<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
U S WEST, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------------------
4) Date Filed:
------------------------------------------------------------------------
<PAGE>
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[LOGO]
7800 East Orchard Road
Englewood, Colorado 80111
NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders of U S WEST, Inc. ("U S WEST" or the
"Company") will be held at Iowa State University's Benton Auditorium in Ames,
Iowa, on Friday, June 7, 1996, at 10:00 a.m., for the following purposes:
1. To elect one Director in Class I and three Directors in Class II
(see page 4);
2. To ratify the appointment of auditors (see page 6);
3. To approve the U S WEST Communications Group Long-Term Incentive
Plan (see page 6); and
4. To act upon such other matters as may properly come before the
Annual Meeting, including a shareholder proposal (see page 7).
Shareholders of record at the close of business on April 8, 1996 will be
entitled to vote at the Annual Meeting or any postponements or adjournments
thereof.
By Order of the Board of Directors
[SIGCUT]
CHARLES P. RUSS, III
Executive Vice President -- Law and
Human
Resources, General Counsel and
Secretary
April 8, 1996
EACH SHAREHOLDER'S VOTE IS IMPORTANT.
PLEASE DATE, SIGN, AND RETURN PROMPTLY THE ACCOMPANYING PROXY CARD.
- --------------------------------------------------------------------------------
<PAGE>
U S WEST
Executive Offices
7800 East Orchard Road
Englewood, Colorado 80111
PROXY STATEMENT
This Proxy Statement and the accompanying proxy/voting instruction card
("proxy card") are first being mailed on April 8, 1996 to holders of U S WEST
Communications Group common stock ("Communications Stock") and U S WEST Media
Group common stock ("Media Stock") in connection with the solicitation of
proxies by the Board of Directors of U S WEST (the "Board"). Shares can be voted
at the Annual Meeting only if the shareholder is represented by proxy or is
present in person.
EACH SHAREHOLDER'S VOTE IS IMPORTANT. ACCORDINGLY, SHAREHOLDERS ARE URGED TO
SIGN AND RETURN THE ACCOMPANYING PROXY CARD REGARDLESS OF WHETHER THEY PLAN TO
ATTEND THE ANNUAL MEETING. If a shareholder attends and votes by ballot at the
Annual Meeting, that vote will cancel any previously given proxy vote.
Additionally, a shareholder giving a proxy may revoke it at any time before it
is voted at the Annual Meeting by giving a valid proxy bearing a later date.
When proxy cards are properly signed and returned, the shares represented
will be voted in accordance with the shareholder's directions. Votes will be
tallied by Boston EquiServe Limited Partnership, U S WEST's transfer agent. If a
proxy card is signed and returned without specifying choices, the shares will be
voted as recommended by the Board. No shareholder's vote will be disclosed
except to the extent necessary to meet legal requirements.
For participants in the U S WEST Shareowner Investment Plan, the proxy card
will cover the number of full shares in the plan account, as well as shares
registered in the participant's name. For participants in the U S WEST Payroll
Stock Ownership Plan ("PAYSOP") or the U S WEST Savings Plan/ESOP ("SP/E"), the
proxy card will serve also as a voting instruction card for the trustees of
those plans with respect to the shares held in the participants' accounts.
Shares held in the PAYSOP or the SP/E for which proxy cards are not returned (as
well as shares held in the suspense account of the SP/E) will be voted by the
respective trustees of the PAYSOP and the SP/E in accordance with their own
proxy voting guidelines.
On December 31, 1995, approximately 775,125 record holders held 473,635,025
outstanding shares of Communications Stock, and approximately 770,346 record
holders held 472,314,379 outstanding shares of Media Stock. Each share of
Communications Stock is entitled to one vote, and each share of Media Stock is
entitled to 0.640 vote, on all matters properly brought before the Annual
Meeting. The relative voting power of Communications Stock and Media Stock is
determined by a formula set forth in U S WEST's Certificate of Incorporation.
The formula provides that each share of Communications Stock has one vote, and
each share of Media Stock has a variable number of votes equal to the ratio of
the time-weighted average market value of one share of Media Stock to the
time-weighted average market value of one share of Communications Stock,
calculated over a period of 20 days of trading on a national securities
exchange. The 20-day trading period ends ten trading days prior to the record
date for a meeting of shareholders. For this Annual Meeting, the 20-day period
began February 26, 1996 and ended March 22, 1996.
Shareholders representing a majority of the combined voting power of the
Communications Stock and the Media Stock must be present or represented by proxy
to constitute a quorum to conduct business at the Annual Meeting. Each class of
common stock will vote together as a single class on all matters presented for
consideration at the Annual Meeting. If a quorum is present, the four nominees
for Directors receiving the highest number of votes will be elected. For all
other matters to be considered by shareholders at the Annual Meeting, the
affirmative vote of a majority of the votes of the shares entitled to vote and
present in person or by proxy is necessary for approval. Shares represented by
proxies that are marked "Abstain" on the proxy card with regard to such other
matters, and proxies that are marked to deny discretionary authority on other
1
<PAGE>
matters, will not be included in the vote total and will have no effect on the
outcome of the vote. Shares held of record by brokers who are prohibited from
exercising discretionary authority for beneficial owners who have not provided
voting instructions (commonly described as "broker non-votes") likewise will not
be included in the vote total and will have no effect on the outcome of the
vote.
Shareholders of record who do not have admission tickets will be admitted
upon verification of ownership at the shareholders' admission counter.
Beneficial owners can obtain tickets at the shareholders' admission counter by
presenting evidence of holdings such as a bank or brokerage firm account
statement.
A shareholder receiving more than one copy of U S WEST's Annual Report to
Shareholders may stop mailing of the duplicate copies by marking the designated
box on the proxy card for selected accounts. This helps reduce the expense of
printing and mailing duplicate materials but will not affect the mailing of
dividend checks, special notices, proxy materials and dividend reinvestment
statements.
BOARD OF DIRECTORS
MEETINGS
Regular meetings of the Board take place six times during the year and
special meetings are scheduled as necessary. The Board held 12 meetings in 1995.
No incumbent Director attended fewer than 75 percent of the aggregate of the
total number of meetings of the Board and all Committees of the Board on which
such Director served. Directors meet their responsibilities not only by
attending Board and Committee meetings but also through participation in
informational sessions, informal consultations, and communication with members
of management on matters affecting U S WEST.
COMMITTEES
The Board has established the following standing Committees:
AUDIT COMMITTEE
The Audit Committee held three meetings in 1995. The Committee members are
Mr. Gilmour (Chair), Mr. Grieve, Mr. Williams, and Ms. Diaz-Oliver. The Audit
Committee's purpose is to oversee U S WEST's accounting and financial reporting
policies and practices and to assist the Board in fulfilling its fiduciary and
corporate accountability responsibilities. U S WEST's internal auditors and
independent certified public accountants periodically meet with the Audit
Committee and always have unrestricted direct access to the Audit Committee
members.
BOARD AFFAIRS COMMITTEE
The Board Affairs Committee held three meetings in 1995. The Committee
members are Mr. Grieve (Chair), Mr. Jacobson, Ms. Diaz-Oliver, Ms. Hufstedler,
and Ms. Nelson. The Board Affairs Committee serves as a nominating committee for
the Board. The Committee also makes recommendations regarding Director
compensation and Board Committee structure and composition. At least twice
annually the Committee Chair determines the agenda and chairs executive sessions
of outside Directors to evaluate the performance and effectiveness of the Board,
its Chairman, and its individual members, and to discuss corporate governance
issues and other topics as determined by outside Directors from time to time.
The Committee reviews and approves of service on outside boards of directors by
the Company's top Executive Officers. This Committee will consider candidates
for the Board recommended by shareholders if the names and qualifications of
such candidates are submitted in writing to the Secretary of U S WEST, 7800 East
Orchard Road, Suite 200, Englewood, Colorado 80111.
CORPORATE DEVELOPMENT AND FINANCE COMMITTEE
The Corporate Development and Finance Committee held three meetings in 1995.
The Committee members are Mr. Jacobson (Chair), Mr. Gilmour, Mr. Grieve, Mr.
Williams, and Ms. Hufstedler. The Committee is responsible for evaluating
Company growth strategies and financing for the Company's operations.
2
<PAGE>
HUMAN RESOURCES COMMITTEE
The Human Resources Committee held seven meetings in 1995. The Committee
members are Mr. Dove (Chair), Mr. Popoff, Ms. Diaz-Oliver, and Ms. Nelson. The
Human Resources Committee is responsible to assure the appropriateness of the
compensation and benefits of the Executive Officers of U S WEST and its
subsidiaries and to provide for the orderly succession of management.
PUBLIC POLICY COMMITTEE
The Public Policy Committee held two meetings in 1995. The Committee members
are Ms. Hufstedler (Chair), Ms. Nelson, Mr. Dove, Mr. Jacobson, and Mr. Popoff.
The Committee is responsible for reviewing public policy issues generally.
TRUST INVESTMENT COMMITTEE
The Trust Investment Committee held two meetings in 1995. The Committee
members are Mr. Popoff (Chair), Mr. Dove, Mr. Gilmour, and Mr. Williams. The
Trust Investment Committee is responsible for overseeing the administration of
the Company's trust funds for the benefit of the fund beneficiaries.
COMPENSATION OF DIRECTORS
To attract and retain exceptionally qualified Directors, the Company offers
a competitive Director compensation package, with a strategic mix of elements
weighted toward equity ownership to align the interests of Directors with the
long-term interests of shareholders. The Company considers equity ownership a
powerful influence to put decision-making in close contact with shareholder
interests and focus attention on directing the Company as owners. The remaining
compensation components consist of cash and non-cash benefits, described below.
During 1995, the Board completed a thorough review of the Report of the National
Association of Corporate Directors Blue Ribbon Commission on Director
Compensation and the recommended Best Practices. The Board determined that the
Company's policies agree with the spirit of that Report.
Non-employee Directors receive an annual retainer of $30,000 and a fee of
$1,200 for attendance at each Board or Committee meeting. For multi-day
meetings, non-employee Directors receive a fee of $1,200 per day. For additional
service as Committee chairs, the chairpersons of the Audit, Human Resources and
Corporate Development & Finance Committees receive an annual retainer of $4,500
and the chairpersons of the Public Policy, Trust Investment and Board Affairs
Committees receive an annual retainer of $3,500.
Directors may elect to defer receipt of all or part of their retainers and
Committee fees in stock or in cash. Deferred amounts that otherwise would be
payable in common stock are credited, in evenly divided proportions of
Communications Stock and Media Stock, in an account as "phantom" stock units,
the value of which rises and falls with the price of Communications Stock and
Media Stock. Additional stock units are credited to the account when a dividend
is declared on the Company's common stock. Cash payments so deferred earn
interest, compounded quarterly, at a rate equal to the average interest rate for
ten-year United States Treasury notes for the previous quarter.
From time to time, on appropriate occasions, Directors are asked to
participate in informational sessions or informal consultations regarding
Company developments or otherwise to assist the Company with special projects or
other business matters with which they have expertise. For such sessions or
consultations of significant duration, Directors are compensated with a cash
payment of $1,200. Directors routinely participate in informational sessions and
consultations of shorter duration without receiving any separate compensation.
Under the terms of the amended 1994 Stock Plan approved by shareholders,
Directors receive 400 shares of Communications Stock and 400 shares of Media
Stock in each of their first five years of service. They also receive annual
grants of 3,000 stock options for each class of common stock. These options have
value for Directors only if the price of the Company's stock appreciates from
the date of the option grant.
