance Co., a Vermont corporation
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
of U S WEST, Inc. on Forms S-3 (File Nos. 33-50047, 33-50047-01, 33-50049,
33-50049-01, 33-51427, 33-62451, 33-57889 and 33-63087) and on Forms S-8 (File
Nos. 33-43362, 33-56895, 33-55289, 33-56709, 33-63089, 33-63093, 33-63085 and
33-63091) 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, dated
February 12, 1996, except for Note 4, paragraph 3, as to which the date is
February 27, 1996, on our audits of the consolidated financial statements of U S
WEST, Inc., as of December 31, 1995 and 1994, and for the years ended December
31, 1995, 1994 and 1993, which report is included in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report dated
February 12, 1996 on the related consolidated financial statement schedules,
which report is included in this Annual Report on Form 10-K.
We consent to the incorporation by reference in the Registration Statement
of U S WEST, Inc. on Forms S-3 (File Nos. 33-50047, 33-50047-01, 33-50049,
33-50049-01, 33-51427, 33-62451, 33-57889 and 33-63087) and on Forms S-8 (File
Nos. 33-43362, 33-56895, 33-55289, 33-56709, 33-63089, 33-63093, 33-63085 and
33-63091) 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, dated
February 12, 1996, on our audits of the combined financial statements of U S
WEST Communication Group, as of December 31, 1995 and 1994, and for the years
ended December 31, 1995, 1994 and 1993, which report is included in this Annual
Report on Form 10-K.
We consent to the incorporation by reference in the Registration Statement
of U S WEST, Inc. on Forms S-3 (File Nos. 33-50047, 33-50047-01, 33-50049,
33-50049-01, 33-51427, 33-62451, 33-57889 and 33-63087) and on Form S-8 (File
Nos. 33-43362, 33-56895, 33-55289, 33-56709, 33-63093, 33-63089, 33-63085 and
33-63091) of our report, dated February 12, 1996, except for Note 5, paragraph
3, as to which the date is February 27, 1996, on our audits of the combined
financial statements and Supplementary Selected Proportionate Results of
Operations of U S WEST Media Group, as of December 31, 1995 and 1994, and for
the years ended December 31, 1995, 1994 and 1993, which report is included in
this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
Denver, Colorado
March 27, 1996
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, Inc., a Delaware corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31, 1995; and
WHEREAS, each of the undersigned is a Director of the Company;
NOW THEREFORE, each of the undersigned constitutes and appoints JAMES T.
ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys for him or her
and in his or her name, place, and stead, and in his or her capacity as a
Director of the Company, to execute and file such annual report, and thereafter
to execute and file any amendment or amendments thereto on Form 10-K/A, hereby
giving and granting to said attorneys full power and authority to do and perform
all and every act and thing whatsoever requisite and necessary to be done in and
about the premises as fully, to all intents and purposes, as he or she might or
could do if personally present at the doing thereof, hereby ratifying and
confirming all that said attorneys may or shall lawfully do, or cause to be
done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 15th day of March, 1996.
/s/ REMEDIOS DIAZ-OLIVER /s/ ALLEN F. JACOBSON
_______________________________ ________________________________
Remedios Diaz-Oliver Allen F. Jacobson
/s/ GRANT A. DOVE /s/ MARILYN C. NELSON
_______________________________ ________________________________
Grant A. Dove Marilyn C. Nelson
/s/ ALLAN D. GILMOUR /s/ FRANK POPOFF
_______________________________ ________________________________
Allan D. Gilmour Frank Popoff
/s/ PIERSON M. GRIEVE /s/ JERRY O. WILLIAMS
_______________________________ ________________________________
Pierson M. Grieve Jerry O. Williams
/s/ SHIRLEY M. HUFSTEDLER
_______________________________
Shirley M. Hufstedler
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, Inc., a Delaware corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31, 1995; and
WHEREAS, the undersigned is an officer or Director, or both, of the Company
and holds the office, or offices, in the Company as indicated below his name;
NOW THEREFORE, each of the undersigned hereby constitutes and appoints
JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys for him
and in his name, place, and stead, and in each of his offices and capacities in
the Company, to execute and file such annual report, and thereafter to execute
and file any amendment or amendments thereto on Form 10-K/A, hereby giving and
granting to said attorneys full power and authority to do and perform all and
every act and thing whatsoever requisite and necessary to be done in and about
the premises as fully, to all intents and purposes, as he might or could do if
personally present at the doing thereof, hereby ratifying and confirming all
that said attorneys may or shall lawfully do, or cause to be done, by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 15th day of March, 1996.
/s/ RICHARD D. McCORMICK /s/ JAMES T. ANDERSON
_________________________________ ____________________________________
Richard D. McCormick James T. Anderson
Chairman of the Board, Acting Executive Vice President and
Chief Executive Officer and Chief Financial Officer
President
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 192
<SECURITIES> 0
<RECEIVABLES> 1,974
<ALLOWANCES> 88
<INVENTORY> 227
<CURRENT-ASSETS> 2,909
<PP&E> 32,884
<DEPRECIATION> 18,207
<TOTAL-ASSETS> 25,071
<CURRENT-LIABILITIES> 5,052
<BONDS> 6,954
651
0
<COMMON> 8,228
<OTHER-SE> (280)
<TOTAL-LIABILITY-AND-EQUITY> 25,071
<SALES> 11,746
<TOTAL-REVENUES> 11,746
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,101
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 527
<INCOME-PRETAX> 2,154
<INCOME-TAX> 825
<INCOME-CONTINUING> 1,329
<DISCONTINUED> 0
<EXTRAORDINARY> (12)
<CHANGES> 0
<NET-INCOME> 1,317
<EPS-PRIMARY> 2.50
<EPS-DILUTED> 2.46
</TABLE>
