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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8611
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U S WEST, INC.
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A DELAWARE CORPORATION I.R.S. EMPLOYER IDENTIFICATION
NO. 84-0926774
7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111
TELEPHONE NUMBER (303) 793-6500
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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U S WEST Communications Group Common Stock New York Stock Exchange
($0.01 per share, par value) Pacific Stock Exchange
U S WEST Media Group Common Stock New York Stock Exchange
($0.01 per share, par value) Pacific Stock Exchange
Liquid Yield Option Notes, due 2011 New York Stock Exchange
(convertible to common stock under certain circumstances)
7.96% Trust Originated Preferred Securities New York Stock Exchange
(Liquidation Amount $25 per Preferred Security)
8.25% Trust Originated Preferred Securities New York Stock Exchange
(Liquidation Amount $25 per Preferred Security)
U S WEST Series D Convertible Preferred Stock New York Stock Exchange
($1.00 per share, par value)
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Securities registered pursuant to Section 12(g) of the Act:
None
At January 31, 1997, 480,824,958 shares of U S WEST Communications Group
common stock and 606,095,033 shares of U S WEST Media Group common stock were
outstanding.
At January 31, 1997, the aggregate market value of the U S WEST
Communications Group voting stock held by non-affiliates was approximately
$15,705,692,598, and the aggregate market value of the U S WEST Media Group
voting stock held by non-affiliates was approximately $11,164,731,957.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ____
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's 1996 Annual Report to Shareholders are
incorporated by reference into Parts I, II and IV.
Portions of the Registrant's definitive Proxy Statement dated April 7, 1997,
to be issued in connection with the 1997 Annual Meeting of Shareholders are
incorporated by reference into Parts II and III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K /X/.
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TABLE OF CONTENTS
PART I
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ITEM PAGE
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1. Business............................................................................................ 1
2. Properties.......................................................................................... 8
3. Legal Proceedings................................................................................... 8
4. Submission of Matters to a Vote of Security Holders................................................. 8
PART II
5. Market for the Registrant's Common Equity and Related Stockholder Matters........................... 9
6. Selected Financial Data............................................................................. 9
7. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 9
8. Consolidated Financial Statements and Supplementary Data............................................ 9
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 9
PART III
10. Directors and Executive Officers of the Registrant.................................................. 10
11. Executive Compensation.............................................................................. 10
12. Security Ownership of Certain Beneficial Owners and Management...................................... 10
13. Certain Relationships and Related Transactions...................................................... 10
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................... 11
Independent Accountants' Reports.................................................................... 16
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PART I
ITEM 1. BUSINESS.
GENERAL
U S WEST, Inc. ("U S WEST" or the "Company") is incorporated under the laws
of the State of Delaware and has its principal executive offices at 7800 East
Orchard Road, Englewood, Colorado 80111, telephone number (303) 793-6500. U S
WEST is a diversified global communications company, and conducts its operations
through U S WEST Communications Group ("Communications Group") and U S WEST
Media Group ("Media Group"). (Financial information concerning U S WEST's
operations is set forth in the Consolidated Financial Statements and Notes
thereto, which begin on page A-24.) U S WEST and its subsidiaries had 69,286
employees at December 31, 1996.
COMMUNICATIONS GROUP. The major component of the Communications Group is U
S WEST Communications, Inc. ("U S WEST Communications"), which provides
telecommunications services to more than 25 million residential and business
customers in the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming (collectively, the "Communications Group Region"). U S WEST
Communications serves approximately 80 percent of the Communications Group
Region's population and approximately 40 percent of its geographic area.
MEDIA GROUP. The Media Group is comprised of: (i) cable and
telecommunications network businesses outside of the Communications Group Region
and internationally, (ii) domestic and international wireless communications
network businesses and (iii) domestic and international directory and
information services businesses, including telephone directories.
RECENT DEVELOPMENTS
MERGER OF CONTINENTAL CABLEVISION, INC. On November 15, 1996, Continental
Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U
S WEST (the "Merger"). Continental, the nation's third largest cable operator,
serves 4.5 million domestic customers and passes 7.4 million domestic homes.
Continental holds significant domestic and international investments, including
a 50 percent interest in a cable venture in Argentina and a 25 percent interest
in a cable venture in Singapore; an 11.5 percent interest in Teleport
Communications Group, a 10 percent interest in PRIMESTAR, a direct broadcast
satellite service; telephone access businesses in Florida and Virginia; and
interests in programming that include Time Warner, Inc., E! Entertainment
Television and the Golf Channel. The aggregate consideration paid by Media Group
to shareowners of Continental consisted of 150,615,000 shares of Media Stock
valued at $2.59 billion, 20,000,000 shares of U S WEST Series D Preferred Stock
with a market value of $920 million and $1.15 billion in cash. In connection
with the Merger, U S WEST also assumed all of Continental's outstanding
indebtedness and other liabilities, which approximated $7.0 billion at November
15, 1996, for a total purchase price of $11.7 billion.
RECAPITALIZATION PLAN. On October 31, 1995, the shareowners of U S WEST,
Inc., a Colorado corporation ("U S WEST Colorado") voted to approve a proposal
(the "Recapitalization Plan") adopted by the Board of Directors to reincorporate
from Colorado to Delaware and create two classes of common stock that are
intended to reflect separately the performance of the communications and
multimedia businesses. Under the Recapitalization Plan, shareowners approved an
Agreement and Plan of Merger between U S WEST Colorado and U S WEST, pursuant to
which U S WEST continues as the surviving corporation. In connection with the
merger, the Certificate of Incorporation of U S WEST has been amended and
restated to, among other things, designate two classes of common stock of U S
WEST, one class of which is authorized as U S WEST Communications Group Common
Stock ("Communications Stock"), and the other class is authorized as U S WEST
Media Group Common Stock ("Media Stock").
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Effective November 1, 1995, each share of common stock of U S WEST Colorado was
converted into one share of Communications Stock and one share of Media Stock.
The Communications Stock and Media Stock are designed to provide shareowners
with separate securities that are intended to reflect separately the
communications businesses of U S WEST Communications and certain other
subsidiaries of the Communications Group, and the multimedia businesses of the
Media Group.
The Communications Group is comprised of U S WEST Communications, U S WEST
Communications Services, Inc., U S WEST Federal Services, Inc., U S WEST
Advanced Technologies, Inc., U S WEST Business Resources, Inc. and U S WEST Long
Distance, Inc. U S WEST Communications comprised approximately 97 percent of the
revenues and 98 percent of the assets of the Communications Group in 1996.
The Media Group is comprised of U S WEST Dex, Inc. (formerly U S WEST
Marketing Resources Group, Inc.), a publisher of White and Yellow Pages
telephone directories and other information services including database
marketing and other interactive services, U S WEST NewVector Group, Inc., which
provides communications and information products and services over wireless
networks, U S WEST Multimedia Communications, Inc., which owns domestic cable
television operations and investments, and U S WEST International Holdings,
Inc., which primarily owns investments in international cable and
telecommunications, wireless communications and directory publishing operations.
Continental has also been a part of the Media Group since November 15, 1996.
Dividends paid to the owners of Communications Stock are currently $0.535
per share per quarter. Dividends on the Communications Stock will be paid at the
discretion of the Board of Directors of U S WEST, based primarily upon the
financial condition, results of operations and business requirements of the
Communications Group and the Company as a whole. With regard to the Media Stock,
the Board of Directors of U S WEST currently intends to retain future earnings,
if any, for the development of the Media Group's businesses and does not
anticipate paying dividends on the Media Stock in the foreseeable future.
COMMUNICATIONS GROUP
OPERATIONS. The principal types of telecommunications services offered by
the Communications Group are (i) local telephone services, (ii) exchange access
services (which connects customers to the facilities of carriers, including
long-distance providers and wireless operators), and (iii) long-distance network
services within Local Access and Transport Areas ("LATAs") in the Communications
Group Region. For the year ended December 31, 1996, local service, exchange
access service and intraLATA long-distance network service accounted for 36.9%,
25.4% and 8.5%, respectively, of the sales and other revenues of U S WEST. At
December 31, 1996, U S WEST Communications had approximately 15,424,000
telephone network access lines in service, a 4.3% increase over year-end 1995.
Excluding the effect of the sales of approximately 113,000 rural telephone
access lines during 1996, access lines increased 5.0% over year-end 1995. In
1996, revenues from a single customer, AT&T Corp., accounted for approximately
10% of the sales and other revenues of the Communications Group.
U S WEST Communications incurred capital expenditures of approximately $2.8
billion in 1996 and expects to incur approximately $2.5 billion in 1997. The
1996 capital expenditures of U S WEST Communications were substantially devoted
to the continued modernization of telephone plant, to improve customer services,
to accommodate additional line capability in several states, and to enter the
personal communications services ("PCS") market.
THE RESTRUCTURING PLAN. U S WEST announced in 1993 that U S WEST
Communications would implement a plan (the "Restructuring Plan") designed to
provide faster, more responsive customer services while reducing the cost of
providing these services. The Restructuring Plan is expected to be
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substantially completed by the end of 1997. See "Restructuring Charge" under
Management's Discussion and Analysis of Financial Condition and Results of
Operations on p. B-8.
REGULATION. U S WEST Communications is subject to varying degrees of
regulation by state commissions with respect to intrastate rates and service,
and access charge tariffs. U S WEST is also subject to the jurisdiction of the
Federal Communications Commission (the "FCC") with respect to interstate access
tariffs (that specify the charges for the origination and termination of
interstate communications) and other matters.
U S WEST's interstate services have been subject to price-cap regulation by
the FCC since January 1991. Price caps are an alternative form of regulation
designed to limit prices rather than profits. The FCC's price cap plan includes
sharing of earnings in excess of authorized levels. The price cap plan has
resulted in reduced access prices paid by interexchange carriers to local
exchange carriers. The price cap index for most services is annually adjusted
for inflation, productivity level and exogenous costs. The price cap plan
provides for three productivity options, including a no-sharing option, and for
increased flexibility for adjusting prices downward in response to competition.
In 1996 and 1995, the Communications Group selected the lowest productivity
option in determining prices. Current deliberations by the FCC on access charge
reform and universal service will likely affect the nature and duration of the
interim rules on price cap regulation.
U S WEST Communications is currently working with state regulators to gain
approval of various initiatives, including efforts to rebalance prices, achieve
accelerated capital recovery and eliminate subsidies.
State and local regulatory authorities may also regulate certain terms and
conditions of the offering of wireless services, such as the siting and
construction of transmitter towers, antennas and equipment shelters and zoning
and building permit approvals. See "Regulatory Environment" under Management's
Discussion and Analysis of Financial Condition and Results of Operations on p.
B-13.
COMPETITION. The Communications Group faces competition in the local
exchange business, exchange access and intraLATA long-distance markets,
primarily from competitive access providers ("CAPS") and interexchange carriers.
CAPs compete with the Communications Group by providing large business customers
with high-capacity network services that connect to interexchange carrier
facilities or other business locations within a serving LATA. Interexchange
carriers compete with the Communications Group by providing intraLATA
long-distance services. Such competition is eroding U S WEST Communications'
market share of intraLATA long-distance services, including Wide Area Telephone
Service and "800" services. Interexchange carriers are competing in this area by
offering lower prices and packaging these services on an intraLATA and interLATA
basis.
The Telecommunications Act of 1996, enacted into law on February 8, 1996,
will dramatically alter the competitive landscape of the telecommunications
industry by permitting competition among local telephone companies,
long-distance companies and cable companies. The Communications Group believes
that its competitors will initially target high-volume business customers in
densely populated urban areas. The resulting loss of local service customers
could affect multiple revenue streams and could have a material, adverse effect
on the Communications Group's operations. Court and state regulatory commission
deliberations on interconnnection rates, as well as the FCC's current
deliberations on access charge reform, could also result in significant changes
in revenues received from long-distance carriers and other competitors. However,
the Communications Group expects to counter this competitive threat by expanding
services to include new retail as well as wholesale markets. Planned future
service offerings include interLATA long-distance services, wireless PCS, and
interconnection services provided to competing providers of local services. The
Communications Group's ability to bundle local, long-distance, wireless PCS and
other services will also provide a competitive advantage against emerging local
service competitors.
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Technological advancements will also increase competition in the future.
Current competitors, including CAPs and interexchange carriers, are positioning
themselves to offer local exchange services. New competitors that are affiliates
of cable television companies and power companies also are expected to play a
greater role in offering local exchange services. In addition to local exchange
services, competitors are expected to offer services that will compete with
those U S WEST Communications plans to offer, including video programming and
interactive multimedia services. Services offered by cellular and PCS operators
also will compete with existing and future services of U S WEST Communications,
including future wireless PCS services. AT&T's entrance into the wireless
communications business through its acquisition of McCaw Cellular
Communications, Inc. may create increased competition in local exchange as well
as wireless services. The loss of local exchange customers to competitors could
affect multiple revenue streams of U S WEST Communications.
MEDIA GROUP
OPERATIONS. The Media Group is comprised of (i) cable and
telecommunications network businesses outside of the Communications Group Region
and internationally, (ii) domestic and international wireless communications
network businesses and (iii) domestic and international directory and
information services businesses. For the year ended December 31, 1996, domestic
and international directory and information services businesses accounted for
10% of the sales and other revenues of U S WEST.
CABLE AND TELECOMMUNICATIONS. On November 15, 1996, Continental was merged
into a wholly owned subsidiary of U S WEST. Continental, the nation's third
largest cable operator, serves 4.5 million domestic customers and passes 7.4
million domestic homes. Continental holds significant domestic and international
investments, including a 50 percent interest in a cable venture in Argentina, a
25 percent interest in a cable venture in Singapore; an 11.5 percent interest in
Teleport Communications Group, a 10 percent interest in PRIMESTAR, a direct
broadcast satellite service; telephone access businesses in Florida and
Virginia; and interests in programming that include Time Warner, Inc., E!
Entertainment Television and the Golf Channel. The Media Group's other domestic
cable and telecommunications operations are conducted through U S WEST
Multimedia Communications, Inc. ("U S WEST Multimedia") and consist of domestic
cable properties and investments outside of the Communications Group Region,
including U S WEST Multimedia's ownership of cable systems in the Atlanta,
Georgia metropolitan area (the "Atlanta Systems") and its investment in Time
Warner Entertainment Company L.P. ("TWE"), the second largest provider of cable
television services in the United States.
The Media Group's international cable and telecommunications operations are
conducted through U S WEST International Holdings, Inc. ("U S WEST
International") and include investments in cable and telecommunications that
focus on serving mass market business and residential customers in key
geographic markets. To decrease investment risk and gain access to technical
skills and capabilities, U S WEST International's strategy has been to make
these investments with other major cable television companies, including Time
Warner Inc. and Tele-Communications, Inc. In certain circumstances, foreign laws
require the participation of local partners in these ventures.
U S WEST International, through subsidiaries, owns a 26.8 percent interest
in Telewest Communications plc ("Telewest"), the largest provider of combined
cable and telecommunications services in the United Kingdom. In 1995, Telewest
Communications plc merged its cable television and telephony interests with SBC
CableComms (UK). An affiliate of Tele-Communications, Inc. ("TCI International")
also owns a 26.8 percent interest in Telewest, with the remaining interests held
by the public.
WIRELESS COMMUNICATIONS. U S WEST NewVector Group, Inc. ("NewVector")
provides cellular services to customers over wireless networks in 12 western and
midwestern states located primarily in the Communications Group Region.
NewVector's cellular services provide customers with high-quality and
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readily available two-way communications services that interconnect with local
and long-distance telephone networks. As of December 31, 1996, NewVector had
approximately two million cellular customers, a 40 percent increase from
December 31, 1995.
In 1994, the Company entered into a definitive agreement with AirTouch
Communications, Inc. ("AirTouch") to combine their domestic cellular assets into
a partnership in a multi-phased transaction. During Phase I, which commenced on
November 1, 1995, the partners are operating their cellular properties
separately. A Wireless Management Company (the "WMC") has been formed and is
providing services to both companies on a contract basis. In Phase II, the
partners will combine their domestic properties, subject to certain
authorizations and partnership approvals. The passage of the Telecommunications
Act of 1996 has removed significant regulatory barriers to the completion of
Phase II. In February 1997, the King County Superior Court in Washington state
ruled that U S WEST violated the terms of its partnership agreement with its
minority partners in the Seattle market by entering into the joint venture
agreement with AirTouch. U S WEST has obtained a stay of the ruling pending its
appeal. Similar litigation has been filed in other jurisdictions regarding other
cellular partnerships by the same minority partner that brought the Seattle
litigation. The Company believes that it will ultimately be successful in all
such litigation. U S WEST expects that Phase II closing will occur in the second
half of 1997.
Upon the implementation of Phase II, management expects the interests in
this cellular joint venture will be approximately 74 percent AirTouch and
approximately 26 percent U S WEST (assuming contribution of all domestic
cellular properties). The actual interests in the joint venture at commencement
of Phase II depend, among other things, on the timing of the Phase II closing
and the ability of the partners to combine their domestic properties. U S WEST's
interests will further adjust depending on the timing of the contribution of its
investment in PrimeCo Personal Communications L.P. ("PrimeCo"). The timing of
such contribution is at U S WEST's discretion and will occur either at the
closing of Phase II or a date selected by U S WEST, no later than mid-1998.
U S WEST has the right to convert its joint venture interest in the domestic
cellular properties into AirTouch stock ("Phase III"). U S WEST's interests will
be valued on a private market basis and the AirTouch common stock received by U
S WEST will be based on a fair public market value. In the event the value to be
received by U S WEST exceeds 19.9 percent of AirTouch's outstanding common
stock, U S WEST will receive the excess in the form of non-voting preferred
stock. U S WEST has the right to initiate Phase III upon completion of Phase II
and the contribution of both U S WEST's and AirTouch's interests in PrimeCo to
the joint venture.
The Media Group has entered into a venture with AirTouch, Bell Atlantic and
NYNEX to form a strategic national marketing and technical alliance. The Media
Group has entered into a separate venture with the same partners to provide
personal communications services. In November 1996, PrimeCo launched PCS service
that reaches 32 million people in 16 major cities nationwide. The venture
purchased 11 licenses in the FCC PCS auction, covering 58 million people in
Chicago, Dallas, Honolulu, Houston, Jacksonville, Miami, Milwaukee, New Orleans,
Richmond, San Antonio and Tampa.
U S WEST International, through subsidiaries, owns 50 percent of One 2 One
(formerly Mercury One 2 One), a 50-50 joint venture between subsidiaries of U S
WEST International and Cable & Wireless plc. One 2 One operates a PCS system in
the United Kingdom. One 2 One's PCS is a digital cellular communications service
designed to offer consumers higher quality service, increased privacy and more
features at lower prices than existing cellular communications systems. One 2
One's customers increased 45 percent in 1996 and account for 50 percent of the
Media Group's international wireless customers. U S WEST International also owns
interests in wireless communications systems or investments in several
countries, including Malaysia, Russia, Hungary, the Czech Republic, the Slovak
Republic, India and Poland.
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DIRECTORY AND INFORMATION SERVICES. The Media Group, through U S WEST Dex,
provides directory publishing as well as database marketing and interactive
services. U S WEST Dex publishes, prints and sells advertising in approximately
320 White and Yellow Pages directories in the Communications Group Region. U S
WEST Dex's growth strategy is to increase its advertiser base through expanded
marketing efforts, the expansion of core products, such as new targeted
directories for specific neighborhoods or industries and development of new
directory features, and the development and packaging of new information
products, such as local audiotext services. U S WEST Dex's directory publishing
business had revenue growth of approximately 7.4 percent in 1996.
U S WEST Dex also provides database marketing services that enable
businesses to segment and target customers and is developing the capability to
provide one-to-one marketing over interactive networks. In the future U S WEST
Dex plans to develop, package, market and distribute integrated, interactive
communications, entertainment, information and transaction services over
networks operated by the Media Group and others, including the networks of the
Communications Group in the Communications Group Region. The Media Group is
evaluating opportunities in new markets, including the full scale rollout of the
Yellow Pages on the Internet.