3
<PAGE>
Non-employee Directors who retire after serving a minimum of five credited
years on the Board are paid a sum equal to their final-year retainer multiplied
by the lesser of ten or their number of years of service on the Board. At the
Director's discretion, this amount is paid in ten equal annual installments or a
single installment equal to its discounted present value.
Any Director who is an employee of U S WEST or one of its subsidiaries
receives no compensation for serving as a Director.
SECURITIES OWNED BY MANAGEMENT
The following table sets forth beneficial ownership of shares of
Communications Stock and Media Stock by each Director, each named Executive
Officer, and all Directors and Executive Officers as a group as of December 31,
1995. These shares represent less than one percent of either class of
outstanding common stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
------------------------------------------------------------------
COMMUNICATIONS STOCK MEDIA STOCK
-------------------------------- --------------------------------
SHARES SUBJECT SHARES SUBJECT
TO OPTIONS* TO OPTIONS*
TOTAL NUMBER (INCLUDED IN TOTAL NUMBER (INCLUDED IN
OF SHARES TOTAL) OF SHARES TOTAL)
------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Remedios Diaz-Oliver............... 5,200 1,200 5,200 1,200
Grant A. Dove...................... 3,800 1,200 3,800 1,200
Allan D. Gilmour................... 4,573 1,200 4,573 1,200
Pierson M. Grieve.................. 3,200 1,200 3,200 1,200
Shirley M. Hufstedler.............. 6,493 1,200 7,575 1,200
Allen R. Jacobson.................. 6,662(1) 1,200 6,662(1) 1,200
Charles M. Lillis.................. 40,268 0 105,868 60,000
Richard D. McCormick............... 389,510(2) 221,959 454,217(3) 221,959
Marilyn Carlson Nelson............. 2,600 1,200 2,600 1,200
Frank Popoff....................... 3,100 1,200 3,100 1,200
Charles P. Russ III................ 46,412 29,966 50,300 35,000
James H. Stever.................... 98,660 56,783 98,453 56,783
Solomon D. Trujillo................ 48,117 21,558 56,229 31,558
Jerry O. Williams.................. 3,400 1,200 3,400 1,200
All Directors and Executive
Officers (as a group)............. 699,600 355,345 847,207 430,379
</TABLE>
- ------------------------------
* Shares subject to acquisition through exercise of stock options within 60
days.
(1)
Includes 3,462 shares subject to shared voting and investment power.
(2)
Includes 95,282 shares subject to shared voting and investment power.
(3)
Includes 95,264 shares subject to shared voting and investment power.
ELECTION OF DIRECTORS (ITEM A ON PROXY CARD)
Pursuant to the Certificate of Incorporation of U S WEST, the Board consists
of three classes of Directors. Each class of Directors is subject to election by
shareholders every three years. Any Director appointed by the Board between
annual meetings is subject to election by shareholders at the following annual
meeting. The Board has adopted a policy that requires Directors to retire at the
annual meeting following the Director's 70th birthday.
Unless otherwise instructed, proxies will be voted for the election of the
four nominees listed below. If a shareholder returning a proxy does not wish
shares to be voted for particular nominees, the shareholder must so indicate in
the space provided on the proxy card.
If one or more of the nominees becomes unavailable or unable to serve at the
time of the Annual Meeting, the shares to be voted for such nominee or nominees
that are represented by proxies will be voted
4
<PAGE>
for any substitute nominee or nominees designated by the Board or, if none, the
size of the Board will be reduced. The Board knows of no reason why any of the
nominees would be unavailable or unable to serve at the time of the Annual
Meeting.
Shirley M. Hufstedler will retire from the Board at the conclusion of the
Annual Meeting.
A brief listing of the principal occupations, other major affiliations and
ages of the four nominees for election as Directors, and the Directors whose
terms of office do not expire at this Annual Meeting, follows.
NOMINEE FOR ELECTION AS DIRECTOR IN CLASS I
(THE TERM OF THIS CLASS OF DIRECTORS EXPIRES AT THE 1998 ANNUAL MEETING OF
SHAREHOLDERS)
ALLEN F. JACOBSON, retired. Chairman and Chief Executive Officer of
Minnesota Mining & Manufacturing Company from 1986 to 1991. Director of Abbott
Laboratories, Deluxe Corporation, Minnesota Mining & Manufacturing Corporation,
Mobil Corporation, Northern States Power Company, Potlatch Corporation, The
Prudential Insurance Company of America, Sara Lee Corporation, Silicon Graphics,
Inc., and Valmont Industries, Inc. Director of U S WEST since 1983. Age 69.
DIRECTORS IN CLASS I
(THE TERM OF THIS CLASS OF DIRECTORS EXPIRES AT THE 1998 ANNUAL MEETING OF
SHAREHOLDERS)
REMEDIOS DIAZ-OLIVER, President and Chief Executive Officer of All American
Containers, Inc. since November 1991. Chief Executive Officer and President of
American International Containers, Inc., from 1990 to October 1991; Chief
Executive Officer and Executive Vice President from 1977 to 1990. Director of
Avon Products, Inc., Barnett Banks, Inc., American Cancer Society, Greater Miami
Chamber of Commerce, Hamilton Foundation, Infants in Need, Jackson Memorial
Foundation, National Hispanic Leadership Agenda, and University of Miami School
of Medicine. Director of U S WEST since 1988. Age 57.
GRANT A. DOVE, Managing Partner of Technology Strategies and Alliances since
1992. Executive Vice President of Texas Instruments from 1982 to 1987. Director
of Control Data Systems Incorporated, Cooper Cameron Corporation, Forefront
Group, Inc., InterVoice, Inc., and Microelectronics and Computer Technology
Corporation. Director and Chairman of Optek Technology, Inc. Director of U S
WEST since 1988. Age 67.
NOMINEES FOR ELECTION AS DIRECTORS IN CLASS II
(THE TERM OF THIS CLASS OF DIRECTORS EXPIRES AT THE 1999 ANNUAL MEETING OF
SHAREHOLDERS)
PIERSON M. GRIEVE, retired. Chairman of the Board and Chief Executive
Officer of Ecolab, Inc. from 1983 through 1995. Director of Danka Business
Systems PLC, Ecolab, Inc., Meredith Corporation, Norwest Corporation, St. Paul
Companies and Waldorf Corporation. Director of U S WEST since 1990. Age 68.
RICHARD D. MCCORMICK, Chairman of the Board since May 1992; President and
Chief Executive Officer since 1991; President and Chief Operating Officer from
1986 to 1991. Director of Financial Security Assurance Holdings Ltd., Norwest
Corporation and UAL, Inc. Director of U S WEST since 1986. Age 55.
MARILYN CARLSON NELSON, Vice Chair of Carlson Holdings, Inc. since 1991;
Senior Vice President, 1988 to 1991. Director of Exxon Corporation, the First
Bank System, Inc. and Carlson Holdings, Inc. Director of U S WEST since 1993.
Age 56.
DIRECTORS IN CLASS III
(THE TERM OF THIS CLASS OF DIRECTORS EXPIRES AT THE 1997 ANNUAL MEETING OF
SHAREHOLDERS)
ALLAN D. GILMOUR, retired. Vice Chairman of Ford Motor Co. from 1993 to
1995; Executive Vice President of Ford Motor Co. and President, Ford Automotive
Group, from 1990 to 1993; Executive Vice President, Corporate Staffs, from 1989
to 1990; Executive Vice President, International Automotive Operations, from
1987 to 1989. Director of The Dow Chemical Company, DTE Energy Company, The
Prudential Insurance Company of America and Whirlpool Corporation. Director of U
S WEST since 1992. Age 61.
FRANK POPOFF, Chairman of The Dow Chemical Company since 1992 and Chief
Executive Officer from 1987 to 1995. Director of American Express Company and
Chemical Financial Corporation. Director of U S WEST since 1993. Age 60.
5
<PAGE>
JERRY O. WILLIAMS, President and Chief Executive Officer of Grand Eagle
Companies, Inc., since May, 1992. Chairman of the Board of The Monotype
Corporation Plc. from December, 1990 to May, 1992; Managing Director from
January, 1990 to May, 1992. Director of ECRM Inc. and Monotype Typography, Inc.
Director of U S WEST since 1988. Age 57.
------------------------
RATIFICATION OF APPOINTMENT OF AUDITORS (ITEM B ON PROXY CARD)
The Board, upon recommendation of the Audit Committee, has appointed the
firm of Arthur Andersen LLP, Certified Public Accountants, as independent
auditors to make an examination of the accounts of U S WEST for calendar year
1996. THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" RATIFICATION OF THIS
APPOINTMENT.
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 of 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.
Representatives of Arthur Andersen LLP and Coopers & Lybrand L.L.P. are
expected to be present at the Annual Meeting. They will have the opportunity to
make a statement if they desire, and will be available to respond to questions.
PROPOSAL TO APPROVE THE U S WEST COMMUNICATIONS GROUP
LONG-TERM INCENTIVE PLAN (ITEM C ON PROXY CARD)
The U S WEST Communications Group Long-Term Incentive Plan (the "Plan") is
intended to provide key executives of U S WEST Communications Group and of the
Company with incentive compensation based upon the sum of regular cash
dividends, if any, paid on Communications Stock, and the achievement of
pre-established, objective performance goals. Eligibility under the Plan will be
limited to executives and key employees of the Communications Group and the
Company selected by the Human Resources Committee of the Board.
The Plan includes a two-year performance period that concludes on December
31, 1997, and three performance periods of three years that conclude,
respectively, on December 31 of 1998, 1999 and 2000. The Human Resources
Committee will assign Dividend Equivalent Units ("DEUs") to Plan participants at
the beginning of each performance period and on such other occasions as it may
determine. The Human Resources Committee will determine the number of DEUs to be
assigned to any participant, based on the Company's compensation strategy and
philosophy described in the report on executive compensation that begins on p.
13. At the conclusion of each performance period, participants will be entitled
to receive a percentage of the product of their respective DEUs multiplied by
the aggregate value of dividends paid during the performance period on one share
of Communications Stock. The percentage, which may not exceed 100%, will be
determined pursuant to a performance formula established by the Human Resources
6
<PAGE>
Committee within 90 days of the commencement of a performance period. The
performance formula will be based on one or more of the Communications Group's
financial results, revenue, productivity and efficiency measures, customer
service, and employee and management satisfaction measures.
Payments, if any, following a performance period will be in the form of
Communications Stock, and shall occur as soon as practicable following the
conclusion of the performance period. The number of shares issued for a
performance period will be determined by dividing the amount payable to a
participant for a performance period by the closing price of Communications
Stock, averaged over a 20-trading day period commencing ten trading days prior
to the end of the performance period. Shares so paid may be restricted or
unrestricted, at the discretion of the Human Resources Committee. A pool of
1,300,000 shares of Communications Stock will be available for issuance over the
life of the Plan, and the number of DEUs issued to any participant over the life
of the Plan shall not exceed 200,000.
THE FOREGOING SUMMARY OF THE PLAN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF THE PLAN AS SET FORTH IN APPENDIX A.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THIS PLAN.
------------------------
SHAREHOLDER PROPOSAL
A shareholder proponent has notified the Company of the intent to present
the following proposal and supporting statement at the Annual Meeting. The
adoption of the proposal would not, in itself, cause the implementation of the
action or policy called for by the proposal, but simply would constitute a
recommendation to the Board.
SHAREHOLDER PROPOSAL (ITEM 1 ON THE PROXY CARD)
Evelyn Y. Davis, Watergate Office Building, 2600 Virginia Avenue, N.W.,
Suite 215, Washington, D.C. 20037, owning of record 120 shares of Communications
Stock and 120 shares of Media Stock, has given notice that she intends to
present at the Annual Meeting the following resolution:
"RESOLVED: That the shareholders of U S WEST recommend that the Board of
Directors take the necessary steps to institute the election of directors
ANNUALLY, instead of the stagger system as is now provided."
"REASONS: The great majority of New York Stock Exchange listed
corporations elect all their directors each year."
"This insures that ALL directors will be more accountable to ALL
shareholders each year and to a certain extent prevents the
self-perpetuation of the Board."
"Last year the owners of 108,763,030 shares, representing approximately
30.4% of shares voting, voted FOR this proposal."
"If you AGREE, please mark your proxy FOR this resolution."
THIS PROPOSAL HAS BEEN SUBMITTED AT EACH OF THE PAST SEVEN ANNUAL MEETINGS
AND EACH TIME HAS BEEN SOUNDLY DEFEATED. THE BOARD AGAIN HAS CONSIDERED THE
PROPOSAL AND AGAIN RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" IT.
The Board believes that the election of Directors by classes enhances the
likelihood of continuity and stability in the Board and its policies. When
Directors are elected by classes, a change in the composition of a majority of
the Board normally requires at least two shareholder meetings, instead of one.
Board classification also encourages any person seeking to acquire control of U
S WEST to initiate such an action through arm's length negotiations with
management and the Board, who are in a position to negotiate a transaction that
is fair to all shareholders of U S WEST. With a classified Board, it is more
likely that a majority of the Directors of U S WEST will have prior U S WEST
Board experience, thereby facilitating planning for the business of U S WEST.
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION SECURITIES
----------------------------------- RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/SARS LTIP
SALARY COMPENSATION AWARD(S) -------------------- PAYOUTS
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) ($) ($) CLASS * (#) ($)(2)
- --------------------------- --------- --------- --------- ------------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RICHARD D. MCCORMICK 1995 $ 760,000 $ 450,000 $ 22,865 U 140,000 $2,083,292
President, CEO and 1994 $ 700,000 $ 560,000 $ 27,527 $ -- U 100,000 $ --
Chairman of the Board 1993 $ 700,000 $ 575,000 $ 8,439 $ -- U 45,000 $1,038,904
CHARLES M. LILLIS 1995 $ 490,000 $ 375,000 $ 632 $ 100,800(1) U 100,000 $1,488,098
Executive Vice President, 1994 $ 453,333 $ 295,000 $ 14,380 $ -- U 55,000 $ --
U S WEST & President 1993 $ 408,750 $ 275,000 $ 8,212 $ -- U 30,000 $ 742,081
and CEO, U S WEST
Media Group
SOLOMON D. TRUJILLO 1995 $ 342,500 $ 300,000 $ 10,468 U 130,000 $ 976,441
Executive Vice President, C 8,049
U S WEST & President 1994 $ 289,583 $ 170,000 $ 4,796 $ 428,750(1) U 25,000 $ --
and CEO, U S WEST 1993 $ 266,667 $ 135,000 $ 8,560 U 10,000 $ 227,581
Communications Group
CHARLES P. RUSS, III 1995 $ 370,000 $ 180,000 $ 15,050 U 40,000 $ 892,847
Executive Vice President
-- C 4,160
Law and Human Resources, 1994 $ 361,667 $ 170,000 $ 2,578 $ -- U 25,000 $ --
General Counsel and 1993 $ 350,000 $ 155,000 $ 1,185 $ 21,625(1) U 15,000 $ 445,257
Secretary
JAMES H. STEVER 1995 $ 350,000 $ 160,000 $ 4,219 U 30,000 $ 892,847
Executive Vice President
-- 1994 $ 340,000 $ 160,000 $ 6,831 U 25,000 $ --
Public Policy 1993 $ 328,849 $ 155,000 $ 0 U 15,000 $ 445,257
<CAPTION>
ALL OTHER
COMPENSATION
NAME AND PRINCIPAL POSITION ($)(3)
- --------------------------- -------------
<S> <C>
RICHARD D. MCCORMICK $ 68,182
President, CEO and $ 35,612
Chairman of the Board $ 65,092
CHARLES M. LILLIS $ 31,156
Executive Vice President, $ 27,067
U S WEST & President $ 33,026
and CEO, U S WEST
Media Group
SOLOMON D. TRUJILLO $ 29,461
Executive Vice President,
U S WEST & President $ 30,538
and CEO, U S WEST $ 24,606
Communications Group
CHARLES P. RUSS, III $ 26,241
Executive Vice President
--
Law and Human Resources, $ 29,381
General Counsel and $ 19,867
Secretary
JAMES H. STEVER $ 34,133
Executive Vice President
-- $ 43,192
Public Policy $ 39,189
</TABLE>
- ------------------------------
* U = U S WEST, Inc. Common Stock
C = Communications Stock
M = Media Stock
NOTE: On October 31, 1995, the shareholders of U S WEST approved reincorporation
from Colorado to Delaware and creation of two classes of common stock,
Communications Stock and Media Stock, which are intended to reflect separately
the performance of the Company's communications and multimedia businesses.
Options granted on or after the effective date, November 1, 1995, are options in
either Communications Stock or Media Stock. Options outstanding prior to
November 1, 1995, were reclassified as one option each of Communications Stock
and Media Stock. The exercise price of these reclassified options is based on
the weighted closing price Communications Stock and Media Stock as of November
1, 1995, which on a combined basis equals the full exercise price of the
original option.
(1) Mr. Lillis received 5,600 shares of Media Stock in November, 1995, subject
to a two-year restriction on sale or transferability. Mr. Trujillo received
10,000 shares of U S WEST common stock in February, 1994, subject to
restrictions on sale or transferability that lapse on one quarter of such
shares on the first through the fourth anniversaries of the grant date of such
shares. Mr. Russ received 500 shares of U S WEST common stock in June, 1993,
subject to a one-year restriction on sale or transferability. All of these
shares are entitled to dividends, if any, paid during the restriction period.
(2) Shares issued for the 1993 performance period were paid to participants
pursuant to a performance-based program implemented by the Human Resources
Committee in 1991 in connection with the restricted stock feature of the then
effective Stock Incentive Plan. In May, 1994, shareholders approved the
Executive Long-Term Incentive Plan. Yearly payouts of restricted shares, if
any, under the Executive Long-Term Incentive Plan are determined by the total
shareholder return achieved by the Company over a six-year performance period
that began in 1991. For 1993, Messrs. McCormick, Lillis, Trujillo, Russ and
Stever, respectively, received 24,231, 17,308, 5,308, 10,385 and 10,385 shares
of U S WEST common stock. As a result of the Company's negative total
shareholder return in 1994, no additional shares of restricted stock were paid
to participants. In 1995, total shareholder return was sufficiently positive
to offset the negative total shareholder return of 1994 and still permit a
payout of additional shares to participants. Messrs. McCormick, Lillis,
Trujillo, Russ and Stever, respectively, received 36,710, 26,222, 17,206,
15,733 and 15,733 shares each of Communications Stock and Media Stock as a
result of the total shareholder return in 1995. All of the shares paid for
1993 and 1995 are subject to a two-year restriction period on sale or
transferability, measured from the date of issuance, and all such shares shall
be entitled to dividends, if any, paid during such restriction period. At
December 31, 1995, Messrs. McCormick, Lillis, Trujillo, Russ and Stever,
respectively, held 24,231, 17,308, 12,808, 10,385 and 10,385 restricted shares
of Communications Stock, and 24,231, 22,908, 12,808, 10,385 and 10,385
restricted shares of Media Stock. At December 31, 1995, the aggregate value of
all shares of restricted stock held by Messrs. McCormick, Lillis, Trujillo,
Russ and Stever, respectively, was $1,323,618, $1,051,849, $699,637, $567,281
and $567,281.
8
<PAGE>
(3) The amounts in this column are attributable to (1) the Company matching
contribution under the Deferred Compensation Plan, (2) the Company matching
contribution under the SP/E, (3) the current dollar value of the remainder of
the premium paid under a split-dollar insurance arrangement, and (4) the
amount paid for the term insurance portion of the foregoing split-dollar
arrangement. The separate components of these amounts are set forth below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------
DEFERRED
COMPENSATION SAVINGS PLAN SPLIT-DOLLAR TERM PORTION
NAME COMPANY MATCH COMPANY MATCH PREMIUM VALUE PREMIUM
- -------------------------------- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
McCormick....................... $ 30,441 $ 7,500 $ 28,826 $ 1,415
Lillis.......................... $ 0 $ 7,500 $ 22,831 $ 825
Trujillo........................ $ 8,885 $ 7,500 $ 12,886 $ 220
Russ............................ $ 11,000 $ 7,500 $ 7,199 $ 542
Stever.......................... $ 9,697 $ 7,500 $ 16,415 $ 521
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------------
DEFERRED
COMPENSATION SAVINGS PLAN SPLIT-DOLLAR TERM PORTION
NAME COMPANY MATCH COMPANY MATCH PREMIUM VALUE PREMIUM
- -------------------------------- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
McCormick....................... $ 26,826 $ 7,500 $ 0 $ 1,286
Lillis.......................... $ 15,195 $ 7,188 $ 4,051 $ 633
Trujillo........................ $ 11,022 $ 7,324 $ 12,000 $ 192
Russ............................ $ 10,583 $ 7,500 $ 10,814 $ 484
Stever.......................... $ 16,126 $ 7,500 $ 19,131 $ 435
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
----------------------------------------------------------------------
DEFERRED
COMPENSATION SAVINGS PLAN SPLIT-DOLLAR TERM PORTION
NAME COMPANY MATCH COMPANY MATCH PREMIUM VALUE PREMIUM
- -------------------------------- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
McCormick....................... $ 27,139 $ 7,861 $ 29,014 $ 1,078
Lillis.......................... $ 8,646 $ 11,792 $ 12,073 $ 515
Trujillo........................ $ 2,998 $ 9,537 $ 11,908 $ 163
Russ............................ $ 0 $ 8,750 $ 10,667 $ 450
Stever.......................... $ 5,931 $ 9,827 $ 22,062 $ 1,369
</TABLE>
9
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted to the
named Executive Officers during 1995. The Company employed the Black-Scholes
option pricing model to develop the theoretical values set forth under the
"Grant Date Present Value" column. These stock options comprise a portion of the
named Executive Officers' total long-term compensation potential. As such, the
issued amounts are consistent with the Company's compensation philosophy as
outlined in the Report of the Human Resources Committee on Executive
Compensation, beginning on p. 13.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE GRANT DATE
SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE VALUE ($)
- ------------------------------------------------- ----------- ---------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Richard D. McCormick............................. 140,000 4.37% $ 43.750 9/1/05 $ 852,600(4)
Charles M. Lillis................................ 100,000 3.12% $ 43.750 9/1/05 $ 609,000(4)
Solomon D. Trujillo.............................. 30,000(3) 0.94% $ 41.250 7/3/05 $ 182,700(4)
100,000 3.12% $ 43.750 9/1/05 $ 609,000(4)
4,003(2) 0.12% $ 33.125 11/7/01 $ 14,371(5)
4,046(2) 0.13% $ 33.125 6/1/02 $ 14,768(5)
Charles P. Russ, III............................. 40,000 1.25% $ 43.750 9/1/05 $ 243,600(4)
4,160(2) 0.13% $ 33.750 1/4/03 $ 14,934(5)
James H. Stever.................................. 30,000 0.94% $ 43.750 9/1/05 $ 182,700(4)
</TABLE>
- ------------------------------
(1)
Except as otherwise noted, these stock options (i) were issued prior to
November 1, 1995 on shares of common stock of U S WEST, Inc., (ii) become
exercisable in one-third increments on the first, second and third
anniversaries of the date of grant, and (iii) include a reload feature. The
reload feature gives the optionee the right to receive a further option, at
the then current market price, for a number of shares equal to the number of
shares of stock surrendered by the optionee in payment of the exercise price
of the original option. Stock options issued prior to November 1, 1995, the
effective date of the creation of Communications Stock and Media Stock, were
reclassified as one option each of Communications Stock and Media Stock. The
exercise price of reclassified options is based on the weighted closing price
of Communications Stock and Media Stock as of November 1, 1995, which on a
combined basis equals the full exercise price of the original option.