U S WEST International owns 100 percent of Thomson Directories, which it
acquired in 1994. Thomson Directories annually publishes 163 directories in the
United Kingdom, reaching 46 million people, or 80 percent of all households, in
the United Kingdom. U S WEST International owns a 50 percent interest in Listel,
Brazil's largest telephone directory publisher, which it acquired in 1994 from
the Abril Group. U S WEST International also owns 100 percent of Polska, which
publishes 61 directories in Poland.
REGULATION. The products and services of the Media Group are subject to
varying degrees of regulation. Under the Telecommunications Act of 1996, the
regulation of cable rates will be discontinued effective March 31, 1999, or
earlier if competition exists. The same Act also (i) eliminates certain cross-
ownership restrictions among cable operators, broadcasters and multichannel,
multipoint distribution system operators, (ii) removes barriers to competition
with local exchange providers, and (iii) eliminates restrictions that previously
applied to the Media Group relating to long-distance services.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") authorizes the FCC to set standards for governmental
authorities to regulate the rates for certain cable television services, except
for services offered on a per-channel or per-program basis, and equipment.
Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a series
of rate regulations. The FCC also publicly announced that it would consider
"social contracts" as an alternative form of rate regulation for cable
operators. Continental's social contract with the FCC was adopted by the FCC on
August 3, 1995 and amended on August 21, 1996 to include systems recently
acquired by Continental. The social contract is a six-year agreement covering
all of Continental's franchises, including those that were unregulated, and
settled Continental's pending rate cases. As part of the resolution, Continental
agreed to, among other things, invest at least $1.7 billion in domestic system
rebuilds and upgrades through 2000 to expand channel capacity and improve system
reliability and picture quality. At December 31, 1996, $870 million is remaining
on this commitment. Continental also agreed to reduce its benchmark broadcast
service tier service rates. The social contract also provides that, if the laws
and regulations applicable to services offered in any Continental franchise
change in a manner that would have a material favorable financial impact on
Continental, U S WEST may petition the FCC to terminate the social contract.
Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services, franchise renewal and imposition of franchise fees.
The Media Group is subject to various regulations in the foreign countries
in which it has operations. In the United Kingdom, the licensing, construction,
operation, sale and acquisition of cable and wireline
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and wireless communications systems are regulated by various governmental
entities, including the Department of Trade and Industry and the Department of
National Heritage.
COMPETITION. Cable television systems generally compete for viewer
attention with programming from a variety of sources, including the direct
reception of broadcast television signals by the viewer's own antenna,
subscription and low power television stations, multichannel multipoint
distribution systems ("MMDS" or "wireless cable"), satellite master antenna
("SMATV") service, direct broadcast satellite ("DBS") services, telephone
companies, including other RBOC's, and other cable companies within an operating
area. The extent of such competition in any franchise area is dependent, in
part, upon the quality, variety and price of the programming provided by these
technologies. Many of these competitive technologies are generally not subject
to the same local government regulation that affects cable television. Cable
television systems are also in competition for both viewers and advertising in
varying degrees with other communications and entertainment media, and such
competition may increase with the development and growth of new technologies.
Telewest's cable television services compete with broadcast television stations,
DBS services, SMATV systems and certain narrowband operators in the United
Kingdom.
The Media Group will be offering telecommunications services in competition
with the dominant local exchange carriers ("LECs"), CAPs and other potential
providers of telephone services in local domestic markets, including the
interexchange carriers such as AT&T, MCI Communications and Sprint Corp. The
degree of competition will be dependent upon the state and federal regulations
concerning entry, interconnection requirements, and the degree of unbundling of
the LECs' networks. Competition will be based upon price, service quality and
breadth of services offered. Telewest's telecommunications services compete with
domestic telephone companies in the United Kingdom, such as British
Telecommunications plc.
New Vector's wireless business is subject to FCC regulation and licensing
requirements. To assure competition, the FCC has awarded two competitive
cellular licenses in each market. Many competing cellular providers are
substantial businesses with experience in broadcasting, telecommunications,
cable television and radio common carrier services. In many markets, competing
cellular service is provided by businesses owned or controlled by a LEC, AT&T or
other major telephone companies. Competition is based upon the price of cellular
service, the quality of the service and the size of the geographic area served.
The development of PCS services will create multiple new competitors for
NewVector's wireless businesses. Competition for the provision of wireless
services is also provided by providers of enhanced specialized mobile radio
services. In the United Kingdom, One 2 One's operations compete with two
established cellular providers and one PCS provider. In addition, One 2 One
competes in the consumer market with telephone companies such as British
Telecommunications plc.
U S WEST Dex's directory publishing businesses continue to face competition
from local and national publishers of directories, as well as other advertising
media such as newspapers, magazines, broadcast media, direct mail and operator
assisted services. Directory listings are now offered in electronic data bases
through telephone company and third party networks. As such offerings expand and
are enhanced through interactivity and other features, the Company will
experience heightened competition in its directory publishing businesses. U S
WEST Dex will continue to expand its core products and develop and package new
information products to meet its customers' needs. U S WEST Dex's database
marketing services also continue to face competition from direct mail list
providers, co-op direct mail programs and coupon programs. U S WEST Dex will
also face emerging competition in the provision of interactive services from
cable and entertainment companies, on-line services, advertising agencies
specializing in interactive advertising and many small companies who are
information providers. Many of these potential competitors may also be joint
venture partners, suppliers or distributors.
The actions of public policy makers play an important role in determining
how increased competition affects the Media Group. The Media Group is working
with regulators and legislators to help ensure that public policies are fair and
in the best interests of customers.
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See "Competitive and Regulatory Environment" under Management's Discussion
and Analysis of Financial Condition and Results of Operation on p. C-19.
ITEM 2. PROPERTIES.
The properties of U S WEST do not lend themselves to description by
character and location of principal units. At December 31, 1996, the majority of
U S WEST property was utilized in providing telecommunications services by U S
WEST Communications. Substantially all of U S WEST Communications' central
office equipment is located in owned buildings situated on land owned in fee,
while many garages and administrative and business offices are in leased
quarters.
ITEM 3. LEGAL PROCEEDINGS.
U S WEST and its subsidiaries are subject to claims and proceedings arising
in the ordinary course of business. While complete assurance cannot be given as
to the outcome of any contingent liabilities, in the opinion of U S WEST, any
financial impact to which U S WEST and its subsidiaries are subject is not
expected to be material in amount to U S WEST's operating results or its
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF U S WEST
Pursuant to General Instructions G(3), the following information is included
as an additional item in Part I:
<TABLE>
<CAPTION>
DATE ASSUMED
POSITION AGE PRESENT POSITION
---------------------------------------------------------- --- ----------------
<S> <C> <C> <C>
James T. Anderson Vice President & Treasurer 57 1984
Michael P. Glinsky Executive Vice President & Chief Financial Officer 52 1996(1)
Charles M. Lillis Executive Vice President, and President & Chief Executive 55 1987(2)
Officer, U S WEST Media Group
Richard D. McCormick Chairman of the Board, Chief Executive Officer & President 56 1991(3)
Charles P. Russ, III Executive Vice President-Law, Public Policy and Human 52 1992
Resources, General Counsel & Secretary
Solomon D. Trujillo Executive Vice President, and President & Chief Executive 45 1995(4)
Officer, U S WEST Communications Group
</TABLE>
- ------------------------------
(1)
Mr. Glinsky was elected Executive Vice President and Chief Financial Officer
effective April 15, 1996.
(2)
Mr. Lillis was elected President and Chief Executive Officer, U S WEST Media
Group effective August 22, 1995.
(3)
Mr. McCormick was elected Chairman of the Board effective May 1, 1992.
(4)
Mr. Trujillo was elected President and Chief Executive Officer of U S WEST
Communications Group effective July 1, 1995, and Executive Vice President, U S
WEST effective October 6, 1995. Previously, Mr. Trujillo was President and
Chief Executive Officer of U S WEST Dex, Inc.
Executive Officers are not elected for a fixed term of office, but serve at
the discretion of the Board of Directors.
8
<PAGE>
Each of the above executive officers has held a managerial position with U S
WEST or an affiliate of U S WEST since 1992, except for Messrs. Glinsky and
Russ. Mr. Glinsky was a managing partner of Coopers & Lybrand L.L.P., from 1967
to April, 1996. Mr. Russ was Vice President, Secretary and General Counsel of
NCR Corporation from February, 1984 to June, 1992.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required by this item is included in Note 21, Quarterly
Financial Data, on page A-67. The U.S. markets for trading in U S WEST common
stock are the New York Stock Exchange and the Pacific Stock Exchange. As of
January 31, 1997, U S WEST Communications Group common stock was held by
approximately 722,195 shareowners of record and U S WEST Media Group common
stock was held by approximately 700,545 shareowners of record.
ITEM 6. SELECTED FINANCIAL DATA.
Reference is made to the information set forth on pages A-1 through A-2.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Reference is made to the information set forth on pages A-3 through A-20.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the information set forth on pages A-24 through A-69.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Coopers & Lybrand L.L.P. served as the Company's independent auditor, and
Arthur Andersen LLP served as the primary auditing firm for major subsidiaries
within U S WEST Media Group, from 1984 to 1995. In view of the targeted stock
structure that the Company adopted in 1995, the Company determined, following a
recommendation of the Audit Committee, that it is more efficient and effective
for the Company to have a single firm perform the auditing function for the
entire business.
During the Company's 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. 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. occurred
that must be disclosed under applicable securities laws; and (3) the Company did
not consult with Arthur Andersen LLP on items that concerned the application of
accounting principles to a specific transaction, either completed or proposed,
or on the type of audit opinion that might be rendered on the Company's
financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item with respect to executive officers is
set forth in Part I, page 8, under the caption "Executive Officers of U S WEST."
9
<PAGE>
The information required by this item with respect to Directors is included
in the U S WEST definitive Proxy Statement dated April 7, 1997 ("Proxy
Statement") under "Election of Directors" on pages 4 through 6 and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included in the Proxy Statement
under "Executive Compensation" on pages 11 through 25 and "Compensation of
Directors" on pages 3 and 4 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included in the Proxy Statement
under "Securities Owned by Management" on page 4 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
10
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
PAGE
NUMBER
----------------------
<S> <C> <C>
(1) -- Report of Independent Accountants....................................... A-21 through A-22
(2) -- Consolidated Financial Statements:
Consolidated Statements of Operations -- for the years ended December
31, 1996, 1995 and 1994................................................ A-24 through A-25
Consolidated Balance Sheets as of December 31, 1996 and 1995............ A-26 through A-27
Consolidated Statements of Cash Flows -- for the years ended December
31, 1996, 1995 and 1994................................................ A-28
Notes to Consolidated Financial Statements and supplementary data....... A-29 through A-69
(3) -- Consolidated Financial Statement Schedule:
Report of Independent Accountants....................................... 16
II -- Valuation and Qualifying Accounts................................. S-1
(4) -- U S WEST Communications Group Combined Financial Statements:
Combined Statements of Operations -- for the years ended December 31,
1996, 1995 and 1994.................................................... B-19
Combined Balance Sheets as of December 31, 1996 and 1995................ B-20
Combined Statements of Cash Flows -- for the years ended December 31,
1996, 1995 and 1994.................................................... B-21
Notes to the Combined Financial Statements.............................. B-22 through B-44
(5) -- U S WEST Media Group Combined Financial Statements:
Combined Statements of Operations -- for the years ended December 31,
1996, 1995 and 1994.................................................... C-27
Combined Balance Sheets as of December 31, 1996 and 1995................ C-28
Combined Statements of Cash Flows -- for the years ended December 31,
1996, 1995 and 1994.................................................... C-29
Notes to the Combined Financial Statements and supplementary data....... C-30 through C-67
</TABLE>
Financial statement schedules other than those listed above have been
omitted because the required information is contained in the financial
statements and notes thereto, or because such schedules are not required or
applicable.
(b) Reports on Form 8-K:
U S WEST filed the following reports on Form 8-K during the fourth
quarter of 1996:
(i) report dated November 15, 1996, relating to a press release issued
by U S WEST issued by Communications, entitled "U S WEST Communications
Receives a King County Superior Court Decision in Washington State Rate
Order Appeal." In addition on November 26, 1996, U S WEST Communications,
Inc. issued a press release entitled "U S WEST Communications To Continue
Appeal of Washington State Rate Order;"
(ii) report dated November 15, 1996, amending the report dated November
15, 1996 to include the unaudited Pro Form Condensed Combined Financial
Statements of U S WEST, Inc. and subsidiaries and U S WEST Media Group as of
September 30, 1996 and for the nine months ended September 30, 1996, and for
the year ended December 31, 1995; and
11
<PAGE>
(iii) report dated December 11, 1996, filing a Form of Distribution
Agreement, a Form of Fixed-Rate Medium-Term Note, and Form of Floating Rate
Medium-Term Note concerning the U S WEST Capital Funding, Inc.,
unconditionally guaranteed as to payment of principal premium, if any, and
interest by U S WEST, Inc.
(c) Exhibits:
Exhibits identified in parentheses below, on file with the Securities
and Exchange Commission ("SEC"), are incorporated herein by reference as
exhibits hereto.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <C> <S>
(3b) -- Bylaws of U S WEST, Inc. as adopted on November 1, 1995, as amended March 15, 1996 and August 2, 1996
(Exhibit 3(ii) to Form 10-Q filed on August 9, 1996).
(4a) -- Form of Amended and Restated Rights Agreement between U S WEST, Inc. and State Street Bank and Trust
Company, as Rights Agent (Exhibit 4-A to Registration Statement No. 33-59315).
4b -- No instrument which defines the rights of holders of long and intermediate term debt of U S WEST,
Inc. and all of its subsidiaries is filed herewith pursuant to Regulation S-K, Item
601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees to furnish a copy of any
such instrument to the SEC upon request.
(10a) -- Reorganization and Divestiture Agreement dated as of November 1, 1983, between American Telephone and
Telegraph Company and its affiliates, U S WEST, Inc., The Mountain States Telephone and Telegraph
Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and NewVector
Communications, Inc. (Exhibit 10a to Form 10-K, date of report March 8, 1984, File No. 1-3501).
(10b) -- Shared Network Facilities Agreement dated as of January 1, 1984, between American Telephone and
Telegraph Company, AT&T Communications of the Midwest, Inc., The Mountain States Telephone and
Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company
(Exhibit 10b to Form 10-K, date of report March 8, 1984, File No. 1-3501).
(10c) -- Agreement Concerning Termination of the Standard Supply Contract effective December 31, 1983, between
American Telephone and Telegraph Company, Western Electric Company, Incorporated, The Mountain States
Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell
Telephone Company and Central Services Organization (Exhibit 10d to Form 10-K, date of report March
8, 1984, File No, 1-3501).
(10d) -- Agreement Concerning Certain Centrally Developed Computer Systems effective December 31, 1983,
between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The
Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific
Northwest Bell Telephone Company and Central Services Organization (Exhibit 10e to Form 10-K, date of
report March 8, 1984, File No. 1-3501).
(10e) -- Agreement Concerning Patents, Technical Information and Copyrights effective December 31, 1983,
between American Telephone and Telegraph Company and U S WEST, Inc. (Exhibit 10f to Form 10-K, date
of report March 8, 1984, File No. 1-3501).
(10f) -- AMPS Software Agreement effective December 31, 1983, between American Telephone and Telegraph Company
and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 28, 1984, File No.
1-8611).
(10g) -- Agreement Concerning Contingent Liabilities, Tax Matters and Termination of Certain Agreements dated
as of November 1, 1983, between American Telephone and Telegraph
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
Company, U S WEST, Inc., The Mountain States Telephone and Telegraph Company, Northwestern Bell
Telephone Company, Pacific Northwest Bell Telephone Company and NewVector Communications, Inc.
(Exhibit 10h to Form 10-K, date of report March 8, 1984, File No. 1-3501).
<C> <C> <S>
(10h) -- Agreement Concerning Trademarks, Trade Names and Service Marks effective December 31, 1983, between
American Telephone and Telegraph Company, American Information Technologies Corporation, Bell
Atlantic Corporation, BellSouth Corporation, Cincinnati Bell, Inc., NYNEX Corporation, Pacific
Telesis Group, The Southern New England Telephone Company, Southwestern Bell Corporation and U S
WEST, Inc. (Exhibit 10i to Form 10-K, date of report March 8, 1984, File No. 1-3501).
(10i) -- U S WEST, Inc. Short-Term Incentive Plan (Exhibit 10i to Form 10-K date of report March 19, 1993,
File No. 1-8611).
10j -- U S WEST Executive Financial Counseling Plan.
(10k) -- U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration
Statement No. 2-87861).
(101) -- Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance
(Exhibit 10-gg to Registration Statement No. 2-87861).
(10m) -- Extract from the U S WEST Management Pension Plan regarding limitations on and payments of pension
amounts which exceed the limitations contained in the Employee Retirement Income Security Act
(Exhibit 10-hh to Registration Statement No. 2-87861).
(10n) -- U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March 29,
1989, File No. 1-8611).
(10o) -- Amended U S WEST Deferred Compensation Plan (Annex X to Registration Statement No. 33-59315).
(10p) -- Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March 5,
1992, File No. 1-8611).
(10q) -- Amended U S WEST 1994 Stock Plan (Annex IX to Registration Statement No. 33-59315).
(10r) -- Shareholders' Agreement dated as of January 1, 1988 among Ameritech Services, Inc., Bell Atlantic
Management Services, Inc., BellSouth Services Incorporated, NYNEX Service Company, Pacific Bell,
Southwestern Bell Telephone Company, The Mountain States Telephone and Telegraph Company,
Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company (Exhibit 10r to Form
SE filed March 5, 1992, File No. 1-8611).
(10s) -- U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to
Registration Statement No. 2-87861).
(10t) -- U S WEST Mid-Career Pension Plan (Exhibit 10u to Form 10-K, date of report March 29, 1989, File No.
1-8611).
(10u) -- Form of U S WEST, Inc. Non-Qualified Stock Option Agreement (Exhibit 10u to Form 10-K, date of report
March 28, 1996, File No. 1-8611).
(10v) -- Form of U S WEST, Inc. Restricted Stock Agreement (Exhibit 10v to Form 10-K, date of report March 28,
1996, File No. 1-8611).
10w -- Employment letter from Richard D. McCormick to Charles P. Russ, III dated January 31, 1997
(10x) -- Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and U S
WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993, File No.1-8611).
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <C> <S>
10y -- Form of U S WEST, Inc. Executive Change of Control Agreement.
10z -- Form of Change of Control Agreement for Chief Executive Officer.
10aa -- Form of Group Executive Change of Control Agreement.
(10ab) -- Form of Executive Severance Agreement (Exhibit 10ab to Form 10-K, date of report March 28, 1996, File
No. 1-8611).
(10ac) -- U S WEST, Inc. Executive Long-Term Incentive Plan (Exhibit 10ad to Form 10-K, date of report March 7,
1995, File No. 1-8611).
(10ad) -- U S WEST, Inc. Executive Short-Term Incentive Plan (Exhibit 10ae to Form 10-K, date of report March
7, 1995, File No. 1-8611).
10ae -- Amended U S WEST Communications Group Long-Term Incentive Plan.
10af -- Employment letters from Richard D. McCormick to Michael P. Glinsky dated April 2, 1996 and January
31, 1997
10ag -- 364-Day and Five-Year Credit Agreements dated as of November 1, 1996, among U S WEST Capital Funding,
Inc., U S WEST, Inc. and the Banks listed therein.
11 -- Statement Re Computation of Per Share Earnings.
12 -- Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial Services,
Inc.
21 -- Subsidiaries of U S WEST, Inc.
23 -- Consent of Independent Accountants.
24 -- Powers of Attorney.
99 -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 1996,
to be filed by amendment.
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Englewood, State of Colorado, on March 28, 1997.
U S WEST, Inc.
By: /s/ MICHAEL P. GLINSKY
-----------------------------------
Michael P. Glinsky
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<S> <C>
PRINCIPAL EXECUTIVE OFFICER
/s/ Richard D. McCormick* Chairman of the Board, President and Chief
Executive Officer
PRINCIPAL FINANCIAL OFFICER
/s/ Michael P. Glinsky Executive Vice President and Chief Financial
Officer
DIRECTORS:
/s/ Remedios Diaz-Oliver*
/s/ Grant A. Dove*
/s/ Allan D. Gilmour*
/s/ Pierson M. Grieve*
/s/ Allen F. Jacobson*
/s/ Richard D. McCormick*
/s/ Marilyn C. Nelson*
/s/ Frank Popoff*
/s/ Jerry O. Williams*
*By /s/ MICHAEL P. GLINSKY
--------------------------------------
Michael P. Glinsky
(FOR HIMSELF AND AS ATTORNEY-IN-FACT)
</TABLE>
Dated March 28, 1997
15
<PAGE>
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in U S WEST, Inc.'s (the
"Company") Annual Report on Form 10-K for the year ended December 31, 1996, and
have issued our report thereon dated February 12, 1997 appearing on page A-21.