(2)
These stock options become fully exercisable one year from the date of grant
and do not include a reload feature.
(3)
These stock options become fully exercisable on the third anniversary of the
date of grant.
(4)
This value reflects the standard application of the Black-Scholes option
pricing model to options issued on common stock of U S WEST, using the
following assumptions: volatility, 15.6%; dividend yield, 5.3% (based on a
weighted average dividend yield for the last five years), and a risk-free rate
of return of 6.5% based on the options being outstanding for the ten-year
option term.
(5)
This value reflects the standard application of the Black-Scholes option
pricing model to options issued on Communications Stock, using the following
assumptions: volatility, 19.6%; dividend yield, 6.4%; and a risk-free rate of
return of 5.4% to 5.6% based on the options being outstanding for a term
ranging from 71 months to 84 months.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
<TABLE>
<CAPTION>
FOR COMMUNICATIONS STOCK OPTIONS
-------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
VALUE AT FY-END (#) OPTIONS/SARS
SHARES ACQUIRED REALIZED -------------------------- ---------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. McCormick................ -- $ -- 221,959 285,000 $ 3,041,579 $ 3,036,231
Charles M. Lillis................... -- $ 633,831 -- 185,000 $ -- $ 1,921,760
Solomon D. Trujillo................. 1,951 $ 119,724 21,558 173,049 $ 282,827 $ 1,719,585
Charles P. Russ, III................ 874 $ 54,589 29,966 84,160 $ 413,968 $ 838,045
James H. Stever..................... -- $ -- 56,783 70,000 $ 759,322 $ 735,138
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
FOR MEDIA STOCK OPTIONS
-------------------------------------------------------
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
VALUE AT FY-END (#) OPTIONS/SARS
SHARES ACQUIRED REALIZED -------------------------- ---------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------ ----------------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. McCormick................ -- $ -- 221,959 285,000 $ 931,301 $ 644,896
Charles M. Lillis................... -- $ -- 60,000 185,000 $ 251,922 $ 386,074
Solomon D. Trujillo................. -- $ -- 31,558 165,000 $ 129,103 $ 321,076
Charles P. Russ, III................ -- $ -- 35,000 80,000 $ 145,758 $ 168,046
James H. Stever..................... -- $ -- 56,783 70,000 $ 226,099 $ 153,862
</TABLE>
U S WEST PENSION PLANS
The following table illustrates the maximum estimated annual benefits
payable to the named Executive Officers upon retirement pursuant to the U S WEST
Pension Plans, based upon the pension plan formula for specified final average
annual compensation and specified years of service:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ANNUAL ----------------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40 45
- ---------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 500,000................... $ 112,500 $ 160,000 $ 187,500 $ 225,000 $ 262,500 $ 293,750 $ 325,000
600,000................... 135,000 180,000 225,000 270,000 315,000 352,500 390,000
700,000................... 157,500 210,000 262,500 315,000 367,500 411,250 455,000
800,000................... 180,000 240,000 300,000 360,000 420,000 470,000 520,000
900,000................... 202,500 270,000 337,500 405,000 472,500 528,750 585,000
1,000,000.................. 225,000 300,000 375,000 450,000 525,000 587,500 650,000
1,100,000.................. 247,500 330,000 412,500 495,000 577,500 646,250 715,000
1,200,000.................. 270,000 360,000 450,000 540,000 630,000 705,000 780,000
1,300,000.................. 292,500 390,000 487,500 585,000 682,500 763,750 845,000
1,400,000.................. 315,000 420,000 525,000 630,000 735,000 822,500 910,000
</TABLE>
The calculation of "final average annual compensation," is the highest
average compensation for 60 consecutive months of the 120 consecutive month
period preceding retirement and includes compensation that would appear under
the "Salary" and "Bonus" columns of the Summary Compensation Table. As of
December 31, 1995, Messrs. McCormick, Lillis, Trujillo, Russ and Stever had 34,
10, 21, 3, and 29 actual years of service, respectively. Mr. Lillis is eligible
to receive a variable percentage of his final average annual compensation based
upon his age at the termination of his employment. (The applicable percentage is
26% at age 54 (his present age), which increases by varying increments from year
to year -- i.e., 9% through age 55, 5% per year through age 58, and 1% per year
thereafter.) Mr. Russ is entitled to a supplemental annual pension benefit of
$14,000 for each of his first seven years of service at U S WEST. This benefit
becomes payable on the earlier of his separation from service or his retirement
and is payable in a lump sum equal to the present value of the benefit at the
time of payment.
Benefits set forth in the preceding table are computed as a straight-life
annuity and are subject to deduction for Social Security.
EXECUTIVE AGREEMENTS
U S WEST has entered into change of control agreements with certain of its
officers, including the named Executive Officers. The change of control
agreements provide compensation and/or termination benefits to Executive
Officers under circumstances following a change of control of U S WEST. The
purpose of these agreements is to encourage the Executive Officers to continue
to carry out their duties in the event of a possible change of control. A
"Change of Control" is defined in these agreements as: (i) a change of control
that would have to be reported under Item 6(e) of Schedule 14A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), regardless of whether the
Company is subject to that reporting
11
<PAGE>
requirement; (ii) the acquisition by a party or certain related parties,
directly or indirectly, of twenty percent or more of the Company's voting
securities, unless pursuant to a transaction approved by the Board; (iii) any
period of two consecutive calendar years during which there shall cease to be a
majority of the Board comprised of 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; (iv) the Company becomes a party to a
transaction in which it will not be the surviving corporation or in which it
will be the surviving corporation but shares of its outstanding common stock
will be converted into shares of another company or other securities, cash or
property (other than a reincorporation or the establishment of a holding company
involving no change of ownership of the Company), (v) shareholders of the
Company approve a merger, plan of reorganization, consolidation or share
exchange, and immediately afterwards the holders of the Company's voting
securities prior thereto hold securities representing fifty percent or less of
the voting securities of the Company or other surviving entity and, also
immediately afterwards, members of the Company's Board prior to such transaction
constitute less than half of the Company's or other surviving entity's Board;
(vi) the Company redeems all shares of either class of common stock in exchange
for shares of a subsidiary that holds the assets attributed to that class;
distributes to all shareholders of either class of common stock the shares of a
subsidiary that holds the assets attributable to that class; converts all shares
of either class of common stock into the other class of common stock; or
distributes to shareholders, at a time when only one class of common stock
exists, shares of a subsidiary that holds all or substantially all of the assets
of the Company; or (vii) any other event that a majority of the Board, in its
sole discretion, deems to be a change of control. The agreements are effective
and are renewed automatically for three-year periods, and are subject to
cancellation by the Board upon not less than 90 days' notice prior to a
three-year renewal. These agreements provide that, in particular circumstances,
the officers will receive certain benefits upon termination of their employment
or if their job duties or compensation and benefits are substantially reduced or
otherwise substantially adversely modified following a Change of Control. In the
case of the Chief Executive Officer, these benefits will be paid in certain
circumstances if he voluntarily terminates employment following a Change of
Control.
Termination benefits, when payable under the agreements, are to be paid
immediately upon termination following a change of control and are to consist of
a sum equal to (i) three times the officer's annual base salary prior to
termination, (ii) three times the officer's annual bonus amount under the
Executive Short-Term Incentive Plan (such bonus amount to be calculated on the
basis of the extent to which the performance factors targeted by the Human
Resources Committee have been achieved, which shall be deemed to be 100% unless
the percentage actually achieved is greater than 100%, in which case the higher
percentage shall apply), and (iii) gross-ups of income sufficient to compensate
the officer for any excise taxes incurred in connection with the benefits paid
upon termination. The change of control agreements also provide for continued
health care benefits on terms substantially similar to those on which the
Company provides such benefits to retiring employees who are service
pension-eligible at the time of the Change of Control. Finally, upon
termination, the change of control agreements will modify the officer's pension
benefits to vest immediately if not already vested, and three years will be
added to both the officer's age and years of service.
U S WEST has entered into executive severance agreements with certain of its
officers, including each named Executive Officer other than the Chief Executive
Officer. These agreements set forth the severance benefits that would be payable
in certain circumstances other than a change of control, such as a termination
not for cause, termination in connection with a downsizing, or resignation of an
officer who elects not to accept reassignment to a comparable position. The
severance benefits payable in such circumstances, following the delivery of a
waiver and release by the Executive Officer, include: (i) an amount equal to two
times base salary; (ii) the amounts that would be otherwise due under the
Executive Short-Term Incentive Plan and the Executive Long-Term Incentive Plan,
in each case pro-rated to the date of termination and calculated on the basis of
full achievement of targeted performance levels; and (iii) financial counseling
services, or the cash value thereof, through the year following the year of
termination. The agreements also provide for the lapse of any restrictions on
certain grants of common stock issued to the officer, and the accelerated
vesting of a portion of the stock options issued to the officer. Finally, the
agreements include
12
<PAGE>
provisions for medical, dental and vision benefits following termination, and
provisions to protect confidentiality of Company information and to arbitrate
employment disputes. In the event of a change of control, the terms of the
executive severance agreements will be superseded by any applicable change of
control agreement.
In the event that Mr. Russ voluntarily resigns before December 31, 1996,
other than in circumstances involving a Change of Control or a diminution of his
status or compensation, he would be required to return to U S WEST a pro-rata
portion of $1,449,000 of the lump sum amount paid to him in 1992 upon employment
with U S WEST for amounts that would have otherwise been due to him from his
former employer. The pro rata portion would be based upon the time remaining
between his resignation and December 31, 1996.
REPORT OF HUMAN RESOURCES COMMITTEE ON EXECUTIVE COMPENSATION
HUMAN RESOURCES COMMITTEE. The Human Resources Committee of the Board (the
"Committee") is composed entirely of independent outside Directors who meet
regularly to oversee compensation levels and benefits plans to ensure that such
levels and plans are appropriately competitive with the marketplace and aligned
with shareholder interests. The Committee submits reports to the full Board
concerning its activities and decisions. None of these non-employee Directors
has interlocking or other relationships with other boards or the Company that
would call into question his/her independence as Committee members.
COMPENSATION PHILOSOPHY. The Committee has approved a compensation plan
designed to attract, motivate, and retain the high-caliber executives necessary
to achieve the Company's business strategies. The plan rewards those executives
for building long-term value for Company shareholders. The Company takes an
integrated and managed approach in developing its executive compensation
strategy and plans. This approach balances the overall needs of the Company,
including the unique business strategies and human resources initiatives of U S
WEST, the Communications Group and the Media Group.