Our audit was made for the purpose of forming an opinion on those statements
taken as a whole. The schedule appearing on page S-1 of this Form 10-K is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. The information for Year 1996 on this schedule
has been subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1997.
------------------------
Our report on the consolidated financial statements of U S WEST, Inc. is
included on page A-22 of this Form 10-K. In connection with our audits of such
consolidated financial statements, we have also audited the related consolidated
financial statement schedule listed in the index on page S-1 of this Form 10-K
for the years ended December 31, 1995 and 1994.
In our opinion, the consolidated financial statement schedules referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
16
<PAGE>
U S WEST, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED BALANCE
BEGINNING CHARGED TO OTHER AT END
OF PERIOD TO EXPENSE ACCOUNTS DEDUCTIONS OF PERIOD
------------- -------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Year 1996............................................ $ 88 $ 160(a) $ 25 $ 148(b) $ 125
Year 1995............................................ 62 122(a) 13 109(b) 88
Year 1994............................................ 54 91(a) 3 86(b) 62
RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING,
INCLUDING FORCE AND FACILITY CONSOLIDATION
Year 1996............................................ 368 -- -- 242 126
Year 1995............................................ 702 -- -- 334 368
Year 1994............................................ 935 -- -- 233 702
RESERVES RELATED TO 1991 BUSINESS RESTRUCTURING,
INCLUDING FORCE REDUCTIONS AND THE WRITE OFF OF
CERTAIN INTANGIBLE ASSETS
Year 1996............................................ -- -- -- -- --
Year 1995............................................ -- -- -- -- --
Year 1994............................................ 95 -- -- 95 --
CAPITAL ASSETS SEGMENT:
REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR
LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT(c)
Year 1996............................................ 56 -- -- (44) 100
Year 1995............................................ 77 -- -- 21 56
Year 1994............................................ 225 -- -- 148 77
</TABLE>
- ------------------------
Note: Certain reclassifications within the schedule have been made to conform to
the current year presentation.
(a) Does not include amounts charged directly to expense. These amounts were
$7, $6 and $10 for 1996, 1995 and 1994, respectively.
(b) Represents credit losses written off during the period, less collection of
amounts previously written off.
(c) Amounts have been restated to conform to current presentation.
S-1
<PAGE>
U S WEST, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Sales and other revenues............................. $ 12,911 $ 11,746 $ 10,953 $ 10,294 $ 9,823
Income before extraordinary items and cumulative
effect of change in accounting principles(1)....... 1,144 1,329 1,426 476 1,076
Net income (loss)(2)................................. 1,178 1,317 1,426 (2,806) (614)
Earnings per common share before extraordinary items
and cumulative effect of change in accounting
principle(1, 3).................................... -- -- 3.14 1.13 2.61
Earnings (loss) per common share(2, 3)............... -- -- 3.14 (6.69) (1.49)
Dividends per common share(3)........................ -- -- 2.14 2.14 2.12
Weighted average common shares outstanding
(thousands)(3)..................................... -- -- 453,316 419,365 412,518
Total assets......................................... $ 40,855 $ 25,071 $ 23,204 $ 20,680 $ 23,461
Total debt(4)........................................ 15,351 8,855 7,938 7,199 5,430
Manditorily redeemable preferred securities(5)....... 1,131 651 51 -- --
Shareowners' equity.................................. 11,549 7,948 7,382 5,861 8,268
Return on common shareowners' equity(6).............. 13.2% 17.2% 21.6% -- 14.4%
Percentage of debt to total capital(4)............... 54.8% 50.7% 51.6% 55.1% 39.6%
Ratio of earnings to combined fixed charges and
preferred stock dividends.......................... 3.29 4.03 4.85 2.38 3.85
Capital expenditures(4).............................. $ 3,474 $ 3,140 $ 2,820 $ 2,441 $ 2,554
Employees............................................ 69,286 61,047 61,505 60,778 63,707
Number of common shareowners......................... -- -- 816,099 836,328 867,773
COMMUNICATIONS GROUP INFORMATION:(1, 2, 3)
Earnings per common share.......................... $ 2.62 $ 2.50 $ 2.53
Dividends per common share......................... 2.14 2.14 2.14
Average common shares outstanding (thousands)...... 477,549 470,716 453,316
Number of common shareowners....................... 725,560 775,125 --
MEDIA GROUP INFORMATION:(1, 2, 3)
Earnings (loss) per common share................... $ (0.16) $ 0.29 $ 0.61
Average common shares outstanding (thousands)...... 491,924 470,549 453,316
Number of common shareowners....................... 705,341 770,346 --
</TABLE>
- ------------------------------
(1) 1996 income is before the cumulative effect of a change in accounting
principle and includes a gain of $36 ($0.08 per Communications share) on the
sales of certain rural telephone exchanges and current effect of $15 ($0.03
per Communications share) from adopting Statement of Financial Accounting
Standard ("SFAS") No. 121. Also included are net losses of $71 ($0.15 per
Media share) related to the November 15, 1996 merger of Continental
Cablevision, Inc. ("Continental") (the "Merger" or the "Continental Merger")
into a wholly owned subsidiary of U S WEST, Inc. ("U S WEST" or "Company")
and a charge of $19 ($0.04 per Media share) from the sale of the Company's
cable television interests in Norway, Sweden and Hungary. 1995 income is
before an extraordinary item and includes a gain of $95 ($0.20 per Media
share) from the merger of Telewest Communications plc ("Telewest") with SBC
CableComms (UK), a gain of $85 ($0.18 per Communications share) on the sales
of certain rural telephone exchanges and costs of $17 ($0.01 per
Communications share and $0.02 per Media share) associated with the November
1, 1995, recapitalization. 1994 income includes a gain of $105 ($0.23 per
share) on the partial sale of U S WEST's
A-1
<PAGE>
U S WEST, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
joint venture interest in Telewest, a gain of $41 ($0.09 per share) on the
sale of U S WEST's paging operations and a gain of $51 ($0.11 per share) on
the sales of certain rural telephone exchanges. 1993 income is before
extraordinary items and 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. 1993 and 1992 income is from continuing operations.
(2) 1996 net income includes a gain of $34 ($0.07 per Communications share)
for the cumulative effect of the adoption of SFAS No. 121. 1995 net income
was reduced by an extraordinary item 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 SFAS No. 71 and $77 ($0.18 per share) for the early
extinguishment of debt. 1993 net income also includes a charge of $120
($0.28 per share) for U S WEST's decision to discontinue the operations of
its capital assets segment. 1992 net income includes a charge of $1,793
($4.35 per share) for the cumulative effect of a change in accounting
principles. Discontinued operations provided net income of $38 ($0.09 per
share) and $103 ($0.25 per share) in 1993 and 1992, respectively.
(3) Media Group's 1996 average common shares outstanding include 150,615,000
shares issued related to the November 15, 1996 Continental Merger. 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 and dividends per
common share for 1995 and 1994 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.
(4) 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. Percentage of debt to total capital includes Company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures ("Preferred Securities") and other
preferred stock as a component of total capital.
(5) Includes Preferred Securities of $1,080 in 1996, $600 in 1995 and
preferred stock subject to mandatory redemption of $51 in 1996, 1995 and
1994.
(6) 1996 return on common shareowners' equity is based on income before the
cumulative effect of a change in accounting principle. 1995 return on common
shareowners' equity is based on income before extraordinary items. 1993
return on common shareowners' equity is not presented. Return on common
shareowners' equity for fourth-quarter 1993 was 19.9 percent based on income
from continuing operations. 1992 return on common shareowners' equity is
based on income before the cumulative effect of change in accounting
principles.
A-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)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the local exchange, intraLATA
toll, cable, telephony, wireless and directories markets, (ii) changes in demand
for the Company's products and services, including optional custom calling
features, (iii) different than anticipated employee levels, capital
expenditures, and operating expenses at the Communications Group as a result of
unusually rapid, in-region growth, (iv) the gain or loss of significant
customers, (v) pending regulatory actions in state jurisdictions, (vi)
regulatory changes affecting the cable and telecommunications industries,
including changes that could have an impact on the competitive environment in
the local exchange market, (vii) a change in economic conditions in the various
markets served by the Company's operations that could adversely affect the level
of demand for cable, wireless, directories or other services offered by the
Company, (viii) greater than anticipated competitive activity requiring new
pricing for services, (ix) higher than anticipated start-up costs associated
with new business opportunities, (x) increases in fraudulent activity with
respect to wireless services, or (xi) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
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"). For a detailed description of the business activities of
the Communications Group and Media Group, please see the Management's Discussion
and Analysis of Financial Condition and Results of Operations of Communications
Group and Media Group included herein.
CONTINENTAL CABLEVISION, INC. MERGER
On November 15, 1996, Continental Cablevision, Inc. ("Continental") was
merged into a wholly owned subsidiary of U S WEST (the "Merger" or the
"Continental Merger"). Continental, the nation's third largest cable operator,
serves 4.5 million domestic customers and passes 7.4 million domestic homes.
Continental holds significant domestic and international investments, including
a 50 percent interest in a cable venture in Argentina, a 25 percent interest in
a cable venture in Singapore, an 11 percent interest in Teleport Communications
Group ("TCG"), a 10 percent interest in PRIMESTAR (a direct broadcast satellite
service), telephone access businesses in Florida and Virginia, and interests in
programming that
A-3
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
include Time Warner, Inc., E! Entertainment Television and the Golf Channel. The
aggregate consideration paid by U S WEST to shareholders of Continental
consisted of 150,615,000 shares of Media Stock valued at $2.59 billion,
20,000,000 shares of U S WEST Series D Preferred Stock with a market value of
$920 million and $1.15 billion in cash. In connection with the Merger, U S WEST
also assumed all of Continental's outstanding indebtedness and other
liabilities, which approximated $7.0 billion at November 15, 1996, for a total
purchase price of $11.7 billion. U S WEST has accounted for the Merger by the
purchase method of accounting. Accordingly, the purchase price is allocated to
the assets acquired and liabilities assumed based on their estimated fair
values.
The following results of operations discussion is condensed. For a detailed
discussion of operating results on a Group basis, see the Communications Group
and the Media Group Management's Discussion and Analysis of Financial Condition
and Results of Operations -- "Results of Operations."
RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
NET INCOME (LOSS)
<TABLE>
<CAPTION>
EARNINGS (LOSS)PER SHARE
NET INCOME (LOSS) --------------------------- INCREASE
------------------------------------------
INCREASE (DECREASE)
(DECREASE) ---------
--------------------
1996 1995 $ % 1996 1995(1) $
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Communications Group............................ $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12
Media Group..................................... (71) 141 (212) -- (0.16) 0.29 (0.45)
--------- --------- --------- ---------
Total net income................................ $ 1,178 $ 1,317 $ (139) (10.6)
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
%
--
<S> <C>
Communications Group............................ 4.8
Media Group..................................... --
Total net income................................
</TABLE>
- ------------------------------
(1) Earnings (loss) per share 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.
COMMUNICATIONS GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE
-------------------------------------------- --------------------
INCREASE
(DECREASE)
------------
1996 1995 $ % 1996 1995(1)
--------- --------- --------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Reported net income........................................ $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.............. (36) (85) 49 57.6 (0.08) (0.18)
Cumulative effect of change in accounting principle(2)... (34) -- (34) -- (0.07) --
Current year effect of change in accounting
principle(2)........................................... (15) -- (15) -- (0.03) --
Recapitalization costs................................... -- 8 (8) -- -- 0.01
Early extinguishment of debt............................. -- 8 (8) -- -- 0.02
--------- --------- --------- --- --------- ---------
Normalized income.......................................... $ 1,164 $ 1,107 $ 57 5.1 $ 2.44 $ 2.35
--------- --------- --------- --- --------- ---------
--------- --------- --------- --- --------- ---------
<CAPTION>
INCREASE
(DECREASE)
----------------------
$ %
--------- -----
<S> <C> <C>
Reported net income........................................ $ 0.12 4.8
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.............. 0.10 55.6
Cumulative effect of change in accounting principle(2)... (0.07) --
Current year effect of change in accounting
principle(2)........................................... (0.03) --
Recapitalization costs................................... (0.01) --
Early extinguishment of debt............................. (0.02) --
--------- ---
Normalized income.......................................... $ 0.09 3.8
--------- ---
--------- ---
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications 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.
(2) Effective January 1, 1996, U S WEST adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See the U S
WEST Consolidated Financial Statements -- Note 7 -- Property, Plant and
Equipment.
A-4
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Communications Group's 1996 normalized income was $1,164, an increase of
$57, or 5.1 percent, compared with $1,107 in 1995. Normalized earnings per share
were $2.44, an increase of $0.09, or 3.8 percent, as compared to 1995. The
increase in normalized income is primarily attributable to demand for services,
evidenced by revenue growth of 6.3 percent. Partially offsetting the increased
demand are higher costs incurred to address business growth, service-improvement
initiatives and costs related to new business opportunities.
The Communications Group expects net income growth in the core business to
be partially offset by cost increases related to growth initiatives such as
wireless personal communications services ("PCS") and interLATA long-distance
service. Net income growth could also be impacted by costs related to
implementing the interconnection requirements and other provisions of the
Telecommunications Act of 1996. However, the net income impact will depend on
the nature and timing of the requirements, and the type of recovery mechanisms
provided for by the Federal Communications Commission ("FCC") and state
commissions. (See the Communications Group Management's Discussion and Analysis
of Financial Condition and Results of Operations -- "Regulatory Environment.")
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted
in a one-time gain of $34 (net of tax of $22), or $0.07 per Communications
share, related to the cumulative effect of change in accounting principle. See
the U S WEST Consolidated Financial Statements -- Note 7 -- Property, Plant and
Equipment.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
MEDIA GROUP NET INCOME (LOSS)
<TABLE>
<CAPTION>
NET INCOME (LOSS) EARNINGS (LOSS) PER SHARE
------------------------------------------ -------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- ---------
1996 1995 $ % 1996 1995(1) $
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Reported net income (loss)............................ $ (71) $ 141 $ (212) -- $ (0.16) $ 0.29 $ (0.45)
Adjustments to reported net income:
Merger of joint venture(2).......................... -- (95) 95 -- -- (0.20) 0.20
Recapitalization costs.............................. -- 9 (9) -- -- 0.02 (0.02)
Early extinguishment of debt........................ -- 4 (4) -- -- 0.01 (0.01)
--------- --------- --------- --- --------- --------- ---------
Normalized income (loss).............................. $ (71) $ 59 $ (130) -- $ (0.16) $ 0.12 $ (0.28)
--------- --------- --------- --- --------- --------- ---------
--------- --------- --------- --- --------- --------- ---------
<CAPTION>
%
---------
<S> <C>
Reported net income (loss)............................ --
Adjustments to reported net income:
Merger of joint venture(2).......................... --
Recapitalization costs.............................. --
Early extinguishment of debt........................ --
---
Normalized income (loss).............................. --
---
---
</TABLE>
- ------------------------------
(1) Earnings (loss) per share have been presented on a pro forma basis as if
the 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.
(2) Relates to the merger of Telewest Communications plc ("Telewest") with SBC
CableComms (UK).
During 1996, the Media Group recorded a net loss of $71, or $0.16 per Media
share, compared to normalized income of $59, or $0.12 per Media share, in 1995.
Excluding the effects of the Continental Merger, the Media Group would have been
break-even. The decline in 1996 normalized income (loss), excluding Continental,
is primarily due to higher equity losses related to international and domestic
growth initiatives, partially offset by improvement in the domestic cellular
operation. Media Group losses will be significant in 1997 and beyond as a result
of the Continental Merger.
A-5
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment") and incurred
after-tax costs of $9 associated with the Recapitalization Plan.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group....................................................... $ 10,079 $ 9,484 $ 595 6.3
Media Group................................................................ 2,955 2,374 581 24.5
Intergroup eliminations.................................................... (123) (112) (11) (9.8)
--------- --------- --------- ---
Total sales and other revenues............................................. $ 12,911 $ 11,746 $ 1,165 9.9
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1996 1995 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service.......................... $ 4,770 $ 4,344 $ 413 $ 27 $ 8 $ (22) $ 426
Interstate access...................... 2,507 2,378 250 (48) (69) (4) 129
Intrastate access...................... 770 747 45 (16) -- (6) 23
Long-distance network.................. 1,100 1,189 (53) (7) (1) (28) (89)
Other services......................... 932 826 -- -- -- 106 106
--------- --------- ----- ----- ----- ----- ---------
Total.................................. $ 10,079 $ 9,484 $ 655 $ (44) $ (62) $ 46 $ 595
--------- --------- ----- ----- ----- ----- ---------
--------- --------- ----- ----- ----- ----- ---------
<CAPTION>
%
---------
<S> <C>
Local service.......................... 9.8
Interstate access...................... 5.4
Intrastate access...................... 3.1
Long-distance network.................. (7.5)
Other services......................... 12.8
---
Total.................................. 6.3
---
---
</TABLE>
Local service revenues include local telephone exchange, local private line
and public telephone services. The 9.8 percent increase in local service
revenues is primarily attributable to growth in access lines and increased
demand for new product and service offerings, and existing central office
features. Total reported access lines increased 629,000 during 1996, or 4.3
percent, of which 244,000 was attributed to second lines. Second line
installations increased 30.5 percent compared with 1995. Access lines grew by
742,000, or 5.0 percent, when adjusted for sales of approximately 113,000 rural
telephone access lines during 1996.
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 30 percent of
access revenues and 10 percent of total revenues are derived from providing
access services to AT&T Corp. ("AT&T").
Higher revenues from interstate access services were driven by access line
growth and an increase of 8.9 percent in interstate billed access minutes of
use. The increased business volume was partially offset by the effects of price
reductions and sharing related accrued refunds to interexchange carriers. The
Communications Group reduced prices for interstate access services in both 1996
and 1995 as a result of FCC orders and competitive pressures. Intrastate access
revenues increased primarily due to higher demand partially offset by the
effects of price reductions.
A-6
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Long-distance revenues are derived from calls made within the Local Access
and Transport Area ("LATA") boundaries of the Communications Group 14 state
region (the "Region"). During 1996, long-distance revenues decreased 7.5
percent, primarily due to the effects of competition and the implementation of
multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in May and October
1996, respectively. The MTCPs essentially allow independent telephone companies
to act as toll carriers. The 1996 impact of the MTCPs was a $27 reduction in
long-distance revenues, offset by increases in intrastate access revenues of $5
and decreases in other operating expenses (i.e., access expense) of $21. Similar
changes in other states are scheduled to occur in 1997, though the impact on
1997 net income is not expected to be material.
Excluding the effects of the MTCPs, long-distance revenues decreased 5.2
percent. Long-distance revenues have declined over the last several years as
customers have migrated to interexchange carriers that have the ability to offer
long-distance 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. The Communications Group expects erosion in
long-distance revenue to continue in 1997 due to the loss of exclusivity of 1+
dialing in Minnesota and Arizona, effective in February and April 1996,
respectively, and continued dial-around activity in other states within the
Region, though management expects the decline to be less than in 1996. The
Communications Group is partially mitigating competitive losses through
competitive pricing of intraLATA long-distance services and increased
promotional efforts to retain customers.
Revenues from other services primarily consist of voice messaging services,
inside wire maintenance services, billing and collection services provided to
interexchange carriers, high-speed data transmission services, and the provision
of customer premises equipment ("CPE").
During 1996, revenues from other services increased $106, or 12.8 percent,
primarily as a result of continued market penetration in voice messaging
services and increased inside wire maintenance services. Also contributing to
other services revenue growth were increased contract revenues related to a
large wire installation project and CPE sales.