Each compensation element supports the Company's mission, values, and
culture. The compensation principles that link the individual elements into an
integrated compensation strategy are as follows: (i) a compensation structure
that directly aligns the executives with the interests and concerns of
shareholders; (ii) competitive compensation within industry and peer companies;
(iii) customized business unit plans that reflect the unique characteristics of
the Company's diversified operations; (iv) individual compensation highly
correlated with personal performance and shareholder value creation; (v)
programs that foster executive movement across the organization; and (vi)
executive development and succession planning programs to provide long-term
organizational strength and flexibility.
The key elements of the Company's executive compensation program are base
salary, annual incentives, and long-term incentive compensation consisting
primarily of stock options and performance-based stock plans. In developing an
executive's total compensation package, the Committee considers each of these
key compensation elements as well as retirement benefits, insurance, and
perquisites.
Overall, the Committee believes that the Company's competitive market for
executive talent is broader than the industry peer groups established to compare
shareholder returns, which are set forth on the accompanying Performance Graphs.
Accordingly, the population of companies surveyed for compensation data extends
beyond the companies included in the peer group indices in the Performance
Graphs.
Total compensation is targeted near industry median benchmarks of surveyed
companies for each component of compensation. Superior performance will result
in above-market compensation delivered through variable-pay components.
Likewise, less than satisfactory performance will result in below-market
compensation.
BASE SALARY. U S WEST has in place a market-based three-band salary
structure for its executive employees. Assignment to one of the three salary
bands is based on level of responsibility, scope and impact of decision-making,
and internal and external comparability. For purposes of comparability and
competitive market pricing, the Company utilizes annual executive compensation
salary surveys prepared by nationally
13
<PAGE>
recognized independent compensation consulting firms. These surveys encompass
both the telecommunications and media industries, as well as surveys of
companies of similar size in other industries. On average, the Company seeks to
target executive base salary levels at the median range of surveyed companies.
To facilitate executive movement among U S WEST, Inc., Communications Group, and
Media Group, the Company has established comparable base salary opportunities
across company lines.
Executive salary reviews generally are conducted within a twelve to
twenty-four month cycle. Base salary adjustments may occur at the time of such
reviews and depend upon individual performance results, a change in job
responsibilities, competitive forces, and/or the overall financial condition of
the Company. Mr. McCormick's most recent salary treatment occurred in January
1995. At that time his base salary was increased to $760,000. The Board
considered Mr. McCormick's performance over the 1993 and 1994 performance period
and salary survey results. This salary increase represents a 4.2% annualized
increase from January 1993. Mr. McCormick's current base salary places him
within the median range of surveyed companies.
SHORT-TERM INCENTIVE COMPENSATION. The U S WEST Executive Short-Term
Incentive Plan (ESTIP) approved by shareholders in May, 1994 provides each named
Executive Officer the potential to earn annual cash awards based on the
achievement of pre-established performance goals. Participants include the Chief
Executive Officer and any individual employed by the Company at the end of any
calendar year who appears in the Summary Compensation Table of the Annual Proxy
Statement to Shareholders. The cash bonus pool from which the Company pays the
bonuses for the CEO and the other named Executive Officers is limited to 0.25%
of "Cash Provided by Operating Activities" for the annual performance period.
The Committee has discretion to pay any portion of this pool based on factors
including the Company's performance relative to pre-set financial, strategic,
and customer goals, as well as individual performance goals. Any amount of the
cash bonus pool not so paid may be added, at the Committee's sole discretion, to
the cash bonus pool that is available for any subsequent year or years. The
Committee has elected not to add unpaid portions of 1995's cash bonus pool to
the bonus pool for 1996 and subsequent years.
The pre-set performance goals for 1995 included U S WEST's consolidated net
income (20% weighting) and a weighted average roll-up of Communications Group
and Media Group business units goals (80% weighting). The business unit goals
for 1995 included net cash flow, operating income, strategic accomplishments,
and qualitative measures.
Mr. McCormick's target short term award opportunity is 80% of base salary.
This variable component of cash compensation maintains his "at risk"
compensation within the median target range of surveyed companies.
In determining the amount to be paid to Mr. McCormick for 1995 performance,
the Committee considered the above-mentioned pre-set performance goals for U S
WEST, Inc., Communications Group and Media Group. Mr. McCormick received ESTIP
compensation of $450,000, or 59.2% of his 1995 base salary.
LONG-TERM INCENTIVE COMPENSATION. For 1995, the Company's long-term
incentive compensation included performance-based restricted stock issued under
the U S WEST Executive Long-Term Incentive Plan (ELTIP) and stock options issued
under the amended U S WEST 1994 Stock Plan. Shareholders have approved both
plans.
During the past year, this combination of stock options and
performance-based restricted stock grants provided a strategic mix of
equity-based incentives that (i) continues to focus performance on the
attainment of long-term strategic objectives, (ii) provides incentive to the
executives for increasing total shareholder return, and (iii) provides
continuity throughout the officer body by rewarding long-term commitment to the
Company. The long-term compensation elements used for 1995 were:
PERFORMANCE-BASED RESTRICTED STOCK. For the six-year performance period
beginning January 1, 1991, a target number of restricted performance shares
of U S WEST stock was set for potential earn out by each Executive Officer,
including the named Executive Officers. A portion of such shares may be
14
<PAGE>
earned annually based upon total shareholder return. Recipients of
restricted stock grants have the rights and privileges of a shareholder with
respect to the shares, including the right to vote such shares and receive
dividends.
The original target number of performance shares granted was determined
by a market survey of the long-term incentive plans of 35 companies
(telecommunications industry or similar size). The performance grants were
converted to an annual full market value as a percent of salary and
multiplied by six (years of duration of the performance period) to establish
the target award for executives.
For purposes of this plan, shareholder return over the six-year
performance period is calculated annually as share price appreciation, plus
dividends, divided by the share price at the beginning of the six-year
performance period. Share price appreciation is derived using the average
beginning and end-of-year closing prices of U S WEST stock for a
20-business-day period commencing 10 business days prior to the end of each
year. Because of the multi-year orientation of this plan, if total
shareholder return is negative during a plan year, no payout would occur for
that year, and the negative total shareholder return would need to be offset
in the following year(s) before further payouts could occur.
Under this formula, U S WEST's consolidated total shareholder return for
1995 was a positive 53.9%. A reduction was made to the return of minus 18.9%
(a required makeup of 1994's negative return), which resulted in the total
net payout from the performance share pool of 35.0%. The shares paid to
participants for 1995 performance carry a two-year restriction on sale or
transferability. For 1995, Mr. McCormick received 36,710 restricted shares
each of Communications Stock and Media Stock worth $2,083,292.
STOCK OPTIONS. The Committee generally has elected to grant stock
options annually. The Company's stock option grants are designed to deliver,
together with all other long-term incentives, the potential for the
executive to earn a market-based percentage of salary dependent on future
stock performance. The Committee may take prior years' grants and
circumstances into consideration when setting current year grants. Stock
options granted during 1995 have an exercise price equal to the market price
of the Company's stock on the date of grant, vest in one-third increments
commencing one year from the grant date, and carry a ten-year term.
Mr. McCormick received a stock option grant for 140,000 U S WEST, Inc.
shares. The Committee believes that the number of option shares granted to
Mr. McCormick in 1995 is consistent with the Committee's total compensation
philosophy to link a substantial portion of the CEO's compensation directly
with the value created for shareholders. This option grant is consistent
with the average grants made to peer company CEOs as determined by market
survey data.
Coincident with the November 1, 1995, implementation of targeted stock,
all U S WEST, Inc. stock options, including those held by Mr. McCormick,
were reclassified as one option each of Communications Stock and Media
Stock. The grant price of these reclassified options is based on the
weighted closing price of Communications Stock and Media Stock as of
November 1, 1995, which on a combined basis equals the value of the original
grant.
SIGNIFICANT EVENTS AFFECTING FUTURE LONG-TERM COMPENSATION. In conjunction
with the implementation of targeted stock, the Board has approved new long-term
compensation programs for Communications Group, Media Group, and U S WEST
executives. These programs are designed to maintain direct alignment with
shareholders' interests by focusing executives' efforts on the strategic
imperatives that drive long-term value creation for the Communications Group and
Media Group shareholders.
Communications Group executives' long-term opportunity will
comprised of a combination of Communication Group stock options
and performance-based dividend equivalent units (DEUs) issued
under the U S WEST Communications Group Long-Term Incentive Plan,
which is being presented for shareholder vote at this Annual
Meeting (see page 6). The full text of the plan is set forth in
Appendix "A." A DEU represents the sum of
15
<PAGE>
regular cash dividends per share of Communications Stock, if any,
paid during a performance period under the plan. DEUs provide the
executive the opportunity to earn incentive compensation based on
the achievement of pre-established strategic and/or financial
goals. These goals are structured to focus the executive's
medium-term performance on the strategic imperatives that drive
long-term value creation for the Company's shareholders. The
initial DEU performance measurement period began in January 1996
and any awards earned under this plan will pay out in shares of
Communications Stock in 1998 and/or 1999.
Media Group executives' long-term incentive opportunity will be
comprised entirely of Media Group stock options. The shares
available for grant were established under the amended 1994 Stock
Plan.
Certain named Executive Officers' long-term incentive compensation
will be based on the combined long-term results of Communications
Group and Media Group. For the first measurement period, Mr.
McCormick's long-term incentive opportunity will be weighted
equally between the performance of Communications Group and Media
Group. These weightings will be reviewed annually by the Committee
and may be adjusted consistent with the needs of the business.
DEDUCTIBILITY OF COMPENSATION. The Committee has carefully considered
Section 162 (m) of the Internal Revenue Code and believes the Company's
pay-for-performance practices ensure that executive compensation is strongly
tied to performance. The Committee believes it is in the best interests of the
Company and its shareholders to comply with the new tax law while still
preserving the flexibility to reward executives consistent with the Company's
pay philosophy for each compensation element. Shareholders approved the ESTIP
and ELTIP on May 6, 1994 and the amended 1994 Stock Plan on October 31, 1995.
STOCK OWNERSHIP GUIDELINES. To encourage further growth in shareholder
value, the Board has approved stock ownership targets for the Executive Officers
of the Company. The Board established these targets because it believes that a
significant level of stock ownership provides a powerful incentive to manage the
Company as owners. The Committee reviews Executive Officers' stock ownership
annually and, at its discretion, may consider such ownership in the granting of
restricted shares and stock options. The target ownership level for the Chairman
and CEO equals 5 times base salary. At the end of 1995, Mr. McCormick held
Company stock valued at 12 times his 1995 salary.
CONCLUSION. It is the opinion of the Committee that U S WEST's integrated
executive compensation strategy aligns the Company's executive compensation
practices with corporate performance and the best interests of shareholders by
ensuring the continuity and ongoing development of a strong leadership team
fully aligned with our shareholders. We trust this letter and the accompanying
tables and graphs help you understand further the Company's compensation
philosophy, programs, and actions.