Future revenues at U S WEST Communications, Inc. ("U S WEST Communications")
may be affected by pending regulatory actions in federal and local regulatory
jurisdictions. (See the Communications Group Management's Discussion and
Analysis of Financial Condition and Results of Operations -- "Regulatory
Environment.")
A-7
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MEDIA GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.................................................................... $ 1,120 $ 1,058 $ 62 5.9
International............................................................... 139 122 17 13.9
--------- --------- --------- ---------
1,259 1,180 79 6.7
Wireless communications:
Cellular service............................................................ 1,078 845 233 27.6
Cellular equipment.......................................................... 105 96 9 9.4
--------- --------- --------- ---------
1,183 941 242 25.7
Cable and telecommunications:
Domestic.................................................................... 488 215 273 --
International............................................................... 6 -- 6 --
--------- --------- --------- ---------
494 215 279 --
Other......................................................................... 19 38 (19) (50.0)
--------- --------- --------- ---------
Sales and other revenues...................................................... $ 2,955 $ 2,374 $ 581 24.5
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Media Group sales and other revenues increased 24.5 percent, to $2,955 in
1996. Excluding the effects of the Continental Merger, sales and other revenues
increased 13.9 percent. The increase was primarily due to strong growth in
cellular service revenue.
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising, which represents 98 percent of the domestic directory and
information services revenue, increased 7.4 percent, to $1,102 in 1996. The
increases are largely a result of a 5.7 percent increase in revenue per local
advertiser (primarily a result of price increases of approximately 4.0 percent)
combined with an increase of 3,000 in local advertisers during the year.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 27.6 percent,
to $1,078 in 1996, due to a 40 percent increase in subscribers during the year
(with 22 percent of the additions occurring in December), partially offset by a
12 percent drop in average revenue per subscriber to $53.00 per month. The
increase in subscribers relates to continued growth in demand for wireless
services. Consumers, who use cellular phones for safety and convenience, have
contributed significantly to this growth in demand. U S WEST anticipates this
growth trend to continue, although at decreased rates.
New wireless competitors offering PCS services will create additional
competitive pressures on pricing in Media Group markets in 1997. Pricing
pressures associated with new and existing competitors, combined with the
continuing shift in the customer base from businesses to consumers, will cause
the average revenue per subscriber to continue to decline.
Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a
result of a 61 percent increase in units sold which was somewhat offset by lower
equipment costs. A 30 percent increase in customers added during the year and
the implementation of a phone exchange program for existing customers led to the
increase in units sold.
A-8
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues increased $273, to $488 in 1996. The November 15, 1996 Continental
Merger contributed $252 to the increase. Revenues related to the cable systems
in Atlanta (the "Atlanta Systems") increased 9.8 percent, to $236, as a result
of a 3.9 percent increase in revenue per subscriber to $39.36 per month
(primarily a result of price increases of 6 to 7 percent) and a basic subscriber
increase of 4.5 percent.
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group........................................................... $ 2,340 $ 2,178 $ 162 7.4
Media Group.................................................................... 515 467 48 10.3
--------- --------- --------- ---
Total operating income......................................................... $ 2,855 $ 2,645 $ 210 7.9
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP OPERATING INCOME
The Communications Group's operating income increased $162, or 7.4 percent,
to $2,340 during 1996. Revenues increased $595, or 6.3 percent, partially offset
by an increase of $433, or 5.9 percent, in operating costs. Higher operating
costs were incurred to address business growth, service-improvement initiatives
and costs related to new business opportunities.
MEDIA GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic....................................................................... $ 452 $ 399 $ 53 13.3
International.................................................................. 2 (1) 3 --
--------- --------- --- ---------
454 398 56 14.1
Wireless communications.......................................................... 243 147 96 65.3
Cable and telecommunications:
Domestic....................................................................... (13) 23 (36) --
International.................................................................. (7) -- (7) --
--------- --------- --- ---------
(20) 23 (43) --
Other(1)......................................................................... (162) (101) (61) (60.4)
--------- --------- --- ---------
Operating income................................................................. $ 515 $ 467 $ 48 10.3
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>
- ------------------------------
(1) Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
Media Group operating income increased $48, or 10.3 percent, to $515.
Excluding the effects of the November 15, 1996 Continental Merger, Media Group
operating income increased $73, or 15.6 percent. The increase was primarily due
to strong subscriber growth in wireless communications operations.
A-9
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DIRECTORY AND INFORMATION SERVICES. During 1996, operating income related
to domestic Yellow Pages directory advertising increased 1.6 percent to $511.
Revenue increases of 7.4 percent were offset by an approximate 10 percent
increase in paper, printing, delivery and distribution costs and a charge of $25
to reorganize and reduce headcount in 1996. Operating losses associated with
on-going product development activities reduced domestic directory and
information services operating income by $59 in 1996, compared with a reduction
of $104 in 1995. The decrease in operating losses is primarily the result of
exiting various product development activities in 1995.
WIRELESS COMMUNICATIONS. Cellular operating income increased 65.3 percent,
to $243 in 1996. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has
been more than offset by a combined decrease of 18 percent in the costs incurred
to acquire and support customers.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications results include
an operating loss of $25 related to the November 15, 1996 Continental Merger.
The operating loss includes $112 of depreciation and amortization expense as a
result of the preliminary purchase price allocation. Continental will generate
operating losses for the foreseeable future because of the effects of
amortization of intangible assets and depreciation associated with network
upgrades.
The Atlanta Systems contributed operating income of $12 in 1996, compared
with $23 in 1995. An increase in depreciation expense related to system upgrade
activities has contributed to the decline in operating income.
OTHER. Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Other operating losses increased in 1996 primarily as a result of a change in
cost allocation policy. Beginning in 1996, other operating losses include costs
that are not specifically identifiable with an operating company. Previously
such costs were allocated to the operating companies. Other operating losses
also include a charge of $10 related to staff reductions at international
headquarters in 1996.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense................................................................... $ 612 $ 527 $ 85 16.1
Equity losses in unconsolidated ventures........................................... 346 207 139 67.1
Guaranteed minority interest expense............................................... 55 14 41 --
Other expense -- net............................................................... 61 36 25 69.4
</TABLE>
Interest expense increased $85, or 16.1 percent, primarily as a result of
assuming $6.5 billion, at market value, in debt related to the Continental
Merger. Also contributing to the increase was a higher average debt level at the
Communications Group and a decrease in the amount of interest capitalized
resulting from a lower average balance of telecommunications plant under
construction at the Communications Group.
A-10
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Equity losses increased $139 in 1996, primarily due to network expansion
costs and additional financing costs at Telewest and One 2 One. Rapid customer
growth at One 2 One also contributed to the increase. Start-up and other costs
associated with new international investments located in Poland and Malaysia
contributed to the increase, along with losses related to Continental's cable
and telecommunications investments. Domestically, improved results from the TWE
partnership, related to improvements in cable and programming operations, were
more than offset by increased losses at PrimeCo Personal Communications L.P.
("PrimeCo") as the partnership launched service in the fourth quarter of 1996.
The Company expects PrimeCo to experience several years of operating losses
associated with the start-up phase of its operations. The Company expects equity
losses to continue to be significant in 1997 as expansion activities of its
equity investments continue.
Guaranteed minority interest expense reflects an increase of $34 related to
the September 11, 1995 issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Company-guaranteed
debentures ("Preferred Securities") totaling $600, and an increase of $7 related
to an additional $480 issuance of Preferred Securities on October 29, 1996.
Other expense increased $25 in 1996, primarily as a result of a pretax
charge of $31, associated with the sale of the Company's cable television
interests in Norway, Sweden and Hungary, and a $13 adjustment related to the
Company's equity investment in Bell Communications Research, Inc. ("Bellcore"),
of which U S WEST Communications has a one-seventh ownership interest. Partially
offsetting were foreign currency translation gains associated with loans to
international ventures and costs incurred in 1995 associated with the
Recapitalization Plan.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes.............................................. $ 696 $ 825 $ (129) (15.6)
Effective tax rate...................................................... 37.8% 38.3% -- --
</TABLE>
The decrease in the effective tax rate is primarily a result of lower pretax
earnings and a one-time benefit associated with the leveraged lease portfolio.
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
NET INCOME
<TABLE>
<CAPTION>
NET INCOME
------------------------------------------ EARNINGS PER SHARE(1)
INCREASE (DECREASE) ------------------------------------------
DECREASE
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Communications Group...................... $ 1,176 $ 1,150 $ 26 2.3 $ 2.50 $ 2.53 $ (0.03) (1.2)
Media Group............................... 141 276 (135) (48.9) 0.29 0.61 (0.32) (52.5)
--------- --------- --------- ---------
Total net income.......................... $ 1,317 $ 1,426 $ (109) (7.6)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications Stock and 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.
A-11
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
COMMUNICATIONS GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE(1)
------------------------------------------ ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income....................... $ 1,176 $ 1,150 $ 26 2.3 $ 2.50 $ 2.53 $ (0.03) (1.2)
Adjustments to reported net income:
Gains on sales of rural telephone
exchanges............................. (85) (51) (34) (66.7) (0.18) (0.11) (0.07) (63.6)
Recapitalization costs.................. 8 -- 8 -- 0.01 -- 0.01 --
Early extinguishment of debt............ 8 -- 8 -- 0.02 -- 0.02 --
--------- --------- --- --------- --------- --------- --------- ---------
Normalized income......................... $ 1,107 $ 1,099 $ 8 0.7 $ 2.35 $ 2.42 $ (0.07) (2.9)
--------- --------- --- --------- --------- --------- --------- ---------
--------- --------- --- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per 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 normalized income was $1,107, an increase of
$8, or 0.7 percent, compared with $1,099 in 1994. The increase in normalized
income was attributable to revenue growth of 3.4 percent largely offset by
significantly higher costs incurred to improve customer service and meet greater
than expected business growth. Normalized pro forma earnings per Communications
share were $2.35, a decrease of $0.07, or 2.9 percent, from 1994. 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 refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
MEDIA GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE(1)
------------------------------------------ ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income......................... $ 141 $ 276 $ (135) (48.9) $ 0.29 $ 0.61 $ (0.32) (52.5)
Adjustments to reported net income:
Sale of Paging operations(2).............. -- (41) 41 -- -- (0.09) 0.09 --
Partial sale and merger of joint venture
interest(2, 3).......................... (95) (105) 10 9.5 (0.20) (0.23) 0.03 13.0
Recapitalization costs.................... 9 -- 9 -- 0.02 -- 0.02 --
Early extinguishment of debt.............. 4 -- 4 -- 0.01 -- 0.01 --
--------- --------- --------- --------- --------- --------- --------- ---------
Normalized income......................... $ 59 $ 130 $ (71) (54.6) $ 0.12 $ 0.29 $ (0.17) (58.6)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
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.
(2) The 1994 gain relates to the partial sale of U S WEST's joint venture
interest in Telewest and the sale of U S WEST's paging operations.
(3) The 1995 gain relates to the merger of Telewest with SBC CableComms (UK).
A-12
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 1995, normalized income declined 54.6 percent, to $59, excluding the
effects of the one-time items. The decline is due primarily to higher equity
losses related to international growth initiatives and increased amortization
and interest expense.
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 and incurred
costs of $9 associated with the Recapitalization Plan.
SALES AND OTHER REVENUES
<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 sales and other revenues............................................... $ 11,746 $ 10,953 $ 793 7.2
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1995 1994 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service......................... $ 4,344 $ 4,067 $ 273 $ 35 $ (10) $ (21) $ 277
Interstate access..................... 2,378 2,269 191 (66) (2) (14) 109
Intrastate access..................... 747 729 36 (31) 8 5 18
Long-distance network................. 1,189 1,329 (54) (23) (1) (62) (140)
Other services........................ 826 782 -- -- -- 44 44
--------- --------- ----- --- --- --- ---------
Total................................. $ 9,484 $ 9,176 $ 446 $ (85) $ (5) $ (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>
Local service revenues increased principally as a result of higher demand
for new and existing services, and demand for second lines. Reported total
access lines increased 496,000, or 3.5 percent, of which 161,000 were second
lines. Second line installations increased 25.5 percent compared with 1994.
Access line growth was 4.1 percent when adjusted for sales of rural telephone
access lines during 1995.
Higher revenues from interstate access services were driven by an increase
of 9.2 percent in interstate billed access minutes of use, which more than
offset the effects of price reductions and refunds. Intrastate access revenues
increased primarily due to the impact of increased business volumes and MTCPs,
partially offset by the impact of rate changes.
Long-distance revenues were impacted by the implementation of MTCPs in
Oregon and Washington in 1994. The 1995 impact of the MTCPs was a $62 reduction
in long-distance revenues, partially offset by increases in intrastate access
revenues of $12 and decreases in other operating expenses (i.e., access expense)
of $42. Excluding the effects of the MTCPs, long-distance revenues decreased by
5.9 percent during 1995, primarily due to the effects of competition and rate
reductions.
During 1995, revenues from other services increased primarily as a result of
continued market penetration in voice messaging services and sales of high-speed
data transmission services. Revenue growth
A-13
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
from other services was also attributed to inside wire maintenance services and
a large contract related to a wire installation project. These increases were
partially offset by a decrease in billing and collection service revenues.
MEDIA GROUP SALES AND OTHER REVENUES
<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
--------- --------- --------- ---------
Sales and other revenues...................................................... $ 2,374 $ 1,908 $ 466 24.4
--------- --------- --------- ---------
--------- --------- --------- ---------
</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. The increase was
a result of 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 33.5 percent,
to $845 in 1995, due to a 51 percent increase in subscribers during the year
(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.
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.
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.
A-14
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group........................................................... $ 2,178 $ 2,118 $ 60 2.8
Media Group.................................................................... 467 389 78 20.1
--------- --------- --------- ---
Total operating income......................................................... $ 2,645 $ 2,507 $ 138 5.5
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP OPERATING INCOME
The Communications Group's operating income increased $60, or 2.8 percent,
to $2,178 during 1995. Revenue growth contributed $308 of the increase which was
largely offset by an increase of $248, or 3.5 percent, in operating costs. The
higher operating costs were incurred to improve customer service and meet
greater than expected business growth.
MEDIA GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.......................................................................... $ 399 $ 397 $ 2 0.5
International..................................................................... (1) (1) -- --
--------- --------- --- ---
398 396 2 0.5
Wireless communications:
Cellular.......................................................................... 147 82 65 79.3
Paging sales and service(1)....................................................... -- 6 (6) --
--------- --------- --- ---
147 88 59 67.0
Cable and telecommunications........................................................ 23 -- 23 --
Other(2)............................................................................ (101) (95) (6) (6.3)
--------- --------- --- ---
Operating income.................................................................... $ 467 $ 389 $ 78 20.1
--------- --------- --- ---
--------- --------- --- ---
</TABLE>
- ------------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
six months ending June 30, 1994.
(2) Primarily includes headquarters expenses for shared services and
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 sale of the
paging business. The increase was 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 $104 in 1995, compared with a reduction of $66 in 1994.
A-15
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
WIRELESS COMMUNICATIONS. Cellular operating income increased 79.3 percent,
to $147 in 1995. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber 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 and support
customers.
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 in 1995.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense................................................................... $ 527 $ 442 $ 85 19.2
Equity losses in unconsolidated ventures........................................... 207 121 86 71.1
Other expense (income) -- net...................................................... 36 (25) 61 --
</TABLE>
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.
Equity losses increased $86 in 1995, primarily due to costs related to
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 also contributed to the increase. These increased losses were partially
offset by earnings in the European wireless operations and gains related to
movement in foreign currency exchange rates. Losses related to domestic
investments in TWE and PrimeCo also increased.
The increase in other expense is largely attributable to costs associated
with the Recapitalization Plan in 1995, increased minority interest expense
associated with the 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.
A-16
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Communications Group................................................................. $ 3,306 $ 2,719 $ 2,509
Media Group.......................................................................... 692 640 551
Elimination(1)....................................................................... -- 61 187
--------- --------- ---------
Total cash provided by operating activities.......................................... $ 3,998 $ 3,420 $ 3,247
--------- --------- ---------
--------- --------- ---------
- ------------------------------
(1) Reflects an adjustment for the cash funding of postretirement benefits by Communications Group and the related
issuance of U S WEST common stock.
</TABLE>
During 1996, cash provided by operating activities increased $578 due
primarily to growth in Communications Group operations. The increase in
operating cash flows at the Communications Group reflects a $157 decrease in the
cash funding of postretirement benefits and lower restructuring plan
expenditures. Operating cash flow in Media Group increased due to growth in the
cellular and Yellow Pages businesses, in addition to the contributing effects of
the Continental Merger. See the U S WEST Consolidated Financial Statements --
Note 11 -- Restructuring Charge.
Cash provided by operating activities increased $173 in 1995. Business
growth in the Communications Group and a reduction in the cash funding of
postretirement benefit costs were partially offset by increases in restructuring
plan expenditures. Improvement in the Media Group operating cash flow resulted
from growth in the cellular business and the acquisition of the Atlanta Systems,
partially offset by higher income tax and interest payments.
INVESTING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Communications Group................................................................. $ 2,230 $ 2,268 $ 2,156
Media Group.......................................................................... 818 1,238 1,422
--------- --------- ---------
Total cash used for investing activities............................................. $ 3,048 $ 3,506 $ 3,578
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total capital expenditures were $3,071, $2,825 and $2,603 in 1996, 1995 and
1994, respectively. In 1997, capital expenditures are expected to approximate
$4.1 billion, of which $2.5 billion and $1.6 billion pertain to the
Communications Group and the Media Group, respectively. Included in the 1997
capital expenditure estimates are the Communications Group entry costs for
wireless PCS and the interLATA long-distance markets and interconnection costs
to meet the requirements of the Telecommunications Act of 1996. Also included
are costs for the Media Group to upgrade the domestic cable network and the
domestic cellular network.
In March 1995, PrimeCo, a wireless services joint venture in which Media
Group has a 24 percent interest, 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. In 1996, the Company invested an additional $132 to fund
network build activities.
A-17
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Investing activities of the Company include equity investments in
international ventures. The Company invested $243, $681 and $444 in
international ventures in 1996, 1995 and 1994, respectively. Investments in 1996
include loans provided to One 2 One, the purchase of a 23 percent interest in a
venture to provide wireless service in Poland and the purchase of a 28 percent
interest in a venture in Belgium to provide telephony services on the cable
network. In 1995, the Company invested $681 in international ventures in
Malaysia, the Netherlands, Czech Republic and 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 $420 in 1997. This
includes investments to provide digital wireless service in India and to fund
expansion at One 2 One. Additionally, in 1997, U S WEST may contribute equity to
ventures acquired from Continental.
In connection with its review of the financial and operating performance,
market value and capital requirements of its international investment portfolio,
management has identified certain investments it believes are appropriate to
sell or restructure under acceptable terms. Management expects that sales
proceeds could approximate $300 in 1997. In January 1997, the Company sold its 5
percent interest in a French wireless venture for proceeds of $82. Additionally,
U S WEST is pursuing a possible sale or restructuring of Continental's joint
venture interest in Optus Vision Pty Ltd, an Australian cable/telephony venture.
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Communications Group.................................................................. $ (1,168) $ (395) $ (293)
Media Group........................................................................... 227 525 993
Elimination(1)........................................................................ -- (61) (187)
--------- --------- ---------
Total cash (used for) provided by financing activities................................ $ (941) $ 69 $ 513
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Reflects an adjustment for the receipt of cash by the Media Group for the
funding of postretirement benefits by Communications Group and the related
issuance of U S WEST common stock.
Total debt at December 31, 1996, was $15,351, an increase of $6,496 compared
to December 31, 1995. The increase is primarily a result of assuming Continental
debt totaling $6,525 (at market value) on November 15, 1996. Concurrently, the
Company refinanced $3,657 of the assumed debt with commercial paper. In January
1997, the Company issued medium- and long-term debt totaling $4.1 billion, at a
weighted average rate of 7.47 percent. The proceeds were used to refinance the
commercial paper. Accordingly, such commercial paper is classified as long-term
debt in the accompanying U S WEST Consolidated Balance Sheet at December 31,
1996.
The assumption of Continental's debt, in conjunction with the Merger, has
resulted in a downgrading of U S WEST's credit ratings. Senior unsecured debt
and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps
were Baa1, BBB+ and BBB+, and P2, A2, and D-2, respectively.
The Continental Merger and the regulatory uncertainty surrounding the
Washington State Utilities and Transportation Commission's $91.5 rate reduction
order (see the U S WEST Consolidated Financial Statements -- Note 19 --
Commitments and Contingencies) have also resulted in a general downgrading of U
S WEST Communications' credit ratings. U S WEST Communications' senior unsecured
debt and
A-18
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps were
Aa3, A-plus and AA-minus, and P1, A1 and D-1-plus, respectively, at December 31,
1996.
In 1996, U S WEST issued $254 of exchangeable notes, or Debt Exchangeable
for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each DECS will be
mandatorily exchanged by U S WEST for shares of Financial Security Assurance
Holdings Ltd. ("FSA") held by the Company or, at U S WEST's option, redeemed at
the cash equivalent. The capital assets segment currently holds approximately 40
percent of the outstanding FSA common stock. On October 29, 1996, the Company
refinanced commercial paper through the issuance of 8.25 percent Preferred
Securities totaling $480. The payment of interest and redemption amounts to
holders of the Preferred Securities are fully and unconditionally guaranteed by
U S WEST.
During 1995, debt increased $917 primarily due to the increase in capital
expenditures at the Communications Group, Media Group investments in
international ventures, acquisition of PCS licenses, and a reclassification of
debt from net investment in assets held for sale. In addition, during
fourth-quarter 1995, U S WEST issued $130 of DECS due December 15, 1998. These
increases in debt were partially offset by reductions of debt in 1995 related to
the Media Group investment in TWE and a refinancing of commercial paper by
issuing $600 of Preferred Securities. The payment of interest and redemption
amounts to holders of the Preferred 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. Expenses
associated with the refinancing of long-term debt resulted in extraordinary
after-tax charges to income of $8, net of tax benefits of $5.
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Excluding debt associated with the capital assets segment, the Company's
percentage of debt to total capital at December 31, 1996, was 54.8 percent
compared with 50.7 percent at December 31, 1995. Including debt associated with
the capital assets segment, Preferred Securities and mandatorily redeemable
preferred stock, the Company's percentage of debt to total capital was 59.5
percent at December 31, 1996 and 56.4 percent at December 31, 1995. The increase
in debt related to total capital in 1996 is a result of the increase in debt
associated with the Continental Merger.
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 $5.1 billion, all of which was available at December 31, 1996.
Under registration statements filed with the Securities and Exchange Commission
("SEC"), as of December 31, 1996, U S WEST is permitted to issue up to
approximately $940 of new debt securities.
U S WEST from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST. There is no assurance that any such discussions will result in the
consummation of any such transaction.
A-19
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 this risk. 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 over time and the interest rate variability. This is
achieved through the use of interest rate swaps which adjust the ratio of fixed-
to variable-rate debt.
Notional amounts of interest rate swaps and cap agreements outstanding were
$2,649 and $1,609 at December 31, 1996 and 1995, respectively. This includes
notional amounts for interest rate swaps and cap agreements of $1,500, that were
assumed in connection with the Continental Merger. These contracts have various
maturities that extend to 2004. A 25 basis point increase in interest rates
would create a gain of $4 in the market value of interest rate contracts.
Likewise, a 25 basis point decrease in interest rates would create a loss of $4
in the market value of interest rate contracts.
During fourth-quarter 1996, U S WEST purchased put options for $1.5 billion
notional of U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. A deferred gain of $5 was
recognized in January 1997 at contract closing. The deferred gain will be
recognized as a yield adjustment over the life of the debt, which matures at
various dates through 2027.
FOREIGN EXCHANGE RISK MANAGEMENT
U S WEST enters into forward and zero-cost combination 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 and the repayment of foreign
currency denominated short-term receivables 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.
As of December 31, 1996, 1995 and 1994, notional amounts of foreign exchange
forward and option contracts outstanding were $0, $456 and $170, respectively.
These contracts were primarily for the purchase of Dutch guilders and British
pounds in 1995 and British pounds in 1994. In January and February 1997, the
Company entered into foreign exchange forward contracts in notional amounts
totaling $170 for the purchase and/or sale of British pounds, Japanese yen and
French francs. All foreign exchange contracts have maturities of one year or
less.
The Company had British pound-denominated receivables in the translated
principal amounts of $250, $139 and $48 at December 31, 1996, 1995 and 1994,
respectively. The Company also had foreign exchange risks associated with a
Dutch guilder-denominated payable in the translated principal amount of $216 at
December 31, 1995, which was repaid in February 1996. These positions were
partially hedged in 1996 and 1995. In 1997, these positions are no longer
hedged.
COMPETITIVE AND REGULATORY ENVIRONMENT
For a complete discussion of the competitive and regulatory environment of
the Communications Group and the Media Group, see Management's Discussion and
Analysis of Financial Condition and Results of Operations -- "Competitive and
Regulatory Environment."
A-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Consolidated Balance Sheet of U S WEST,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996, and the
related Consolidated Statements of Operations and Cash Flows for the year then
ended. These consolidated financial statements and the Supplementary Selected
Proportionate Results of Operations referred to below are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and supplementary information based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of U S WEST, Inc.
and subsidiaries as of December 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
We have also audited the Supplementary Selected Proportionate Results of
Operations for the year ended December 31, 1996, presented on page A-69. 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
conformity with generally accepted accounting principles. In our opinion, the
Supplementary Selected Proportionate Results of Operations referred to above
fairly states, in all material respects, the information set forth therein on
the basis of accounting described on page A-69.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1997.
A-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Consolidated Balance Sheet of U S WEST, Inc. as of
December 31, 1995, and the related Consolidated Statements of Operations and
Cash Flows for each of the two 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 the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
A-22
<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 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 objectively assess the
effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based upon
the recognition that the cost of the system should not exceed the benefits
derived. U S WEST believes that the Company's system does provide 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 reports are included
herein, were engaged to express an opinion on our Consolidated Financial
Statements. Their opinions are 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
Michael P. Glinsky
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
February 12, 1997
A-23
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues......................................................... $ 12,911 $ 11,746 $ 10,953
Operating expenses:
Employee-related expenses...................................................... 4,412 4,071 3,779
Other operating expenses....................................................... 2,671 2,323 2,203
Taxes other than income taxes.................................................. 429 416 412
Depreciation and amortization.................................................. 2,544 2,291 2,052
--------- --------- ---------
Total operating expenses..................................................... 10,056 9,101 8,446
--------- --------- ---------
Operating income................................................................. 2,855 2,645 2,507
Interest expense................................................................. 612 527 442
Equity losses in unconsolidated ventures......................................... 346 207 121
Gains on asset sales:
Rural telephone exchanges...................................................... 59 136 82
Merger and partial sale of joint venture interest.............................. -- 157 164
Paging assets.................................................................. -- -- 68
Guaranteed minority interest expense............................................. 55 14 --
Other expense (income) -- net.................................................... 61 36 (25)
--------- --------- ---------
Income before income taxes, extraordinary item and cumulative
effect of change in accounting principle....................................... 1,840 2,154 2,283
Provision for income taxes....................................................... 696 825 857
--------- --------- ---------
Income before extraordinary item and cumulative effect of
change in accounting principle................................................. 1,144 1,329 1,426
Extraordinary item -- early extinguishment of debt -- net of tax................. -- (12) --
--------- --------- ---------
Income before cumulative effect of change in accounting principle................ 1,144 1,317 1,426
Cumulative effect of change in accounting principle -- net of tax................ 34 -- --
--------- --------- ---------
NET INCOME....................................................................... $ 1,178 $ 1,317 $ 1,426
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock..................................................... 9 3 --
--------- --------- ---------
EARNINGS AVAILABLE FOR COMMON STOCK.............................................. $ 1,169 $ 1,314 $ 1,426
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-24
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS (EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE:
Income before extraordinary item and cumulative effect of change in accounting
principle.................................................................... $ 2.55 $ 2.52 $ 2.53
Extraordinary item -- early extinguishment of debt............................. -- (0.02) --
Cumulative effect of change in accounting principle............................ 0.07 -- --
--------- --------- ---------
COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE................................... $ 2.62 $ 2.50 $ 2.53
--------- --------- ---------
--------- --------- ---------
COMMUNICATIONS GROUP AVERAGE COMMON SHARES OUTSTANDING........................... 477,549 470,716 453,316
--------- --------- ---------
--------- --------- ---------
MEDIA GROUP EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item........................................ $ (0.16) $ 0.30 $ 0.61
Extraordinary item -- early extinguishment of debt............................. -- (0.01) --
--------- --------- ---------
MEDIA GROUP EARNINGS (LOSS) PER COMMON SHARE..................................... $ (0.16) $ 0.29 $ 0.61
--------- --------- ---------
--------- --------- ---------
MEDIA GROUP AVERAGE COMMON SHARES OUTSTANDING.................................... 491,924 470,549 453,316
--------- --------- ---------
--------- --------- ---------
U S WEST, INC. EARNINGS PER COMMON SHARE......................................... $ 3.14
---------
---------
U S WEST, INC. AVERAGE COMMON SHARES OUTSTANDING................................. 453,316
---------
---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-25
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 201 $ 192
Accounts and notes receivable, less allowance for
credit losses of $125 and $88, respectively............................................. 2,113 1,886
Inventories and supplies.................................................................. 159 227
Deferred directory costs.................................................................. 259 247
Deferred tax asset........................................................................ 213 282
Prepaid and other......................................................................... 167 75
--------- ---------
Total current assets........................................................................ 3,112 2,909
--------- ---------
Property, plant and equipment -- net........................................................ 18,281 14,677
Investment in Time Warner Entertainment..................................................... 2,477 2,483
Net investment in international ventures.................................................... 1,548 1,511
Intangible assets -- net.................................................................... 12,595 1,798
Net investment in assets held for sale...................................................... 409 429
Other assets................................................................................ 2,433 1,264
--------- ---------
Total assets................................................................................ $ 40,855 $ 25,071
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-26
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt........................................................................... $ 1,051 $ 1,901
Accounts payable.......................................................................... 1,316 975
Due to Continental Cablevision shareowners................................................ 1,150 --
Employee compensation..................................................................... 470 385
Dividends payable......................................................................... 263 254
Current portion of restructuring charge................................................... 126 282
Other..................................................................................... 1,698 1,255
--------- ---------
Total current liabilities................................................................... 6,074 5,052
--------- ---------
Long-term debt.............................................................................. 14,300 6,954
Postretirement and other postemployment benefit obligations................................. 2,479 2,433
Deferred income taxes....................................................................... 4,349 1,071
Unamortized investment tax credits.......................................................... 173 199
Deferred credits and other.................................................................. 800 763
Commitments and Contingencies
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures...................................................... 1,080 600
Preferred stock subject to mandatory redemption............................................. 51 51
Shareowners' equity:
Series D Preferred Stock -- $1.00 per share par value, 20,000,000 shares authorized and
issued.................................................................................. 920 --
Common shares -- Communications Stock -- $0.01 per share par value, 2,000,000,000 shares
authorized, 480,460,536 and 482,877,097 issued and 480,457,336 and 473,635,025
outstanding, respectively. Media Stock -- $0.01 per share par value, 2,000,000,000
shares authorized, 624,782,710 and 481,556,451 issued and 608,863,327 and 472,314,379
outstanding, respectively............................................................... 10,741 8,228
Retained earnings (deficit)............................................................... 18 (115)
LESOP guarantee........................................................................... (91) (127)
Foreign currency translation adjustments.................................................. (39) (38)
--------- ---------
Total shareowners' equity................................................................... 11,549 7,948
--------- ---------
Total liabilities and shareowners' equity................................................... $ 40,855 $ 25,071
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-27
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
OPERATING ACTIVITIES
Net income......................................................................... $ 1,178 $ 1,317 $ 1,426
Adjustments to net income:
Depreciation and amortization.................................................... 2,544 2,291 2,052
Equity losses in unconsolidated ventures......................................... 346 207 121
Gain on asset sales:
Rural telephone exchanges...................................................... (59) (136) (82)
Merger and partial sale of joint venture interest.............................. -- (157) (164)
Paging assets.................................................................. -- -- (68)
Cumulative effect of change in accounting principle.............................. (34) -- --
Deferred income taxes and amortization of investment tax credits................. 5 274 373
Changes in operating assets and liabilities:
Restructuring payments......................................................... (242) (334) (289)
Postretirement medical and life costs, net of cash fundings.................... 39 (24) (5)
Accounts and notes receivable.................................................. (56) (169) (104)
Inventories, supplies and other current assets................................. 31 (79) (81)
Accounts payable and accrued liabilities....................................... 225 45 (4)
Other -- net....................................................................... 21 185 72
--------- --------- ---------
Cash provided by operating activities.............................................. 3,998 3,420 3,247
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment................................... (3,071) (2,825) (2,603)
Investments in international ventures............................................ (243) (681) (350)
Cash from net investment in assets held for sale................................. 213 -- --
Investment in Atlanta Systems.................................................... -- -- (745)
Proceeds from sale of paging assets.............................................. -- -- 143
Proceeds from disposals of property, plant and equipment......................... 189 201 96
Other -- net..................................................................... (136) (201) (119)
--------- --------- ---------
Cash (used for) investing activities............................................. (3,048) (3,506) (3,578)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt -- net............................. 3,987 (1,281) 1,280
Repayments of long-term debt..................................................... (4,699) (1,058) (526)
Proceeds from issuance of Preferred Securities -- net............................ 465 581 --
Proceeds from issuance of long-term debt......................................... 383 2,732 251
Proceeds from issuance of common stock........................................... 168 87 364
Purchases of treasury stock...................................................... (297) (63) (20)
Dividends paid on common and preferred stock..................................... (948) (929) (886)
Proceeds from issuance of mandatorily redeemable preferred stock................. -- -- 50
--------- --------- ---------
Cash (used for) provided by financing activities................................. (941) 69 513
--------- --------- ---------
Cash (used for) provided by continuing operations................................ 9 (17) 182
Cash (to) discontinued operations................................................ -- -- (101)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease).............................................................. 9 (17) 81
Beginning balance................................................................ 192 209 128
--------- --------- ---------
Ending balance................................................................... $ 201 $ 192 $ 209
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-28
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareowners 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,
shareowners 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"). 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 shareowners 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., U S WEST Business
Resources, Inc. and U S WEST Long Distance, Inc. The Communications Group
provides telecommunications 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
high-speed data applications, customer premises equipment and certain other
communications services to business customers and governmental agencies both
inside and outside the Region.
The Media Group is comprised of Continental Cablevision, Inc., the third
largest cable television system operator in the United States, U S WEST
Multimedia Communications, Inc., which owns domestic cable television operations
and investments, U S WEST Dex, Inc. (formerly 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 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
A-29
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: RECAPITALIZATION PLAN (CONTINUED)
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.
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 Statement of Financial Accounting
Standards ("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 -- Net Investment in Assets Held for Sale -- 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 and Continental provide for depreciation of
property, plant and equipment based on various straight-line group methods using
remaining useful (economic) lives based on industry-wide studies. U S WEST
Communications discontinued accounting for its regulated telephone
A-30
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operations under SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," in 1993. The average depreciable lives used for the major
categories of telephone property, plant and equipment follow:
<TABLE>
<CAPTION>
AVERAGE LIFE
CATEGORY (YEARS)
- -------------------------------------------------------------------------- -------------------
<S> <C>
General purpose computers................................................. 6
Digital switch............................................................ 10
Digital circuit........................................................... 10
Aerial copper cable....................................................... 15
Underground copper cable.................................................. 15
Buried copper cable....................................................... 20
Fiber cable............................................................... 20
Buildings................................................................. 27-49
</TABLE>
When the depreciable property, plant and equipment of U S WEST
Communications and Continental 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. Media Group
depreciates buildings between 10 to 40 years, cable distribution systems between
3 to 15 years, cellular systems between 5 to 15 years, and general purpose
computer and other between 3 to 20 years.
Depreciation expense was $2,411, $2,215 and $2,029 in 1996, 1995 and 1994,
respectively.
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 U S WEST were $67, $72, and $44 in
1996, 1995 and 1994, respectively.
COMPUTER SOFTWARE. All subsidiaries of U S WEST, except Continental, charge
the cost of computer software, whether purchased or developed internally, 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. Continental capitalizes the cost
of computer software, whether purchased or developed internally.
Capitalized computer software of $223 and $190 at December 31, 1996 and
1995, respectively, is recorded in property, plant and equipment. The Company
amortized capitalized computer software costs of $83, $70 and $62 in 1996, 1995
and 1994, 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 straight-line
method over periods ranging from five to forty years. These assets are evaluated
for impairment, with other related assets, using the methodology as prescribed
by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and equity securities are
classified as available for sale and are carried at fair market value with
unrealized gains and losses included in equity.
A-31
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
FINANCIAL INSTRUMENTS. Net interest accrued 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.
REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS. Local telephone service,
cellular access and cable television services are generally billed monthly in
advance, and revenues are recognized the following month when services are
provided. Revenues derived from cable pay-per-view, advertising and other
telephone services, including exchange access, long-distance and 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. 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 PER COMMON SHARE. For 1995 and 1994, earnings per common share
("earnings per share") for Communications Stock and Media Stock 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.
NEW ACCOUNTING STANDARDS. Effective January 1, 1996, U S WEST adopted 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. See Note 7 -- Property, Plant and
Equipment -- to the Consolidated Financial Statements.
In 1996, U S WEST adopted 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 has adopted the disclosure provisions of SFAS No. 123 but continues to
account for the stock incentive plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 16 -- Stock
Incentive Plans -- to the Consolidated Financial Statements.
A-32
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128 requires
presentation of basic and diluted earnings per share on the face of the income
statement. Adoption of the new standard will not have a material impact on
Communications Group or Media Group earnings per share.
NOTE 3: MERGER OF CABLE SYSTEMS
CONTINENTAL CABLEVISION, INC. On November 15, 1996, Continental
Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U
S WEST (the "Merger" or the "Continental Merger"). Continental is the third
largest cable television system operator in the United States. The aggregate
consideration paid by U S WEST to shareowners of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock with a market value of $920 million and $1.15
billion in cash. In connection with the Merger, U S WEST also assumed all of
Continental's outstanding indebtedness and other liabilities, which approximated
$7.0 billion at November 15, 1996, for a total purchase price of $11.7 billion.
Continental serves 4.5 million domestic customers, passes 7.4 million domestic
homes and holds significant other domestic and international properties.
U S WEST has accounted for the Merger by the purchase method of accounting.
Accordingly, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The $8.0 billion
excess of the purchase price over the net tangible assets acquired and the
goodwill related to a deferred income tax liability of $3.3 billion is being
amortized over 25 years, except for intangible assets allocated to Continental's
equity method investments, which are being amortized over 15 years. Amortization
related to Continental's equity method investments is recorded as a component of
equity losses in unconsolidated ventures. The intangible assets acquired consist
principally of the cable television franchises of Continental and goodwill.
Continental's results of operations have been included in the consolidated
results of operations since the Merger date.
Following are summarized, combined, unaudited pro forma results of
operations for U S WEST for the years ended December 31, 1996 and 1995, assuming
the Merger occurred as of the beginning of respective periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
SUMMARIZED RESULTS OF OPERATIONS 1996 1995
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues.................................................................... $ 14,618 $ 13,528
Income before extraordinary item and cumulative effect of
change in accounting principle............................................. 702 835
Net income.................................................................. 736 823
Communications Group earnings per common share*............................. 2.55 2.52
Media Group loss per common share*.......................................... (0.90) (0.64)
</TABLE>
- ------------------------------
* Before extraordinary items and accounting change.
Income before extraordinary item and cumulative effect of change in
accounting principle, net income and earnings (loss) per common share are before
nonrecurring items directly attributable to the Merger. The final allocation of
the purchase price is dependent upon certain valuations and other studies that
have
A-33
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MERGER OF CABLE SYSTEMS (CONTINUED)
not progressed to the stage where there is sufficient information to make a
final allocation in the Consolidated Financial Statements. Accordingly, the
purchase price allocations made in connection with the Consolidated Financial
Statements are preliminary.
The impact on the financial position of U S WEST from the disposition of
certain Continental properties as required by federal rules governing
cross-ownership by telephone companies of cable companies and provision of
interLATA services within the Communications Group Region is not expected to be
material.