U S WEST, Inc. Board of Directors Human Resources Committee:
<TABLE>
<S> <C>
Remedios Diaz-Oliver Grant A. Dove (Chairman)
Marilyn Carlson Nelson Frank P. Popoff
</TABLE>
16
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPHS
CONSOLIDATED U S WEST PERFORMANCE
The following graph and chart compare the yearly change in cumulative total
shareholder return on the consolidated Company's common stocks, including the
reinvestment of dividends, with the return on the Standard & Poor's 500 Stock
Index and the "Regional Holding Company Group." On November 1, 1995, the Company
recapitalized its former single class of stock into Communications Stock and
Media Stock. The Performance Graph sets forth the return on $100 invested in U S
WEST common stock on December 31, 1990 over a 5-year period, and reflects a
composite return for the Communications Stock and Media Stock distributed on
November 1, 1995.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(A)
AMONG U S WEST CONSOLIDATED(B),
S&P 500 INDEX, AND REGIONAL HOLDING COMPANY GROUP(C)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
US WEST - CONSOLIDATED S&P 500 REGIONAL HOLDING COMPANY GROUP - WEIGHTED
<S> <C> <C> <C>
Dec-90 100 100 100
Dec-91 103 130 105
Dec-92 110 140 118
Dec-93 138 154 138
Dec-94 113 156 136
Dec-95 183 215 205
Value of $100.00 Invested
12/31/90
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1995
US WEST - Consolidated 100 103 110 138 113 183
S&P 500 100 130 140 154 156 215
RHCs - Weighted 100 105 118 138 136 205
</TABLE>
Assumes $100 invested on December 31, 1990 in the common stock of U S WEST,
the S&P 500 Index, and the Regional Holding Company Group.
Notes:
(a) Total return assumes the reinvestment of dividends.
(b) Combined returns from Communications Stock and U S WEST Media Stock.
(c) Consists of the regional holding companies, excluding U S WEST, that were
created upon the divestiture of American Telephone and Telegraph Company of
its local telephone operating companies. Includes the returns weighted by
market capitalization of Ameritech, Bell Atlantic, BellSouth, NYNEX, Pacific
Telesis, and SBC Communications.
SEPARATE COMMON STOCK GRAPHS
In addition to the required Performance Graph comparing the Company's
consolidated total return to shareholders, the Company has included two
additional performance graphs in order to define the peer groups against which
the performance of the Communications Group and the Media Group will be
compared. Each graph shows how the respective peer group performed against the
S&P 500 for the last
17
<PAGE>
4 years and 10 months and then charts the performance of the Company stock
relative to the Standard & Poor's 500 Stock Index and the customized peer group
index for the two-month period since the recapitalization. This presentation
allows the investors to compare the historical performance of the peer groups
relative to the S&P 500 in addition to the very short trading period that
includes Communications Stock and Media Stock.
For comparison of cumulative total shareholder return on Communications
Stock, the Company has established a customized peer group that includes
companies that offer communications services, including local telephone services
to business and residential customers in domestic geographic markets. The graph
below compares the "Communications Peer Group" to the Standard & Poor's 500
Stock Index over the last five years, including the period from December 31,
1990 to October 31, 1995, prior to the date that the Communications Stock began
trading as a separate class of stock. Beginning November 1, 1995, the graph has
been reindexed to assume $100 was invested in each of the Communications Stock,
the Standard & Poor's 500 Stock Index and the Communications Peer Group in order
to provide the returns on the Communications Stock relative to the indices since
the recapitalization. For the companies in the Communications Peer Group, the
returns of each such company have been weighted to reflect the relative stock
market capitalization as of the beginning of each period for which a return is
indicated.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(A) AMONG
U S WEST COMMUNICATIONS GROUP (SHOWN FOR NOVEMBER-DECEMBER 1995),
S&P 500 INDEX, AND COMMUNICATIONS PEER GROUP(B)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 - THROUGH OCT 95 COMMUNICATIONS PEER GROUP - WEIGHTED
<S> <C> <C>
Dec-90 100 100
Dec-91 130 109
Dec-92 140 122
Dec-93 154 140
Dec-94 156 136
Oct-95 202 188
Value of $100.00 Invested
12/31/90
US WEST - Communications Group S&P 500 - Oct 95 to Dec 95
Oct-95 100 100
Dec-95 121 107
<CAPTION>
<S> <C>
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Oct-95
Value of $100.00 Invested
12/31/90
Communications Peer Group - Weighted
Oct-95 100
Dec-95 109
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEC-90 DEC-91 DEC-92 DEC-93 DEC-94 OCT-95
US WEST Communications Group
S&P 500 100 130 140 154 156 202
Communications Peer Group - Weighted 100 109 122 140 136 188
</TABLE>
<TABLE>
<S> <C> <C>
OCT-95(C) DEC-95
US WEST Communications Group 100 121
S&P 500 100 107
Communications Peer Group - Weighted 100 109
</TABLE>
Assumes $100 invested on December 31, 1990 in the common stock of U S WEST,
the S&P 500 Index, and the Communications Peer Group -- Weighted.
18
<PAGE>
Notes:
(a) Total return assumes the reinvestment of dividends.
(b) Includes the returns weighted by market capitalization of Alltel, Ameritech,
Bell Atlantic, BellSouth, Cincinnati Bell, Frontier Corp, GTE, NYNEX, Pacific
Telesis Group, SBC Communications, and Southern New England Telecom.
(c) The returns of U S WEST Communications Group are calculated beginning
November 1, 1995, the Communications Stock's first day of regular trading.
For comparison of cumulative total shareholder return on Media Stock, the
Company has established a customized peer group that includes companies whose
mix of businesses is consistent with the Media Group's portfolio of domestic and
international businesses, including wireless communications networks, cable, and
multimedia content and services businesses. The graph below compares the "Media
Peer Group" to the Standard & Poor's 500 Stock Index over the last five years,
including the period from December 31, 1990 to October 31, 1995, prior to the
date that the Media Stock began trading as a separate class of stock. Beginning
November 1, 1995, the graph has been reindexed to assume $100 was invested in
each of the Media Stock, the Standard & Poor's 500 Stock Index and the Media
Peer Group in order to provide the returns on the Media Stock relative to the
indices since the recapitalization. For the companies in the Media Peer Group,
the returns of each such company have been weighted to reflect the relative
stock market capitalization as of the beginning of each period for which a
return is indicated.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(A) AMONG
U S WEST MEDIA GROUP (SHOWN ONLY FOR NOVEMBER - DECEMBER 1995),
S&P 500 INDEX, AND MEDIA PEER GROUP(B)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
S&P 500 - THROUGH OCT 95 MEDIA PEER GROUP - WEIGHTED
<S> <C> <C> <C>
Dec-90 100 100
Dec-91 130 125
Dec-92 140 145
Dec-93 154 199
Dec-94 156 168
Dec-95 202 175
Value of $100.00 Invested
12/31/90
US West - Media Group S&P 500 - Oct 95 to Dec 95 Media Peer Group - Weighted
Oct-95 100 100 100
33572 101 107 106
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEC-90 DEC-91 DEC-92 DEC-93 DEC-94 OCT-95
US WEST Media Group
S&P 500 100 130 140 154 156 202
Media Peer Group - Weighted 100 125 145 199 168 175
</TABLE>
<TABLE>
<S> <C> <C>
OCT-95(C) DEC-95
US WEST Media Group 100 101
S&P 500 100 107
Media Peer Group - Weighted 100 106
</TABLE>
Assumes $100 invested on December 31, 1990 in the common stock of U S WEST,
the S&P 500 Index, and the Media Peer Group -- Weighted.
19
<PAGE>
Notes:
(a) Total return assumes the reinvestment of dividends.
(b) Includes for the period from December 31, 1990 to October 31, 1995, the
returns weighted by market capitalization of Cablevision Systems, Comcast
Corp, Dow Jones & Co, Gannett Co., Jones Intercable, TCA Cable TV. Tele-Comm
-- TCI Group, Times Mirror, Tribune Co, US Cellular Corp, and Vanguard
Cellular System. Commencing November 1, 1995, also includes the returns
weighted by market capitalization of AirTouch Communications, Cellular
Communications, Cox Communications, International Family Entertainment, and
United International Holdings.
(c) The returns of U S WEST Media Group are calculated beginning November 1,
1995, the Media Stock's first day of regular trading.
OTHER BUSINESS
Neither the Board nor management intends to bring before the meeting any
business other than the matters referred to in the Notice of Annual Meeting and
this Proxy Statement. The Board is aware that a holder of 47 shares of
Communications Stock, purchased on or about February 20, 1996, may present at
the Annual Meeting a proposal that the Board renegotiate previously-executed
Change of Control Agreements with key executives of the Company to eliminate
payments to executives who leave the employment of the Company following the
occurrence of one of the constructive termination events set forth in those
Agreements (which the proponent characterizes as payments to executives who
"voluntarily quit" after a change of control) unless and until such a policy is
approved by shareholder vote. If such a proposal is properly brought before the
meeting, or any adjournment thereof, the persons named in the proxy intend to
use their discretionary authority to vote against it. The Company also is aware
that this same shareholder has filed preliminary proxy material with the SEC
regarding its proposal. Should the shareholder distribute its proxy material,
the Company may send additional proxy material to shareholders. If any other
business should properly come before the Annual Meeting, the persons named in
the proxy will vote on such matters according to their best judgment.
SOLICITATION OF PROXIES
The cost of soliciting proxies in the accompanying form will be borne by U S
WEST. U S WEST has retained Beacon Hill Associates, Inc. to aid in the
solicitation of proxies at a fee of approximately $17,500 plus out-of-pocket
expenses. Proxies may be solicited also in person or by telephone or telegram by
the Directors, Executive Officers, and employees of U S WEST, who will not
receive additional compensation for such activities.
Brokers, nominees and other similar record holders will be requested to
forward proxy solicitation material to beneficial owners and, upon request, will
be reimbursed by U S WEST for their out-of-pocket expenses.
------------------------
SUBMISSION OF SHAREHOLDER PROPOSALS
Proposals intended for inclusion in next year's Proxy Statement should be
sent to the Secretary of U S WEST at 7800 East Orchard Road, Suite 200,
Englewood, Colorado 80111, and must be received by December 9, 1996.
FINANCIAL STATEMENTS AVAILABLE
CONSOLIDATED FINANCIAL STATEMENTS FOR U S WEST AND ITS SUBSIDIARIES, AS WELL
AS FINANCIAL STATEMENTS FOR THE COMMUNICATIONS GROUP AND THE MEDIA GROUP, ARE
INCLUDED AS APPENDICES B, C AND D TO THIS PROXY STATEMENT. ADDITIONAL COPIES OF
THESE STATEMENTS AND THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1995 (EXCLUDING EXHIBITS, UNLESS SUCH EXHIBITS HAVE BEEN SPECIFICALLY
INCORPORATED BY REFERENCE THEREIN), MAY BE OBTAINED WITHOUT CHARGE FROM THE
TREASURER OF U S WEST, 7800 EAST ORCHARD ROAD, SUITE 200, ENGLEWOOD, COLORADO
80111. THE ANNUAL REPORT ON FORM 10-K IS ALSO ON FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION, WASHINGTON, D.C. 20549, AND THE NEW YORK STOCK EXCHANGE.
Dated: April 8, 1996
20
<PAGE>
APPENDIX A
U S WEST COMMUNICATIONS GROUP
LONG-TERM INCENTIVE PLAN
SECTION I
PURPOSE
The purpose of the U S WEST Communications Group Long-Term Incentive Plan
(the "Plan") is to offer key executives of the U S WEST Communications Group
("Communications Group") and U S WEST, Inc. (the "Company") the opportunity to
earn incentive compensation based on the accomplishment of strategic goals.
These goals are designed to deliver sustained long-term returns to stockholders
of the Company. Payouts under the Plan shall be determined based on the
achievement of these pre-established and objective goals. Specifically, the Plan
grants incentive compensation based upon a percentage (ranging from 0% to 100%)
of the sum of regular cash dividends, if any, paid on Communications Group
common stock ("Communications Stock") over a multiple-year performance period.