ATLANTA SYSTEMS. On December 6, 1994, U S WEST acquired the stock of
Wometco Cable Corp. and subsidiaries, and the assets of Georgia Cable Partners
and Atlanta Cable Partners L.P. (the "Atlanta Systems"), for cash of $745 and
12,779,206 U S WEST common shares valued at $459, for a total purchase price of
approximately $1.2 billion. The Atlanta Systems' results of operations have been
included in the consolidated results of operations since the acquisition date.
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.
NOTE 4: INDUSTRY SEGMENTS
U S WEST has two groups, the Communications Group and the Media Group, which
operate in five industry segments.
The businesses comprising the Communications Group operate in a single
industry segment -- communications and related services. Approximately 97
percent of the revenues of the Communications Group are attributable to the
operations of U S WEST Communications, of which approximately 60 percent are
derived from the states of Arizona, Colorado, Minnesota and Washington.
The Media Group operates in four industry segments: directory and
information services, wireless communications, cable and telecommunications and
capital assets, which is held for sale. The cable and telecommunications segment
consists of cable television properties serving 5.0 million domestic subscribers
and passing 8.3 million domestic homes. 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 12 western and
midwestern states.
A-34
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
Industry segment financial information follows:
<TABLE>
<CAPTION>
COMMUNI-
CATIONS AND DIRECTORY AND WIRELESS CABLE AND
RELATED INFORMATION COMMUNI- TELECOMMUNI- CORPORATE AND INTERSEGMENT
SERVICES SERVICES(1) CATIONS CATIONS(2) OTHER(3) ELIMINATIONS
----------- ------------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1996
Sales and other revenues......... $ 10,079 $ 1,259 $ 1,183 $ 494 $ 19 $ (123)
Operating income (loss).......... 2,340 454 243 (20) (162) --
Identifiable assets.............. 16,915 685 1,579 15,504 6,293 (121)
Depreciation and amortization.... 2,122 48 147 212 15 --
Capital expenditures............. 2,806 36 264 353 15 --
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).......... 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 --
<CAPTION>
CONSOLIDATED
-------------
<S> <C>
1996
Sales and other revenues......... $ 12,911
Operating income (loss).......... 2,855
Identifiable assets.............. 40,855
Depreciation and amortization.... 2,544
Capital expenditures............. 3,474
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).......... 2,507
Identifiable assets.............. 23,204
Depreciation and amortization.... 2,052
Capital expenditures............. 2,820
</TABLE>
- ------------------------------
(1) Includes revenues from directory publishing activities in Europe of $139,
$122 and $78, and identifiable assets of $154, $133 and $124 in 1996, 1995
and 1994, respectively.
(2) Results for Continental and the Atlanta Systems have been included since
the dates of Merger and acquisition. 1996 includes revenues of $6, operating
losses of $7, and identifiable assets of $133 from cable operations in the
Czech Republic.
(3) Identifiable assets include U S WEST's investments in debt and equity
securities, equity and cost method investments and the capital assets
segment, which has been discontinued and is held for sale.
Operating income (loss) represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other expense (income) and income taxes.
Corporate and Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Corporate and Other operating losses increased in 1996 primarily as a result of
a change in cost allocation policy. Beginning in 1996, other operating losses
include costs that are not specifically identifiable with an operating company.
Previously such costs were allocated to the operating companies.
Identifiable assets are those assets used in each segment's operations.
Corporate and Other assets consist primarily of cash, debt and equity
securities, investments in international ventures, the investment in Time Warner
Entertainment, the net investment in assets held for sale and other assets.
SIGNIFICANT CONCENTRATIONS. The largest volume of the Communications
Group's services is provided to AT&T Corp. ("AT&T"). During 1996, 1995 and 1994,
revenues related to those services provided to AT&T were $1,046, $1,085 and
$1,130, respectively. Related accounts receivable at December 31, 1996 and
A-35
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
1995, totaled $89 and $91, respectively. As of December 31, 1996, 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. 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, Inc. ("AirTouch") to combine their
domestic cellular properties into a partnership in a multi-phased transaction.
During Phase I, which commenced on November 1, 1995, the partners are operating
their cellular properties separately. A Wireless Management Company (the "WMC")
has been formed and is providing services to both companies on a contract basis.
In Phase II, the partners will combine their domestic properties subject to
obtaining certain authorizations and partnership approvals. The passage of the
Telecommunications Act of 1996 has removed significant regulatory barriers to
completion of Phase II. In February 1997, the King County Superior Court in
Washington state ruled that U S WEST violated the terms of its partnership
agreement with its minority partners in the Seattle market by entering into the
joint venture agreement with AirTouch. The Company has has obtained a stay of
the ruling pending its appeal. Similar litigation has been filed in other
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. The Company believes it will ultimately be
successful in all such litigation. U S WEST expects that Phase II closing will
occur in the second half of 1997.
Upon the implementation of Phase II, management expects the joint venture
interests will be approximately 74 percent AirTouch and 26 percent U S WEST
(assuming contribution of all domestic cellular properties). The actual
interests in the joint venture at commencement of Phase II depend, among other
things, on the timing of the Phase II closing and the ability of the partners to
combine their domestic properties. U S WEST's interest will further adjust
depending on the timing of the contribution of its investment in PrimeCo
Personal Communications L.P. ("PrimeCo"). The timing of such contribution is at
U S WEST's discretion and will occur either at the closing of Phase II or a date
selected by U S WEST, no later than mid-1998.
U S WEST has the right to convert its joint venture interest in the domestic
cellular properties into AirTouch stock ("Phase III"). U S WEST's interests will
be valued on a private market basis and the AirTouch common stock received by U
S WEST will be based on a fair public market value. In the event the value to be
received by U S WEST exceeds 19.9 percent of AirTouch's outstanding common
stock, U S WEST will receive the excess in the form of nonvoting preferred
stock. U S WEST has the right to initiate Phase III upon completion of Phase II
of the merger and contribution of both U S WEST's and AirTouch's interests in
PrimeCo to the joint venture.
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
A-36
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
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 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-37
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
PRIORITY OF PRIORITY CAPITAL TIME WARNER LIMITED PARTNERS
CONTRIBUTED CONTRIBUTED RATES OF GENERAL -----------------------------
CAPITAL CAPITAL(A) RETURN(B) PARTNERS TIME WARNER U S WEST
- ----------------- ------------- ----------------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
(% PER ANNUM
<CAPTION>
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 13.25%(e) 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 to Time Warner in three
annual installments beginning July 1, 1997 with the initial distribution
expected to be $535 million.
(d) 11.00 percent to the extent concurrently distributed.
(e) 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.
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
$(4), $(31) and $(18) in 1996, 1995 and 1994, 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, U S WEST earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 were
recorded to other income in 1996, 1995 and 1994, respectively. The
A-38
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
U S WEST Consolidated Balance Sheets include management fee receivables of $56
and $50 at December 31, 1996 and 1995, respectively, and a note payable to TWE
of $169 at December 31, 1995.
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1996 1995 1994
- -------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................ $ 10,852 $ 9,517 $ 8,460
Operating expenses(1)............................................... 9,774 8,557 7,612
Interest and other expense, net(2).................................. 798 777 647
--------- --------- ---------
Income before income taxes and extraordinary item................... 280 183 201
Income before extraordinary item.................................... 210 97 161
Net income.......................................................... 210 73 161
</TABLE>
- ------------------------------
(1) Includes depreciation and amortization of $1,235, $1,039 and $943 in 1996,
1995 and 1994, respectively.
(2) Includes corporate services of $69, $64 and $60 in 1996, 1995 and 1994,
respectively, and minority interest expense of $207 and $133 in 1996 and
1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
SUMMARIZED FINANCIAL POSITION 1996 1995
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets(3)........................................................... $ 3,146 $ 2,909
Noncurrent assets(4)........................................................ 16,827 15,996
Current liabilities......................................................... 4,075 3,214
Noncurrent liabilities, including minority interest......................... 7,781 7,787
Senior preferred capital.................................................... 1,543 1,426
Partners' capital(5, 6)..................................................... 6,574 6,478
</TABLE>
- ------------------------------
(3) Includes cash of $216 and $209 at December 31, 1996 and 1995,
respectively.
(4) Includes a loan receivable from Time Warner of $400 at December 31, 1996
and 1995, respectively.
(5) Net of a note receivable from U S WEST of $169 at December 31, 1995.
(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 partners' capital as reflected in
the Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
Time Warner has announced its intention to restructure TWE in a manner that
would decrease its interest in the cable businesses and increase its interest in
the entertainment and cable programming businesses of TWE. Any change in the
structure of TWE would require U S WEST's approval in addition to certain
creditors' and regulatory approvals.
A-39
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES
The significant components of net investment in international ventures
follow:
<TABLE>
<CAPTION>
NET INVESTMENT AT
DECEMBER 31,
LINE OF OWNERSHIP --------------------
VENTURE LOCATION BUSINESS PERCENTAGE 1996 1995
- -------------------------------------- ------------------- -------------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Telewest.............................. United Kingdom Cable & Telecom. 26.8 $ 454 $ 540
Binariang Sdn Bhd..................... Malaysia Cable & Telecom. 20 205 224
A2000 (KTA)........................... Netherlands Cable & Telecom. 50 96 218
All other............................. 793 529
--------- ---------
Total............................... $ 1,548 $ 1,511
--------- ---------
--------- ---------
</TABLE>
In connection with the 1996 Continental Merger, U S WEST acquired a 50
percent interest in Fintelco, S.A., a cable venture in Argentina and a 25
percent interest in a cable venture in Singapore. The purchase price assigned to
these ventures is preliminary.
At December 31, 1996, the difference between the carrying amount and U S
WEST's interest in the underlying equity of the international ventures was
approximately $365. This difference has been allocated primarily to licenses and
cable franchises and is being amortized over lives ranging from five to twenty
years.
The following table shows summarized combined financial information for U S
WEST's equity method investments in international ventures.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMBINED OPERATIONS 1996 1995 1994
- ---------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues.............................................................. $ 1,869 $ 1,163 $ 580
Operating loss........................................................ (540) (373) (244)
Net loss.............................................................. (857) (514) (308)
</TABLE>
- ------------------------------
Note: Results for Continental ventures have been included since the date of
Merger.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1996 1995
- ------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets................................................................. $ 1,126 $ 1,469
Property, plant and equipment -- net........................................... 5,105 3,545
Other assets................................................................... 2,226 1,644
--------- ---------
Total assets................................................................. $ 8,457 $ 6,658
--------- ---------
--------- ---------
Current liabilities............................................................ $ 1,275 $ 1,260
Long-term debt................................................................. 3,880 2,065
Other liabilities.............................................................. 478 58
Owners' equity................................................................. 2,824 3,275
--------- ---------
Total liabilities and equity................................................. $ 8,457 $ 6,658
--------- ---------
--------- ---------
</TABLE>
In November 1994, Telewest Communications 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
A-40
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
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 in 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 shareowners, each own 26.8 percent of the combined company. U S
WEST 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 of U S WEST for which a
quoted market price is available, had a market value of $786 and $914 at
December 31, 1996 and 1995, respectively.
A-41
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
FOREIGN CURRENCY TRANSACTIONS. U S WEST has entered 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 the
combination options, U S WEST combined purchased options to cap the foreign
exchange rate to be paid at a future date with written options to finance the
premium on the purchased options. The commitments, forward contracts and
combination options are for periods of one year or less. For the years ended
December 31, 1996 and 1995, the notional amounts of foreign exchange contracts
outstanding were $0 and $489, respectively. In 1997, U S WEST entered into
foreign exchange forward contracts in notional amounts totaling $170 for the
purchase and/or sale of British pounds, Japanese yen and French francs.
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 earnings
upon sale of the investment. Gains or losses on the portion of the contracts
designated to offset translation of investee net income were recorded in
earnings.
Forward contracts were also used to hedge foreign denominated receivables.
These contracts were carried at market value with gains or losses recorded in
earnings. Foreign currency transaction pretax gains of $27 and pretax hedging
losses of $24 were included in earnings in the year ended December 31, 1996.
Cumulative deferred gains on foreign exchange contracts of $9 and deferred
losses of $28, including deferred taxes (benefits) of $4 and $(11),
respectively, are included in equity at December 31, 1996. 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.
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 7: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings.......................................................... $ 2,722 $ 2,627
Telephone network equipment................................................. 12,925 12,019
Telephone outside plant..................................................... 13,148 12,353
Cable distribution systems.................................................. 2,640 167
Cellular systems............................................................ 897 733
General purpose computers and other......................................... 4,414 4,051
Construction in progress.................................................... 1,010 934
--------- ---------
37,756 32,884
Less accumulated depreciation............................................... 19,475 18,207
--------- ---------
Property, plant and equipment -- net........................................ $ 18,281 $ 14,677
--------- ---------
--------- ---------
</TABLE>
A-42
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
During 1996, property, plant and equipment increased $2,635 as a result of
the Continental Merger. This increase was primarily attributed to cable and
distribution systems.
In 1996, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $243. Consideration received for the sales was $306, including
$174 in cash. In 1995 and 1994, U S WEST Communications sold certain rural
telephone exchanges with a cost basis of $258 and $122, respectively, and
received consideration of $388 (including $214 in cash) during 1995 and $204
(including $93 in cash) during 1994.
ADOPTION OF SFAS NO. 121
Effective January 1, 1996, U S WEST adopted 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. Adoption of SFAS No. 121 resulted in income of $34 (net of tax of
$22) from the cumulative effect of reversing depreciation expense recorded in
prior years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date U S WEST formally committed to a plan to
dispose of the rural telephone exchange assets to January 1, 1996. The income
has been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying values of the rural telephone
exchange assets being held for sale approximates $144 and $338 at December 31,
1996 and 1995, respectively. As a result of adopting SFAS No. 121, depreciation
expense for 1996 was reduced by $24. The combined effects of lower depreciation
expense and the cumulative effect of adoption of the new standard will be
directly offset by lower recognized gains on future rural telephone exchange
sales.
NOTE 8: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value........................... $ 8,388 $ 1,183
Goodwill.................................................................... 4,465 743
--------- ---------
12,853 1,926
Less accumulated amortization............................................... 258 128
--------- ---------
Total intangible assets -- net.............................................. $ 12,595 $ 1,798
--------- ---------
--------- ---------
</TABLE>
During 1996, identified intangibles (primarily franchise value) increased
$7,203 and goodwill increased $3,710 as a result of the Continental Merger.
Amortization expense was $133, $76 and $23 in 1996, 1995 and 1994, respectively.
A-43
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper.......................................................... $ 842 $ 807
Bank loan................................................................. -- 216
Other..................................................................... 55 --
Current portion of long-term debt........................................... 300 1,029
Allocated to the capital assets segment -- net.............................. (146) (151)
--------- ---------
Total....................................................................... $ 1,051 $ 1,901
--------- ---------
--------- ---------
</TABLE>
The weighted-average interest rate on commercial paper was 5.73 percent and
5.79 percent at December 31, 1996 and 1995, respectively.
Other notes payable at December 31, 1996 includes $50 associated with U S
WEST's increase in ownership of a cable venture in the Czech Republic. This note
was paid in January 1997. At December 31, 1995, the bank loan, in the translated
principal amount of $216, was denominated in Dutch guilders. The loan was repaid
in February 1996.
In January 1997, U S WEST paid the cash portion of the Continental Merger
consideration totaling $1,150. This payment was financed with commercial paper.
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 $5.1 billion under
lines of credit, all of which was available at December 31, 1996.
LONG-TERM DEBT
On November 15, 1996, U S WEST assumed Continental debt totaling $6,525 (at
market value) in conjunction with the Merger. Concurrently, U S WEST refinanced
$3,657 of the assumed debt with commercial paper. In January 1997, U S WEST
issued medium- and long-term debt totaling $4.1 billion, at a weighted-average
interest rate of 7.47 percent. The net proceeds were used to refinance
outstanding commercial paper. Such commercial paper is classified as long-term
debt in the accompanying Consolidated Balance Sheet and the following tables.
A-44
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
The components of long-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Senior unsecured notes, debentures, medium-term notes and refinanced
commercial paper........................................................... $ 12,536 $ 6,484
Zero coupon subordinated notes, 7.3 percent yield to maturity convertible at
any time into equal shares of Communications Stock and Media Stock......... 1,529 1,569
Senior subordinated debt.................................................... 400 --
Debt exchangeable for common stock.......................................... 384 130
Insurance company notes..................................................... 68 --
Leveraged employee stock ownership plans (LESOP)............................ 53 91
Capital lease obligations................................................... 140 145
Other....................................................................... 134 69
Unamortized discount -- net................................................. (1,118) (1,178)
Unamortized premium -- net.................................................. 335 --
Allocated to the capital assets segment -- net.............................. (161) (356)
--------- ---------
Total..................................................................... $ 14,300 $ 6,954
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996, long-term debt includes senior unsecured notes and
debentures totaling $2.0 billion, senior subordinated debt of $400 and insurance
company notes of $68 assumed in connection with the Continental Merger. The
senior unsecured notes and debentures and the senior subordinated debt totaling
$2.4 billion are not guaranteed by U S WEST. The notes and debentures limit
Continental's ability to, among other things, pay dividends, create liens, incur
additional debt, dispose of property, investments and leases, and requires
certain minimum ratios of cash flow to debt and cash flow to related fixed
charges.
On May 13, 1996, U S WEST issued $254 of Debt Exchangeable for Common Stock
("DECS") due May 15, 1999, in the principal amount of $26.63 per note. The notes
bear interest at 7.625 percent. Upon maturity, each DECS will be mandatorily
redeemed by U S WEST for shares of Financial Security Assurance Holdings Ltd.
("FSA") 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 FSA. If the market price is $26.63 per share or less, one share
of FSA will be delivered for each note; if the market price is between $26.63
and $32.48 per share, a fractional share is delivered so that the value at
maturity is equal to $26.63; if the market value is greater than $32.48 per
share, .8197 shares are delivered for each note. The capital assets segment
currently owns approximately 40 percent of the outstanding FSA common stock.
In 1995, U S WEST issued $130 of DECS, due December 15, 1998, in the
principal amount of $24.00 per note. The notes bear interest at 7.625 percent.
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
A-45
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
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 for each note. At
December 31, 1996, the capital assets segment owned 30.1 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 income tax benefits of $5.
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- ------------------------------------------------ --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................ $ 36 $ -- $ 90 $ -- $ 155 $ 281 $ 275
Above 5% to 6%.................................. 430 -- -- 50 221 701 691
Above 6% to 7%.................................. -- 380 305 171 3,872 4,728 3,262
Above 7% to 8%.................................. -- -- 13 -- 5,885 5,898 3,230
Above 8% to 9%.................................. 42 11 -- 240 1,725 2,018 397
Above 9% to 10%................................. -- 15 200 10 525 750 254
Above 10%....................................... 34 35 2 2 434 507 2
Variable-rate debt indexed to three-month LIBOR
and two- and ten-year constant maturity
Treasury rates................................. -- 155 -- -- -- 155 180
--------- --------- --------- --------- ----------- --------- ---------
$ 542 $ 596 $ 610 $ 473 $ 12,817 15,038 8,291
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other............. 206 197
Unamortized discount -- net..................... (1,118) (1,178)
Unamortized premium -- net...................... 335 --
Allocated to the capital assets segment --
net............................................ (161) (356)
--------- ---------
Total........................................... $ 14,300 $ 6,954
--------- ---------
--------- ---------
</TABLE>
Interest payments, net of amounts capitalized, were $658, $518, and $523 for
1996, 1995 and 1994, respectively, of which $59, $87 and $134, respectively,
relate to the capital assets segment.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through the use of interest rate swaps, which adjust the ratio of
fixed-to variable-rate debt.
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 accrued as part of
the interest rate swap is accounted for as an adjustment to interest expense.
A-46
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
In 1996, U S WEST assumed interest rate swaps in the notional amount of
$1,000 and interest cap agreements in the notional amount of $500 in connection
with the Continental Merger. The interest rate cap agreements protect against
large increases in interest rates and have various maturities through 1998.
Interest payments received under the terms of a cap agreement would be accounted
for as an adjustment to interest expense.