The Plan is effective from January 1, 1996 to December 31, 2000, contingent on
the approval of stockholders of the Company. Distributions under the Plan are
intended to qualify as "performance based compensation" under section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code") and the regulations
promulgated thereunder.
SECTION II
DEFINITIONS
2.1 "Change of Control" shall mean any of the following:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or
becomes a beneficial owner of (or otherwise has the authority to vote),
directly or indirectly, securities representing twenty percent (20%) or more
of the total voting power of all of the Company's then outstanding voting
securities, unless through a transaction arranged by, or consummated with
the prior approval of the Company's Board of Directors; or
(ii) any period of two (2) consecutive calendar years during which there
shall cease to be a majority of the Company's Board of Directors comprised
as follows: individuals who at the beginning of such period constitute the
Company's Board of Directors and any new director(s) whose election by the
Company's Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved; or
(iii) the Company becomes a party to a merger, consolidation or share
exchange in which either (1) the Company will not be the surviving
corporation or (2) the Company will be the surviving corporation and any
outstanding shares of common stock of the Company will be converted into
shares of any other company (other than a reincorporation or the
establishment of a holding company involving no change of ownership of the
Company) or other securities or cash or other property (excluding payments
made solely for fractional shares); or
(iv) for a Participant who has executed a Change of Control Agreement
with the Company, any event that constitutes a "Change of Control" as set
forth in such Change of Control Agreement, or any other event that a
majority of the Company's Board of Directors, in its sole discretion, shall
determine constitutes a Change of Control.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.3 "Company" shall mean U S WEST, Inc. and any successor thereof.
2.4 "Committee" shall mean the Human Resources Committee of the Company's
Board of Directors, or its delegate.
A-1
<PAGE>
2.5 "Communications Group" shall mean the U S WEST Communications Group of
the Company.
2.6 "Communications Stock" shall mean the common stock, $.01 par value,
issued by the Company that tracks the performance of the Communications Group.
2.7 "Disability" shall mean long-term disability as determined under the
provisions of any Company or Communications Group disability plan maintained for
the benefit of eligible employees of the Company or the Communications Group.
2.8 "Dividend Equivalent Unit" or "DEU" shall mean a unit representing the
sum of regular cash dividends on a share of Communications Stock paid during a
Performance Period.
2.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2.10 "Participant" shall mean an executive or key employee of the Company or
the Communications Group whom the Committee has determined shall participate in
the Plan pursuant to Section III below.
2.11 "Performance Period" shall mean the period of time during which the
performance of the Company and/or the Communications Group is measured for
purposes of determining a Participant's payout under the Plan, as set forth in
Section IV below.
2.12 "Plan" shall mean the U S WEST Communications Group Long-Term Incentive
Plan.
2.13 "Restricted Stock" shall mean shares of Communications Stock that are
subject to a vesting period and to any other terms and conditions determined by
the Committee for any Participant, as set forth in the Participant's Restricted
Stock Agreement.
2.14 "Retirement" or "Retires" shall mean for any Participant, that such
Participant has retired from the Company or the Communications Group and
currently is eligible to receive a service pension benefit under the U S WEST
Pension Plan or a pension benefit under any individually negotiated, custom
written agreement or arrangement executed by a duly authorized representative of
the Company, the Communications Group or any subsidiary of the Company and the
Participant.
SECTION III
ELIGIBILITY
Participation in the Plan shall be limited to executives and key employees
of the Company and the Communications Group, as determined by the Committee. The
Committee members all qualify as "outside directors" within the meaning of Code
section 162(m).
SECTION IV
PERFORMANCE PERIODS
The Plan shall be effective for four (4) Performance Periods. The first
Performance Period shall have a duration of two calendar years, commencing on
January 1, 1996, and terminating on December 31, 1997. Each of the other
remaining Performance Periods shall have a duration of three calendar years, as
follows: the second Performance Period shall commence on January 1, 1996, and
shall terminate on December 31, 1998; the third Performance Period shall
commence on January 1, 1997, and shall terminate on December 31, 1999; and the
fourth Performance Period shall commence on January 1, 1998, and shall terminate
on December 31, 2000.
SECTION V
DIVIDEND EQUIVALENT UNITS
At the beginning of each Performance Period, upon selection for
participation in the Plan, and upon such other occasions as the Committee shall
determine, the Committee shall assign to a Participant Dividend Equivalent Units
("DEUs"), each of which shall represent the sum of regular cash dividends, if
any, on a share of Communications Stock paid during a Performance Period.
A-2
<PAGE>
SECTION VI
PAYMENT OF SHARES
6.1 CALCULATION OF ACTUAL PAYOUT VALUE. At the conclusion of each
Performance Period, the total number of DEUs granted to a Participant shall be
multiplied by the total dividend payout per share of Communications Stock during
the Performance Period. The resulting product shall be equal to the
Participant's maximum payout value for such Performance Period. The
Participant's actual payout value shall be determined by applying a percentage,
not to exceed one hundred percent (100%), to the Participant's maximum payout
value. Such percentage shall be determined by comparing the performance of the
Company and/or the Communications Group to the payout formula established by the
Committee, as provided in Section VII below.
6.2 FORM AND MANNER OF PAYOUT. The DEU award payment to each Participant
shall be made in shares of Communications Stock and shall be determined by
dividing the actual payout value by the average closing price of Communications
Stock over a twenty (20) trading day period. Such period shall commence ten (10)
trading days prior to the end of the Performance Period. Any shares of
Communications Stock payable to a Participant shall be paid as soon as
practicable following the Performance Period. At the discretion of the
Committee, such Communications Stock may be Restricted Stock. The Participant
shall be entitled to certificates representing shares of such Restricted Stock
only if the Participant abides by all terms and conditions of the underlying
Restricted Stock Agreement, to the extent those conditions are not waived by the
Committee in its sole discretion. At the discretion of the Committee, dividends,
if any, paid on shares of Restricted Stock during the vesting period shall be
paid to the Participant. Such dividends shall be payable in cash, shares of
Communications Stock or Restricted Stock as determined by the Committee in its
sole discretion.
6.3 TAXATION. Any shares of Communications Stock paid pursuant to this
Plan are taxable at the time they are paid unless they are paid in the form of
Restricted Stock. Restricted Stock is taxable upon vesting.
6.4 MAXIMUM PAYOUT; SHARES AVAILABLE. Subject to the adjustments set forth
in Section IX, no Participant shall be entitled to receive more than 200,000
DEUs for any Performance Period, and the maximum aggregate number of shares of
Communications Stock that may be paid over the life of this Plan is 1,300,000.
SECTION VII
PERFORMANCE GOALS
Within 90 days of the commencement of each Performance Period, the Committee
shall establish specific, objective, performance goals and a payout formula in
connection with such performance goals. The performance goals shall be based on
one or more of the following performance measures and/or the Company or the
Communications Group: financial results; revenue; productivity and efficiency;
service and customer care; and employees' and/or management's satisfaction.
(a) Financial results shall be measured in terms of one or more of the
following: free cash flow; operating cash flow; cash operating income (Earnings
Before Interest, Taxes, Depreciation and Amortization ("EBITDA")); net income;
earnings per share; total stockholder return; and relative stockholder return.
(b) Revenue shall be measured in terms of one or more of the following:
revenue expressed in dollars or percent growth; revenue per access line; new
product revenue expressed in dollars; percent of revenue or percent growth; and
market share.
(c) Productivity and efficiency shall be measured in terms of one or more of
the following: revenue per employee; labor dollars as a percent of revenue; cash
outlay per access line; and general and administrative expense as a percent of
revenue.
(d) Service and customer care shall be measured in terms of one or more of
the following: customer access; customer commitments met; held orders; and
overall customer satisfaction, as measured by survey.
A-3
<PAGE>
(e) Employees' and management's satisfaction shall be measured by survey.
SECTION VIII
SPECIAL DISTRIBUTION RULES
8.1 CHANGE OF CONTROL. In the event of a Change of Control, the following
shall occur:
(a) For any DEUs issued in any calendar year(s) prior to the date of the
Change of Control, the total dividend payout shall be determined as if the
Change of Control occurred on the date on which the pre-set Performance
Period is scheduled to end, as set forth in Section IV. For any DEUs issued
in the calendar year of the Change of Control, the total dividend payout
shall be determined as if the Change of Control occurred on the date on
which the pre-set Performance Period is scheduled to end, calculated on a
pro rata basis for the amount of time elapsed in that calendar year;
(b) The value of dividends yet to be paid in any current Performance
Period shall be valued at the amount of the most recent dividend paid prior
to the Change of Control, and assuming that dividends would continue to be
paid for the full duration of such Performance Period with the same
frequency as prior to the Change of Control;
(c) The performance goals of the Company for the Performance Period
shall be deemed to have been met in full;
(d) The Participant shall be paid immediately the number of shares of
Communications Stock, or its equivalent value, that results in his or her
case from the foregoing provisions. Any such shares of Communications Stock
shall not be Restricted Stock; and
(e) Any vesting period applicable to Restricted Stock previously issued
under the Plan shall lapse immediately.
8.2 DEATH OR DISABILITY. If a Participant dies or becomes Disabled during
any Performance Period, then solely for purposes of the Plan, the Participant
shall be deemed to have died or become Disabled as of the last day of the
calendar quarter during which the Participant died or became Disabled, and the
benefit, if any, payable under the Plan to the Participant or his or her estate
shall be paid in the same manner set forth in Subsection 8.1, substituting in
each instance, as applicable, the term "death" or "Disability" for the term
"Change of Control."
8.3 RETIREMENT. If a Participant Retires during any Performance Period (i)
any Restricted Stock issued under the Plan shall continue to vest in accordance
with the vesting schedule established at the time such Restricted Stock was
issued and shall continue to be subject to all other terms and conditions of the
underlying Restricted Stock Agreement, (ii) the DEUs held by such Participant
shall be valued as if the last day of any current Performance Period is the last
day of the calendar quarter during which the Participant Retires, and (iii) any
shares of Communications Stock payable to the Participant shall be calculated at
the end of the Performance Period and paid to the Participant pursuant to the
provisions of Section VI; provided, however, that the continuation of vesting
and of participation in the Plan shall be contingent upon such Participant's
execution and delivery to the Company, on or prior to the effective date of the
Participant's Retirement, of the Company's standard "Waiver & Release" form,
available from the Human Resources Department of the Company. If, however, the
Committee in its sole discretion determines that, prior to the end of the
Performance Period, the Participant 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 and/or the Communication
Group or engaged in providing any goods or services that are substantially the
same as goods or services provided or under development by the Company and/or
the Communications Group, unless the Committee in its sole discretion determines
otherwise, or unless the Participant is in full compliance with the Company's
Policy on Service on Outside Boards of Directors, as
A-4
<PAGE>
interpreted solely by the Company's Senior Management Compliance Committee, the
Participant immediately shall forfeit all DEUs and Restricted Stock granted
under the Plan, and no payments of Communications Stock shall thereafter be
made. The foregoing provisions apply unless otherwise determined by the
Committee in its sole discretion.
8.4 OTHER TERMINATION. Unless the Committee in its sole discretion
determines otherwise, if a Participant's employment terminates for any other
reason, the Participant immediately shall forfeit all DEUs and Restricted Stock
granted under the Plan, and no payments of Communications Stock shall thereafter
be made.