During 1995, U S WEST Communications entered into currency swaps to convert
Swiss franc-denominated debt to U.S. 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 and interest rate contracts.
Variable rates are indexed to the three-month LIBOR, two- and ten-year constant
maturity Treasury and 30-day commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------------------
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............... $ 1,235 1997-2004 5.70 6.89 $ 635 1996-2004 5.72 6.80
Currency........................ 204 1999-2001 -- 6.55 204 1999-2001 -- 6.55
</TABLE>
During fourth-quarter 1996, U S WEST purchased $1.5 billion notional of put
options on U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. The contracts closed in January
1997 and a deferred gain of $5 was recognized. In 1993, U S WEST Communications
executed forward U.S. Treasury Bond contracts to lock in the U.S. Treasury rate
component of future debt issues. At December 31, 1996, deferred credits of $8
and deferred charges of $50 on the closed forward contracts are included as part
of the carrying value of the underlying debt. The deferred gains or losses will
be recognized as yield adjustments over the life of the related debt, which
matures at various dates through 2027.
The counterparties to swaps or other 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 10: 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 quoted market prices or discounting future cash flows,
approximate the carrying values. The fair value of foreign exchange contracts
and interest rate cap agreements, based on estimated amounts U S WEST would
receive or pay to terminate such agreements, approximate the carrying values. It
is not practicable to
A-47
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
estimate the fair value of financial guarantees because there are no quoted
market prices for similar transactions.
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 and Preferred Securities, 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,
--------------------------------------------
1996 1995
-------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)...................... $ 15,832 $ 15,850 $ 9,651 $ 10,050
Interest rate swap agreements -- assets................. -- (22) -- (32)
Interest rate swap agreements -- liabilities............ 17 47 -- 51
--------- --------- ----------- ---------
Debt -- net............................................. $ 15,849 $ 15,875 $ 9,651 $ 10,069
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Preferred Securities.................................... $ 1,080 $ 1,074 $ 600 $ 636
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
Investments in debt and equity securities are classified as available for
sale and are carried at market value. The debt 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.
Equity securities totaling $713 acquired in the Continental Merger are
included in the following table. The amortized cost and estimated market value
of debt and equity securities follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------------------- --------------------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED FAIR
SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ------------------------- --------- ------------- ------------- --------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities........ $ 713 $ 2 $ -- $ 715 $ -- $ -- $ -- $ --
Corporate debt........... 20 -- -- 20 20 -- -- 20
Securitized loan......... 55 -- (6) 49 55 -- (5) 50
--------- ----- ----- --------- --------- ----- ----- ---------
Total.................... $ 788 $ 2 $ (6) $ 784 $ 75 $ -- $ (5) $ 70
--------- ----- ----- --------- --------- ----- ----- ---------
--------- ----- ----- --------- --------- ----- ----- ---------
</TABLE>
Net unrealized losses on marketable securities are included in equity. 1996
net unrealized gains are $1 (net of deferred taxes) and 1995 net unrealized
losses are $3 (net of a deferred tax benefit of $2).
NOTE 11: RESTRUCTURING CHARGE
In 1993, the Company incurred a $1 billion restructuring charge (pretax).
The related restructuring plan, which is expected to be substantially complete
by the end of 1997, is designed to provide faster, more
A-48
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: RESTRUCTURING CHARGE (CONTINUED)
responsive customer services, while reducing the costs of providing these
services. Following is a schedule of the incurred costs that were included in
the 1993 restructuring charge:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------------------ -----------
1993 1994 1995 1996 1997 TOTAL
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separation........................... $ -- $ 19 $ 76 $ 102 $ 91 $ 288
Systems development........................... -- 127 145 106 22 400
Real estate................................... -- 50 66 8 6 130
Relocation.................................... -- 21 24 5 2 52
Retraining and other.......................... -- 16 23 21 5 65
--------- --------- --------- --------- ----- ---------
Total cash expenditures....................... -- 233 334 242 126 935
Asset writedown............................... 65 -- -- -- -- 65
--------- --------- --------- --------- ----- ---------
Total......................................... $ 65 $ 233 $ 334 $ 242 $ 126 $ 1,000
--------- --------- --------- --------- ----- ---------
--------- --------- --------- --------- ----- ---------
</TABLE>
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 $245, $263 and $288 in
1996, 1995 and 1994, respectively. Minimum future lease payments as of December
31, 1996, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 191
1998............................................................................. 181
1999............................................................................. 160
2000............................................................................. 142
2001............................................................................. 136
Thereafter....................................................................... 872
---------
Total............................................................................ $ 1,682
---------
---------
</TABLE>
Minimum payments have not been reduced by minimum sublease rentals of $236
due in the future under noncancelable subleases.
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED
DEBENTURES
On October 29, 1996, U S WEST Financing II, a wholly owned subsidiary of U S
WEST ("Financing II") issued $480 of 8.25 percent Trust Originated Preferred
Securities (the "Preferred Securities") and $15 of common securities. U S WEST
holds all of the outstanding common securities of Financing II. Financing II
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"), $495 principal
amount of Capital Funding's 8.25 percent Subordinated Deferrable Interest Notes
due 2036 (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 II are and will be the Deferrable Notes and the Debt
Guarantee.
A-49
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED
DEBENTURES (CONTINUED)
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 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 Capital Funding $619 principal amount of Capital Funding's 7.96
percent Subordinated Debt Securities due 2025, the obligations under which are
fully and unconditionally guaranteed by U S WEST. The sole assets of Financing I
are and will be the Subordinated Debt Securities and the Debt Guarantee.
U S WEST has guaranteed the payment of interest and redemption amounts to
holders of Preferred Securities when Financing I and II have funds available for
such payments (the "Payment Guarantee") as well as Capital Funding's undertaking
to pay all of Financing I and II'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 and II'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 and II.
The 7.96 percent 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, 1996
and 1995, 24,000,000 7.96 percent Preferred Securities were outstanding.
The 8.25 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after October 29, 2001, 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 II is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1996,
19,200,000 8.25 percent Preferred Securities were outstanding.
NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On September 2, 1994, U S WEST 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 -- Net Investment in
Assets Held for Sale -- to the Consolidated Financial Statements.) The preferred
stock was recorded at the fair market value of $51 at the issue date. Media
Group has the right, commencing September 2, 1999, to redeem the shares for one
thousand dollars per share plus unpaid dividends and a redemption premium. The
shares are mandatorily redeemable in 2004 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 $35 and $20 (based on the
Black-Scholes Model) at December 31, 1996 and 1995, respectively, with no
carrying value.
A-50
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15: SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
SERIES D COMMUNI-
PREFERRED CATIONS MEDIA COMMON RETAINED
STOCK STOCK STOCK U S WEST STOCK PREFERRED EARNINGS
SHARES SHARES SHARES SHARES AMOUNT STOCK AMOUNT (DEFICIT)
----------- ----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(SHARES IN THOUSANDS)
Balance December 31, 1993........... 441,140 $ 6,996 $ (857)
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......
Other............................. (9) 17
----------- ----------- --------- ----------- ----------- ----- -----------
Balance December 31, 1994........... 469,343 8,056 (458)
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 Communications
Stock........................... 1,712 52
Issuance of Media Stock........... 392 7
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......
Other............................. (5) 3
----------- ----------- --------- ----------- ----------- ----- -----------
Balance December 31, 1995........... 473,635 472,314 -- 8,228 (115)
Issuance of Communications
Stock........................... 6,822 216
Issuance of Media Stock for
Continental Merger.............. 150,615 2,590
Other issuances of Media Stock.... 1,853 38
Issuance of Series D Preferred
Stock........................... 20,000 $ 920
Purchase of treasury stock........ (15,919) (297)
Net income........................ 1,178
Common dividends declared ($2.14
per share)...................... (1,024)
Preferred dividends............... (9)
Market value adjustment for debt
and equity securities........... (6)
Foreign currency translation......
Other............................. (34) (6)
----------- ----------- --------- ----------- ----------- ----- -----------
Balance December 31, 1996........... 20,000 480,457 608,863 -- $ 10,741 $ 920 $ 18
----------- ----------- --------- ----------- ----------- ----- -----------
----------- ----------- --------- ----------- ----------- ----- -----------
<CAPTION>
FOREIGN
CURRENCY LESOP
TRANSLATION GUARANTEE
--------------- -------------
<S> <C> <C>
Balance December 31, 1993........... $ (35) $ (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...... 6
Other............................. 56
--- -----
Balance December 31, 1994........... (29) (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 Communications
Stock...........................
Issuance of Media Stock...........
Net income........................
Common dividends declared ($2.14
per share)......................
Preferred dividends...............
Market value adjustment for debt
securities......................
Foreign currency translation...... (9)
Other............................. 60
--- -----
Balance December 31, 1995........... (38) (127)
Issuance of Communications
Stock...........................
Issuance of Media Stock for
Continental Merger..............
Other issuances of Media Stock....
Issuance of Series D Preferred
Stock...........................
Purchase of treasury stock........
Net income........................
Common dividends declared ($2.14
per share)......................
Preferred dividends...............
Market value adjustment for debt
and equity securities...........
Foreign currency translation...... (1)
Other............................. 36
--- -----
Balance December 31, 1996........... $ (39) $ (91)
--- -----
--- -----
</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.
A-51
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
PREFERRED STOCK. On November 15, 1996, U S WEST issued 20,000,000 shares of
4.5 percent, 20 year, Series D Convertible Preferred Stock (the "Preferred
Stock") to Continental shareowners. Dividends are payable quarterly on the
nonvoting Preferred Stock as and when declared by the Board of Directors out of
funds legally available. The Preferred Stock has a liquidation value of $50 per
share and is recorded at the November 15, 1996 market value of $46 per share.
The Preferred Stock is convertible, at the option of the holder, into shares of
Media Stock at $26.25 per share. Between November 15, 1999 and November 15,
2001, the Preferred Stock is redeemable at par, at the option of U S WEST, into
shares of Media Stock if the Media common shares have closed at $34.44 per share
for at least 20 of the 30 consecutive trading days prior to the notice of
redemption. After November 15, 2001, the Preferred Stock is redeemable at par,
at the option of U S WEST, in cash, Media Stock, or any combination of cash and
stock. If Media Stock is elected, the number of shares to be issued will be
determined based on the average market price for the ten consecutive trading
days ending on the third business day prior to redemption, reduced by five
percent. On November 15, 2016, U S WEST is required to redeem the Preferred
Stock, at its election, for cash, Media Stock, or any combination of cash and
stock. Upon certain events, including the disposition of all or substantially
all of the properties and assets attributed to the Media Group, the Preferred
Stock becomes mandatorily redeemable. The Preferred Stock ranks senior to all
classes of U S WEST common stock, is subordinated to any senior debt and ranks
pari passu with the Preferred Securities.
COMMON STOCK. In connection with the November 15, 1996, Continental Merger,
U S WEST issued 150,615,000 shares of Media Stock to Continental shareowners,
valued at $2,590. 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 3 -- Merger of Cable Systems -- to
the Consolidated Financial Statements.) In connection with the settlement of
shareowner litigation ("Rosenbaum v. U S WEST, Inc. et al."), U S WEST issued
approximately 5.5 million shares of U S WEST common stock in March 1994 for net
proceeds of $210.
SHARE REPURCHASE. In connection with the November 15, 1996 Continental
Merger, U S WEST purchased and placed into treasury 15,916,000 shares of Media
Stock at an average price per share of $18.66. 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.
FOREIGN CURRENCY TRANSLATION. Included in U S WEST's cumulative foreign
currency translation adjustment are cumulative tax benefits of $24, $24 and $18
at December 31, 1996, 1995 and 1994, respectively.
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. 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 interest are paid on the debt. At December 31, 1996, 11,019,157 shares each
of Communications Stock and Media Stock had been allocated from the LESOP to
participants' accounts, while 1,865,494 and 2,132,291 shares of Communications
Stock and Media Stock, respectively, remained unallocated.
A-52
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
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
shareowners' equity. Contributions from U S WEST as well as dividends on
unallocated shares held by the LESOP ($5, $8 and $11 in 1996, 1995 and 1994,
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 in lieu of
dividends.
U S WEST recognizes expense based on the cash payments method. Total Company
contributions to the plan (excluding dividends) were $77, $86 and $80 in 1996,
1995 and 1994, respectively, of which $10, $15 and $19, 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.
NOTE 16: STOCK INCENTIVE PLANS
U S WEST maintains stock incentive plans for executives and other employees
and non employees, primarily members of the Board. 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 non employees.
Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Communications Group and one Media Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
The maximum aggregate number of shares of Communications Stock and Media
Stock that may be granted in any 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 U S WEST'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 granted may be exercised no
later than 10 years after the grant date.
During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in income in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," was $3 and $7 in 1996 and 1995,
respectively, all of which related to the Plan modifications. No compensation
expense was recognized in 1994.
A-53
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but continues to account for the Plan under APB
Opinion No. 25. Had compensation cost for the Plan been determined consistent
with the fair value based accounting method under SFAS No. 123, the pro forma
net income and earnings per share for U S WEST and both the Communications and
Media Groups would have been the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996
---------------------------- 1995
EARNING (LOSS) --------------------------
NET INCOME PER EARNINGS PER
(LOSS) SHARE NET INCOME SHARE
----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
U S WEST, INC.:
As reported.............................. $ 1,178 $ -- $ 1,317 $ --
Pro forma............................... 1,165 -- 1,318 --
COMMUNICATIONS GROUP:
As reported.............................. 1,249 2.62 1,176 2.50
Pro forma............................... 1,247 2.61 1,178 2.50
MEDIA GROUP:
As reported.............................. (71) (0.16) 141 0.29
Pro forma............................... (82) (0.18) 140 0.29
</TABLE>
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
in 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
COMMUNICATIONS GROUP:
Risk-free interest rate.................................................. 6.50% 6.00%
Expected dividend yield................................................. 6.70% 6.70%
Expected life........................................................... 4.5 years 4.5 years
Expected volatility..................................................... 19.6% 19.6%
MEDIA GROUP:
Risk-free interest rate.................................................. 6.30% 6.00%
Expected life........................................................... 5.0 years 5.0 years
Expected volatility..................................................... 28.5% 28.5%
</TABLE>
A-54
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP MEDIA GROUP U S WEST, INC.
------------------------ ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES* PRICE
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1, 1994.............. 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(1)............................. 4,814,856 41.12
Exercised.............................. (430,631) 34.03
Canceled or expired(1)................. (1,927,083) 37.02
---------- -----------
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
----------- ----------- ----------- -----------
Granted................................ 3,624,602 30.97 5,523,728 19.36
Exercised.............................. (1,205,730) 22.37 (507,329) 14.93
Canceled or expired.................... (429,058) 25.01 (610,471) 17.86
----------- ----------- ----------- -----------
Outstanding December 31, 1996............ 11,412,915 $ 26.67 14,114,094 $ 17.49
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
* Includes options granted in tandem with SARs.
(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e. stock grant).
A-55
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
The number of exercisable options under the Plan and the weighted-average
exercise prices follow:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP MEDIA GROUP
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
EXERCISABLE OPTIONS AT: OF SHARES PRICE OF SHARES PRICE
- --------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995............................ 2,672,666 $ 22.22 3,021,166 $ 14.89
December 31, 1996............................ 3,881,100 25.71 4,867,207 16.74
</TABLE>
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------------ ------------ --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS GROUP
$14.96 - $21.41............. 2,560,778 7.27 $ 21.26 505,430 $ 20.64
$21.41 - $24.62............. 1,241,669 5.42 22.87 1,037,785 22.74
$24.92 - $26.11............. 2,750,886 8.59 26.08 932,931 26.06
$26.34 - $30.63............. 2,334,141 7.86 29.82 1,313,137 29.29
$30.88 - $35.88............. 2,525,441 9.02 31.74 91,817 32.57
------------ --- ----------- ---------- -----------
Total..................... 11,412,915 7.89 $ 26.67 3,881,100 $ 25.71
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
MEDIA GROUP
$10.10 - $14.46............. 3,009,307 6.81 $ 14.23 937,900 $ 13.73
$14.51 - $16.93............. 2,920,683 6.86 15.75 1,608,658 15.38
$16.98 - $17.88............. 2,827,829 8.63 17.64 928,958 17.63
$17.94 - $20.50............. 2,938,175 8.10 19.85 1,391,691 19.74
$20.63 - $21.13............. 2,418,100 9.24 20.63 -- --
------------ --- ----------- ---------- -----------
Total..................... 14,114,094 7.87 $ 17.49 4,867,207 $ 16.74
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 3,624,602 and 4,953,165 Communications Group options and
5,523,728 and 4,886,436 Media Group options were granted in 1996 and 1995,
respectively. Included in the total grants were 198,027 and 1,751,936 of
modified Communications Group options and 249,827 and 1,751,936 of modified
Media Group options revalued as new grants during 1996 and 1995, respectively.
The weighted-average grant date fair value of Communications Group and Media
Group options granted during the year, inclusive of modified options, using the
Black-Scholes option-pricing model was $3.87 and $7.10, respectively, for 1996
and $3.19 and $6.07, respectively, for 1995. Excluding the modifications, the
weighted-average grant date fair value was $3.67 and $7.23, respectively, for
1996, and $2.92 and $6.45, respectively, for 1995. The exercise price of
Communications Group and Media Group stock options, excluding modified options,
equals the market price on the grant date. The exercise prices of modified stock
options may be greater or less than the market price on the revaluation date.
A-56
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
Approximately 2,950,000 and 2,050,000 shares of Communications Stock and
2,200,000 and 1,420,000 of Media Stock were available for grant under the plans
in effect at December 31, 1996 and 1995, respectively. Approximately 14,360,000
shares of Communications Stock and 16,314,000 shares of Media Stock were
reserved for issuance under the Plan at December 31, 1996.
NOTE 17: EMPLOYEE BENEFITS
PENSION PLAN
U S WEST sponsors a defined benefit pension plan covering substantially all
management and occupational employees of the Company. Effective January 1, 1997,
Continental's defined benefit pension plan was merged into the U S WEST plan.
Management benefits are based on a final pay formula, while occupational
benefits are based on a flat benefit formula. U S WEST uses the projected unit
credit method for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. 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 1996, 1995 or 1994.
The composition of the net pension cost (credit) and the actuarial
assumptions of the plan follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period............ $ 203 $ 173 $ 197
Interest cost on projected benefit obligation................ 575 558 561
Actual return on plan assets................................. (1,509) (1,918) 188
Net amortization and deferral................................ 726 1,185 (946)
--------- --------- ---------
Net pension cost (credit)...................................... $ (5) $ (2) $ 0
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1996, 1995 and 1994.
The funded status of the plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $6,544 and
$5,839, respectively........................................................ $ 7,446 $ 6,617
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds........................ $ 10,958 $ 9,874
Less: Projected benefit obligation........................................... 8,310 8,450
--------- ---------
Plan assets in excess of projected benefit obligation........................ 2,648 1,424
Unrecognized net (gain)...................................................... (1,502) (101)
Prior service cost not yet recognized in net periodic pension cost........... 31 (62)
Balance of unrecognized net asset at January 1, 1987......................... (626) (705)
--------- ---------
Prepaid pension cost......................................................... $ 551 $ 556
--------- ---------
--------- ---------
</TABLE>
A-57
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
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 ("FCC") 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 medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period....................... $ 70 $ 65 $ 75
Interest on accumulated benefit obligation.............................. 259 267 260
Actual return on plan assets............................................ (231) (415) 4
Net amortization and deferral........................................... 68 286 (99)
--------- --------- ---------
Net postretirement benefit costs........................................ $ 166 $ 203 $ 240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1996, 1995 and 1994.
A-58
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees................................................................... $ 2,255 $ 2,137
Fully eligible plan participants........................................... 347 327
Other active plan participants............................................. 1,289 1,224
--------- ---------
Total accumulated postretirement benefit obligation.......................... 3,891 3,688
Unrecognized net gain........................................................ 534 539
Unamortized prior service cost............................................... 32 (34)
Fair value of plan assets, primarily stocks, bonds and life insurance(1)..... (2,063) (1,845)
--------- ---------
Accrued postretirement benefit obligation.................................... $ 2,394 $ 2,348
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155
and $94, respectively, in 1996, and $210 and $112, respectively, in 1995.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
Medical cost trend rate*................................................. 8.00% 9.00%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5.5
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 1996 net postretirement benefit cost by approximately $27 and
increased the 1996 accumulated postretirement benefit obligation by
approximately $299.