SECTION IX
ADJUSTMENT OF DEUS OR SHARES OF COMMUNICATIONS STOCK
In the event of any change in the common stock of the Company by reason of
any consolidation, combination, liquidation, reorganization, recapitalization,
stock dividend, stock split, split-up, split-off, spin-off, combination of
shares, exchange of shares or other like change in capital structure of the
Company, the number of DEUs and the maximum number of shares of Communications
Stock remaining for issue under the Plan shall be adjusted appropriately by the
Committee at or about the time of such event, provided that each Participant's
position with respect to DEUs or shares of Communications Stock or other
interests payable under this Plan shall not, as a result of such adjustment, be
worse than it had been immediately prior to such event. Any fractional DEUs,
shares or other interests resulting from such adjustment shall be rounded up to
the next whole DEU, share or other interest, as the case may be. To the extent
that any event set forth in this Section IX constitutes a Change of Control for
any participant, the provisions of this Section IX shall apply prior to any
calculation made pursuant to Subsection 8.1.
SECTION X
ARBITRATION
10.1 SCOPE OF ARBITRATION. Any claim, controversy or dispute between a
Participant and the Company or its subsidiaries or affiliated companies, 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 Plan; 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; 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 a Participant and the
Company or the Communications Group that are not included for arbitration are
claims by the Participant for workers' compensation or unemployment compensation
benefits and/or claims for benefits under a benefit plan maintained by the
Company or the Communications Group, if the plan does not provide for
arbitration of such disputes. IN CONSIDERATION OF ANY DEU, COMMUNICATIONS STOCK
OR ANY RESTRICTED STOCK GRANTED TO A PARTICIPANT UNDER THE TERMS OF THE PLAN,
SUCH PARTICIPANT SHALL VOLUNTARILY, KNOWINGLY AND INTELLIGENTLY WAIVE ANY RIGHT
SUCH PARTICIPANT 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.
SectionSection 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 Plan for arbitration, shall apply to
any common law claims.
10.2 ARBITRATION PROCEEDINGS. 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 to the
Participant's employment with the Company or the Communications Group
A-5
<PAGE>
or to the termination of the Participant's employment shall be conducted under
the AAA Employment Dispute Resolution Rules, effective November 1993. The
arbitrator shall be chosen from a state other than the Participant's state of
residence and other than Colorado. Other than as set forth in this Plan, 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 Plan shall be confidential. The parties shall
share equally the hourly fees of the arbitrator. The Company or the
Communications Group, as appropriate, 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 in 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.
SECTION XI
MISCELLANEOUS PROVISIONS
11.1 ASSIGNMENT OR TRANSFER. No DEUs or other interest or rights under the
Plan shall be subject in any manner to anticipation, hypothecation, alienation,
sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by
creditors of the Participant or the Participant's beneficiary.
11.2 COSTS AND EXPENSES. The costs and expenses of administering the Plan
shall be borne by the Company and shall not be charged against any Participant.
11.3 TAXATION. The Company shall have the right to deduct from any Plan
distribution any federal, state or local income and employment taxes that it is
required by law to withhold.
11.4 OTHER INCENTIVE PLANS. The adoption of this Plan does not preclude
the adoption by appropriate means of any other incentive plan for employees of
the Company or the Communications Group.
11.5 EFFECT ON EMPLOYMENT. Nothing contained in this Plan or any related
agreement or any agreement referred to herein shall affect, or be construed as
affecting, the terms of employment of any Participant except to the extent
specifically provided. Nothing contained in this Plan or any related agreement
or any agreement referred to herein shall impose, or be construed as imposing,
any obligation on (i) the Company or the Communications Group to continue the
employment of any Participant or (ii) any Participant to remain in the employ of
the Company.
11.6 AMENDMENT OF PLAN. The Committee shall have the right to amend,
modify, suspend or terminate this Plan at any time, provided that, in the case
of Participants who are subject to Section 16(a) of the Exchange Act, no
amendment shall be made that (i) materially increases the benefits accruing to
such Participants, (ii) materially increases the number of shares of common
stock that may be issued under this Plan, or (iii) materially modifies the
requirements of eligibility for such Participants, unless such amendment is made
by or with the approval of stockholders. The Committee or its designee shall be
authorized to make any other amendments to the Plan.
11.7 FEDERAL SECURITIES LAW. With respect to grants of Communications
Stock to individuals subject to Section 16 of the Exchange Act, the Company
intends that the provisions of this Plan and all transactions effected in
accordance with the Plan shall comply with Rule 16b-3 under the Exchange Act.
Accordingly, the Committee shall administer and interpret the Plan to the extent
practicable consistently with such rule.
11.8 SECURITIES LAW COMPLIANCE. No shares of common stock shall be issued
under this Plan until all applicable securities law and other legal and stock
exchange requirements have been satisfied. The Committee may require the placing
of stop-orders and restrictive legends on certificates for common stock as it
deems appropriate.
A-6
<PAGE>
11.9 ADMINISTRATION. The Plan shall be administered by the Committee,
which may adopt such rules,
regulations and guidelines as it determines necessary for the administration of
the Plan. The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated duties as aforesaid may employ
one or more persons to render advice on any responsibility that the Committee or
such person may have under the Plan. The Committee may employ such legal or
other counsel, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion or computation received
from any such counsel, consultant or agent. Expenses incurred by the Committee
in the engagement of such counsel, consultant or agent shall be paid by the
Company. The Company shall indemnify members of the Committee and any agent of
the Committee who is an employee of the Company against any and all liabilities
or expenses to which they may be subject by reason of any act or failure to act
with respect to their duties on behalf of the Plan, except in circumstances
involving such person's gross negligence or willful misconduct.
11.10 GOVERNING LAW. This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws of the State of
Colorado.
SECTION XII
ADOPTION OF THE PLAN
This Plan shall become effective on the date it is approved by stockholders
of the Company. All awards granted under this Plan shall be contingent on such
approval by stockholders.
SECTION XIII
TERMINATION OF THE PLAN
The Plan shall terminate on December 31, 2000, except that any outstanding
DEUs granted prior to the termination of the Plan shall remain subject to all
terms and conditions of the Plan as if the Plan were not terminated. Any
Restricted Stock granted under the Plan shall continue to vest in accordance
with the vesting schedule established at the time such Restricted Stock was
issued and shall continue to be subject to all other terms and conditions of the
underlying Restricted Stock Agreement, unless the Committee determines otherwise
in its sole discretion.
A-7
<PAGE>
APPENDIX B
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
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<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>
APPENDIX C
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>
APPENDIX D
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>
[LOGO]
PROXY CARD
- -----------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS ON JUNE 7, 1996.
The undersigned hereby appoints Remedio Diaz-Oliver, Grant A. Dove and Shirley
M. Hufstedler, and each of them, proxies, with the powers the undersigned would
possess if personally present, and with full power of substitution, to vote all
common shares of the undersigned in U S WEST, Inc. at the Annual Meeting to be
held at the Benton Auditorium at Iowa State University, beginning at 10:00 a.m.,
on June 7, 1996, and at any adjournments or postponements thereof, upon all
subjects that may properly come before the Annual Meeting including the matters
described in the Proxy Statement furnished herewith, subject to any directions
indicated on the reverse side of this card. IF NO DIRECTIONS ARE GIVEN, THE
PROXIES WILL VOTE FOR THE ELECTION OF ALL LISTED NOMINEES, IN ACCORDANCE WITH
THE DIRECTORS' RECOMMENDATIONS ON THE OTHER SUBJECTS LISTED ON THE REVERSE SIDE
OF THIS CARD AND AT THEIR DISCRETION ON ANY OTHER MATTER THAT MAY PROPERLY COME
BEFORE THE ANNUAL MEETING.
Your vote for the election of Directors may be indicated on the reverse. The
nominee for Class I is Allen F. Jacobson, and the nominees for Class II are
Pierson M. Grieve, Richard D. McCormick and Marilyn Carlson Nelson.
<PAGE>
[LOGO]
COMMUNICATIONS GROUP
To vote your shares for all Director nominees, mark the "For" box on item "A."
To withhold voting for all nominees, mark the "Withhold" box. If you do not wish
your shares voted "For" a particular nominee, mark the "For All Except" box and
enter the name(s) of the exception(s) in the space provided; your shares will be
voted for the remaining nominees.
- --------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "FOR"
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
A. Election of Directors in Class I and Class II Withhold For All Except
Exceptions ----------------------------------------------------------------- For / / / / / /
B. Ratification of Auditors For / / Against / / Abstain / /
C. Approval of U S WEST Communications Group Long-Term Incentive Plan For / / Against / / Abstain / /
- ------------------------------------------------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "AGAINST" THE SHAREHOLDER PROPOSAL REGARDING
- ------------------------------------------------------------------------------------------------------------------------
1. Elimination of Classified Board For / / Against / / Abstain / /
</TABLE>
Date ________________________, 1996
Sign here as name appears
x _________________________________
x _________________________________
Please sign this proxy and return
promptly whether or not you plan to
attend the Annual Meeting.
<PAGE>
[LOGO]
PROXY CARD
- -----------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS ON JUNE 7, 1996.
The undersigned hereby appoints Remedio Diaz-Oliver, Grant A. Dove and Shirley
M. Hufstedler, and each of them, proxies, with the powers the undersigned would
possess if personally present, and with full power of substitution, to vote all
common shares of the undersigned in U S WEST, Inc. at the Annual Meeting to be
held at the Benton Auditorium at Iowa State University, beginning at 10:00 a.m.,
on June 7, 1996, and at any adjournments or postponements thereof, upon all
subjects that may properly come before the Annual Meeting including the matters
described in the Proxy Statement furnished herewith, subject to any directions
indicated on the reverse side of this card. IF NO DIRECTIONS ARE GIVEN, THE
PROXIES WILL VOTE FOR THE ELECTION OF ALL LISTED NOMINEES, IN ACCORDANCE WITH
THE DIRECTORS' RECOMMENDATIONS ON THE OTHER SUBJECTS LISTED ON THE REVERSE SIDE
OF THIS CARD AND AT THEIR DISCRETION ON ANY OTHER MATTER THAT MAY PROPERLY COME
BEFORE THE ANNUAL MEETING.
Your vote for the election of Directors may be indicated on the reverse. The
nominee for Class I is Allen F. Jacobson, and the nominees for Class II are
Pierson M. Grieve, Richard D. McCormick and Marilyn Carlson Nelson.
<PAGE>
[LOGO]
MEDIA GROUP
To vote your shares for all Director nominees, mark the "For" box on item "A."
To withhold voting for all nominees, mark the "Withhold" box. If you do not wish
your shares voted "For" a particular nominee, mark the "For All Except" box and
enter the name(s) of the exception(s) in the space provided; your shares will be
voted for the remaining nominees.
- --------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "FOR"
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
A. Election of Directors in Class I and Class II Withhold For All Except
Exceptions ----------------------------------------------------------------- For / / / / / /
B. Ratification of Auditors For / / Against / / Abstain / /
C. Approval of U S WEST Communications Group Long-Term Incentive Plan For / / Against / / Abstain / /
- ------------------------------------------------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "AGAINST" THE SHAREHOLDER PROPOSAL REGARDING
- ------------------------------------------------------------------------------------------------------------------------
1. Elimination of Classified Board For / / Against / / Abstain / /
</TABLE>
Date ________________________, 1996
Sign here as name appears
x _________________________________
x _________________________________
Please sign this proxy and return
promptly whether or not you plan to
attend the Annual Meeting.