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.
A-59
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................................................. $ 601 $ 481 $ 418
Deferred................................................................ 5 225 337
Investment tax credits -- net........................................... (28) (38) (47)
--------- --------- ---------
578 668 708
--------- --------- ---------
State and local:
Current................................................................. 75 64 52
Deferred................................................................ 11 54 83
--------- --------- ---------
86 118 135
--------- --------- ---------
Foreign:
Current................................................................. 2 6 --
Deferred................................................................ 30 33 14
--------- --------- ---------
32 39 14
--------- --------- ---------
Provision for income taxes................................................ $ 696 $ 825 $ 857
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST paid $693, $566 and $313 for income taxes in 1996, 1995 and 1994,
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,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN PERCENT)
Federal statutory tax rate......................................... 35.0 35.0 35.0
Investment tax credit amortization................................. (0.9) (1.2) (1.3)
State income taxes -- net of federal effect........................ 3.0 3.5 3.9
Foreign taxes -- net of federal effect............................. 1.1 1.2 0.4
Other.............................................................. (0.4) (0.2) (0.5)
--- --- ---
Effective tax rate................................................. 37.8 38.3 37.5
--- --- ---
--- --- ---
</TABLE>
A-60
<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,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................. $ 1,891 $ 1,540
Leases......................................................................... 679 668
State deferred taxes -- net of federal effect.................................. 1,141 358
Intangible assets.............................................................. 2,414 112
Investments.................................................................... 373 213
Other.......................................................................... 126 74
--------- ---------
Deferred tax liabilities..................................................... 6,624 2,965
--------- ---------
Postemployment benefits, including pension..................................... 698 697
Restructuring, assets held for sale and other.................................. 301 329
Unamortized investment tax credit.............................................. 61 70
Net operating loss and tax credit carryforwards................................ 466 --
Valuation allowance............................................................ (387) --
State deferred taxes -- net of federal effect.................................. 223 166
Other.......................................................................... 455 229
--------- ---------
Deferred tax assets.......................................................... 1,817 1,491
--------- ---------
Net deferred tax liability..................................................... $ 4,807 $ 1,474
--------- ---------
--------- ---------
</TABLE>
In connection with the Continental Merger, U S WEST acquired net operating
loss carryforwards of approximately $1,164 for federal income tax purposes,
expiring in various years through 2011. U S WEST also acquired investment tax
credit carryforwards of approximately $50, expiring in various years through
2005. A valuation allowance of $387 has been established for the carryforwards
due to limitations on utilization which exist for U S WEST. If in future periods
the realization of the carryforwards becomes more likely than not, any reduction
in the valuation allowance will be allocated to reduce goodwill and acquired
intangible assets.
The current portion of the deferred tax asset was $213 and $282 at December
31, 1996 and 1995, respectively, resulting primarily from restructuring charges
and compensation-related items.
The net deferred tax liability includes $671 and $686 in 1996 and 1995,
respectively, related to the capital assets segment.
In 1996 and 1995 foreign operations contributed pretax losses of $315 and
$35, repsectively. In 1994 foreign operations contributed pretax earnings of
$43.
NOTE 19: COMMITMENTS AND CONTINGENCIES
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for hearing, 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
A-61
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: COMMITMENTS AND CONTINGENCIES (CONTINUED)
parties related to the Tax Reform Act of 1986. The range of possible risk is $0
to $155 at December 31, 1996.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995
rate request. In February 1995, U S WEST Communications sought to increase
revenues by raising rates for basic residential services over a four-year
period. The two major issues in this proceeding involve U S WEST Communications'
requests for improved capital recovery and elimination of the imputation of
Yellow Pages revenue. Instead of granting U S WEST Communications' rate request,
the Commission ordered approximately $91.5 in annual revenue reductions,
effective May 1, 1996. Based on the above ruling, U S WEST Communications filed
a lawsuit with the King County Superior Court (the "Court") for an appeal of the
order, a temporary stay of the ordered rate reduction and an authorization to
implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending its decision on U S WEST Communications'
appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. On November 25, 1996, the Court ruled in favor
of the WUTC. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which, on January 22,
1997, granted a stay of the order, pending the State Supreme Court's full review
of the appeal. U S WEST Communications expects the State Supreme Court's review
to begin in the second quarter of 1997.
U S WEST Communications expects its appeal to be successful and has not
accrued any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on the future results of operations.
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Continental and the FCC have entered into a "social contract" as an
alternative form of rate regulation for cable operators. The social contract is
a six-year agreement covering all of Continental franchises. The social contract
requires Continental to, among other things, invest at least $1.7 billion in
domestic system rebuilds and upgrades through 2000 to expand channel capacity
and improve system reliability and picture quality. At December 31, 1996, $870
is remaining on this commitment.
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 approved a plan to dispose of the capital assets segment through the sale
of segment assets and businesses. 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.
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
and 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
A-62
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
operations. No such adjustment was required in 1996 or 1995. Prior to January 1,
1995, the entire capital assets segment was accounted for as discontinued
operations in accordance with APB Opinion No. 30.
Through a series of transactions in 1995 and 1994, U S WEST reduced its
ownership in FSA to 50.3 percent and its voting interest to 41.7 percent. During
the second quarter of 1996, U S WEST received $98 from the sale of 3,750,000
shares of FSA common stock. This sale reduced U S WEST's ownership in FSA to
approximately 40 percent. Also in second-quarter 1996, U S WEST issued DECS due
May 15, 1999. The shares of FSA to be delivered upon maturity of the DECS,
combined with the exercise of outstanding options held by Fund American
Enterprises Holdings, Inc. to purchase FSA shares would, if consummated, result
in a complete disposition of U S WEST's ownership in FSA. (See Note 9 -- Debt --
to the Consolidated Financial Statements.)
In fourth-quarter 1995, U S WEST issued DECS to reduce its investment in
Enhance Financial Services Group, Inc. ("Enhance") by December 1998. The shares
of Enhance to be delivered upon maturity of the DECS would, if consummated,
result in a complete disposition of U S WEST's ownership in Enhance. (See Note 9
- -- Debt -- to the Consolidated Financial Statements.)
U S WEST Real Estate, Inc. has sold various assets for proceeds of $156,
$120 and $327 in each of the three years ended December 31, 1996, respectively.
The sales proceeds were in line with estimates. Proceeds from sales were
primarily used to repay related debt. U S WEST expects to substantially complete
the liquidation of this portfolio by 1998. The remaining balance of assets
subject to sale is approximately $287, net of reserves, as of December 31, 1996.
Building sales and operating revenues of the capital assets segment were
$223, $237 and $553 in 1996, 1995 and 1994, respectively. Subsequent to June 1,
1993, income (loss) from the capital assets segment 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.
A-63
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED 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,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................. $ 21 $ 38
Finance receivables -- net................................................. 869 953
Investment in real estate -- net of valuation allowance.................... 182 368
Bonds, at market value..................................................... 146 149
Investment in FSA.......................................................... 326 384
Other assets............................................................... 165 177
--------- ---------
Total assets............................................................... $ 1,709 $ 2,069
--------- ---------
--------- ---------
LIABILITIES
Debt....................................................................... $ 481 $ 796
Deferred income taxes...................................................... 671 686
Accounts payable, accrued liabilities and other............................ 137 148
Minority interests......................................................... 11 10
--------- ---------
Total liabilities.......................................................... 1,300 1,640
--------- ---------
Net investment in assets held for sale..................................... $ 409 $ 429
--------- ---------
--------- ---------
</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,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Receivables................................................................ $ 821 $ 921
Unguaranteed estimated residual values..................................... 444 447
--------- ---------
1,265 1,368
Less: Unearned income...................................................... 380 390
Credit loss and other allowances......................................... 16 25
--------- ---------
Finance receivables -- net................................................. $ 869 $ 953
--------- ---------
--------- ---------
</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.
The amortized cost of $147 and $149 at December 31, 1996 and 1995,
respectively, of investments in debt securities approximates market value. 1996
net unrealized losses of $7 (net of deferred taxes of $5) and 1995 net
unrealized gains of $39 (net of deferred taxes of $21), are included in equity.
A-64
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
DEBT
Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
----------------------------------------------------- TOTAL
INTEREST RATES 1997 1998 1999 2000 2001 1996
- ---------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Above 5% to 6%............................................ $ -- $ -- $ -- $ -- $ -- $ --
Above 6% to 7%............................................ 15 -- -- -- -- 15
Above 7% to 8%............................................ -- -- -- -- -- --
Above 8% to 9%............................................ -- -- 150 4 -- 154
Above 9% to 10%........................................... -- 5 -- -- -- 5
Above 10% to 11%.......................................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
$ 15 $ 5 $ 150 $ 4 $ -- 174
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allocated to the capital assets segment -- net............ 307
---------
Total..................................................... $ 481
---------
---------
<CAPTION>
TOTAL
INTEREST RATES 1995
- ---------------------------------------------------------- ---------
<S> <C>
Above 5% to 6%............................................ $ 10
Above 6% to 7%............................................ 54
Above 7% to 8%............................................ 5
Above 8% to 9%............................................ 138
Above 9% to 10%........................................... 53
Above 10% to 11%.......................................... 29
---------
289
Allocated to the capital assets segment -- net............ 507
---------
Total..................................................... $ 796
---------
---------
</TABLE>
Debt of $71 at December 31, 1995, 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,
-------------------------------------
DECEMBER 31,
--------------------------------------------------
1995
1996 -------------------------------------
-------------------------------------------------- WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE RATE RATE
NOTIONAL ---------------------- NOTIONAL -----------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE
----------- ------------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed(1).............. $ 350 1997 5.55 9.01 $ 380 1996-1997 5.96
Fixed to variable(1).............. 350 1997 7.32 5.61 380 1996-1997 7.29
Variable-rate basis
adjustment(2).................... 10 1997 6.42 5.81 10 1997 5.92
<CAPTION>
PAY
---------
<S> <C>
Variable to fixed(1).............. 9.03
Fixed to variable(1).............. 5.87
Variable-rate basis
adjustment(2).................... 5.85
</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 U.S. Treasury rates is swapped to a
LIBOR-based interest rate.
A-65
<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
U S WEST 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 1996 1995
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
0 to 5 Years..................................................................... $ 416 $ 639
5 to 10 Years.................................................................... 436 450
10 to 15 Years................................................................... 8 10
--------- ---------
Total............................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1996 1995
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate......................................................... $ 341 $ 442
Corporate secured.............................................................. 519 657
--------- ---------
Total............................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</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 1996 1995 1994
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................... $ 26 $ 44 $ 54
Net finance receivables.......................................... 859 931 981
Total assets..................................................... 1,058 1,085 1,331
Total debt....................................................... 236 274 533
Total liabilities................................................ 998 1,024 1,282
Equity........................................................... 60 61 49
</TABLE>
A-66
<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>
1996
Sales and other revenues................................................... $ 3,050 $ 3,124 $ 3,179 $ 3,558
Income before income taxes and cumulative effect of change in accounting
principle................................................................ 489 519 494 338
Income before cumulative effect of change in accounting principle.......... 297 313 304 230
Net income................................................................. 331 313 304 230
Earnings per common share:
Communications Group earnings per common share before cumulative effect
of change in accounting principle...................................... 0.62 0.68 0.60 0.65
Communications Group earnings per common share........................... 0.69 0.68 0.60 0.65
Media Group earnings (loss) per common share............................. -- (0.03) 0.04 (0.16)
1995
Sales and other revenues................................................... $ 2,828 $ 2,894 $ 2,964 $ 3,060
Income before income taxes and extraordinary item.......................... 538 514 538 564
Income before extraordinary item........................................... 330 318 325 356
Net income................................................................. 330 318 316 353
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
</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.
1996 first-quarter net income includes the cumulative and current effects of
$34 ($0.07 per Communications share) and $5 ($0.01 per Communications share),
respectively, from adopting SFAS No. 121. 1996 second-quarter net income
includes $30 ($0.06 per Communications share) from gains on the sales of certain
rural telephone exchanges, a charge of $19 ($0.04 per Media share) related to
the sale of the Company's cable television interests in Norway, Sweden and
Hungary and current effects of $5 ($0.01 per Communications share) from adopting
SFAS No. 121. 1996 third-quarter net income includes $1 (no share impact) from
gains on the sales of certain rural telephone exchanges and current effects of
$3 ($0.01 per Communications share) from adopting SFAS No. 121. 1996
fourth-quarter net income includes $5 ($0.01 per Communications share) from
gains on the sales of certain rural telephone exchanges, net losses of $71 and
losses available for common stock of $77 ($0.15 per Media share) related to the
November 15, 1996 Continental Merger and current effects of $2 ($0.01 per
Communications share) from adopting SFAS No. 121.
1995 first-quarter net income includes $39 ($0.08 per Communications share)
from gains on the sales of certain rural telephone exchanges. 1995
second-quarter net income includes $10 ($0.02 per Communications share) from
gains on the sales of certain rural telephone exchanges. 1995 third-quarter net
income includes $21 ($0.04 per Communications share) from gains 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 gains 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.
A-67
<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
- --------------------------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
(WHOLE DOLLARS)
1996
Communications Stock
First quarter...................................................... $ 37.500 $ 30.250 $ 32.375 $ 0.535
Second quarter..................................................... 34.625 31.125 32.000 0.535
Third quarter...................................................... 32.250 27.250 29.875 0.535
Fourth quarter..................................................... 33.625 29.250 32.250 0.535
Media Stock
First quarter...................................................... $ 23.000 $ 18.875 $ 20.625 $ --
Second quarter..................................................... 21.000 16.875 18.250 --
Third quarter...................................................... 18.875 14.375 16.875 --
Fourth quarter..................................................... 19.875 15.375 18.375 --
1995
U S WEST Stock
First quarter...................................................... $ 41.375 $ 35.125 $ 40.125 $ 0.535
Second quarter..................................................... 42.875 39.125 41.625 0.535
Third quarter...................................................... 48.375 40.875 47.125 0.535
Fourth quarter (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 $ --
</TABLE>
A-68
<PAGE>
U S WEST, INC.
(DOLLARS IN MILLIONS)
SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
U S WEST believes that proportionate financial data facilitates the
understanding and assessment of its Consolidated Financial Statements. The
following proportionate accounting table reflects the relative weight of U S
WEST's ownership interest in its domestic and international investments in cable
and telecommunications, wireless and directory and information services
operations. The proportionate data for each of the three years ended December
31, 1996 are derived from the Supplementary Selected Proportionate Results of
Operations of the Media Group and the Communications Group Combined Financial
Statements. 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 U S WEST with those
of the consolidated operations of U S WEST. This table is not intended to
replace the Consolidated Financial Statements prepared in accordance with GAAP.
<TABLE>
<CAPTION>
COMMUNICATIONS MEDIA
GROUP GROUP ELIMINATIONS TOTAL
--------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
1996
Sales and other revenues.................... $ 10,079 $ 6,367 $ (123) $ 16,323
Operating expenses.......................... 5,617 4,894 (123) 10,388
------- --------- ----- ---------
EBITDA(1)................................... 4,462 1,473 -- 5,935
Depreciation and amortization............... 2,122 1,014 -- 3,136
------- --------- ----- ---------
Operating income............................ 2,340 459 -- 2,799
Income (loss) before cumulative effect of
change in accounting principle............ 1,215 (71) -- 1,144
Net income (loss)........................... $ 1,249 $ (71) $ -- $ 1,178
------- --------- ----- ---------
------- --------- ----- ---------
1995 (UNAUDITED)
Sales and other revenues.................... $ 9,484 $ 5,115 $ (112) $ 14,487
Operating expenses.......................... 5,264 3,966 (112) 9,118
------- --------- ----- ---------
EBITDA(1)................................... 4,220 1,149 -- 5,369
Depreciation and amortization............... 2,042 673 -- 2,715
------- --------- ----- ---------
Operating income............................ 2,178 476 -- 2,654
Income before extraordinary item............ 1,184 145 -- 1,329
Net income.................................. $ 1,176 $ 141 $ -- $ 1,317
------- --------- ----- ---------
------- --------- ----- ---------
1994 (UNAUDITED)
Sales and other revenues.................... $ 9,176 $ 4,213 $ (131) $ 13,258
Operating expenses.......................... 5,150 3,311 (131) 8,330
------- --------- ----- ---------
EBITDA(1)................................... 4,026 902 -- 4,928
Depreciation and amortization............... 1,908 501 -- 2,409
------- --------- ----- ---------
Operating income............................ 2,118 401 -- 2,519
Net income.................................. $ 1,150 $ 276 $ -- $ 1,426
------- --------- ----- ---------
------- --------- ----- ---------
</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.
A-69
<PAGE>
U S WEST COMMUNICATIONS GROUP
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Operating revenues......................................... $ 10,079 $ 9,484 $ 9,176 $ 8,870 $ 8,530
Net income (loss)(1)....................................... 1,249 1,176 1,150 (2,809) (815)
Earnings per common share(2)............................... 2.62 2.50 2.53 -- --
Dividends per common share(2).............................. 2.14 2.14 2.14 -- --
EBITDA(3).................................................. 4,462 4,220 4,026 3,743 3,553
EBITDA margin(3)........................................... 44.3% 44.5% 43.9% 42.2% 41.7%
Total assets............................................... $ 16,915 $ 16,585 $ 15,944 $ 15,423 $ 20,655
Total debt................................................. 6,498 6,754 6,124 5,673 5,181
Communications Group equity(4)............................. 3,917 3,476 3,179 2,722 6,003
Return on Communications Group equity(4), (5).............. 32.0% 35.6% 39.0% 22.5% 13.7%
Percentage of debt to total capital(4)..................... 62.4% 66.0% 65.8% 67.6% 46.3%
Ratio of earnings to fixed charges (telephone company)..... 4.95 4.86 5.22 2.56 3.97
Capital expenditures....................................... $ 2,806 $ 2,739 $ 2,477 $ 2,226 $ 2,385
Telephone network access lines in service (thousands)(6)... 15,424 14,795 14,299 13,803 13,301
Billed access minutes of use -- interstate (millions)...... 52,039 47,801 43,768 40,594 37,413
Billed access minutes of use -- intrastate (millions)...... 10,451 9,504 8,507 7,529 6,956
Communications Group employees............................. 48,037 50,825 51,402 52,598 55,352
Telephone company employees................................ 45,427 47,934 47,493 49,668 52,423
Telephone company employees per ten thousand access
lines(6).................................................. 29.5 32.4 33.2 36.0 39.4
Average common shares outstanding
(thousands)(2)............................................ 477,549 470,716 453,316 -- --
Common shares outstanding (thousands)(2)................... 480,457 473,635 469,343 -- --
</TABLE>
- ------------------------------
(1) 1996 net income includes a gain of $36 ($0.08 per share) on the sales of
certain rural telephone exchanges and the cumulative and current effects of
$34 ($0.07 per share) and $15 ($0.03 per share), respectively, from adopting
Statement of Financial Accounting Standards ("SFAS") No. 121. 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 $534 for a
restructuring charge and $54 for the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates. 1993 net income
was also reduced by extraordinary charges of $3,123 for the discontinuance
of SFAS No. 71 and $77 for the early extinguishment of debt. 1992 net income
was reduced by $1,745 for the cumulative effect of change in accounting
principles.
(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 and
dividends per common share for 1995 and 1994 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 and common shares outstanding are assumed to
be equal to the average and common shares outstanding for U S WEST, Inc.
(3) Earnings before interest, taxes, depreciation, amortization and other
("EBITDA"). EBITDA also excludes gains on sales of rural telephone exchanges
and a restructuring charge. The Communications Group considers EBITDA an
important indicator of the operating performance 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").
B-1
<PAGE>
U S WEST COMMUNICATIONS GROUP
FINANCIAL HIGHLIGHTS (CONTINUED)
(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) 1996 return on Communications Group equity is based on income before the
cumulative effect of a change in accounting principle. 1995 return on
Communications Group equity is based on income before extraordinary item.
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 the
cumulative effect of change in accounting principles.
(6) Access lines from 1992 through 1995 have been restated to conform to the
current year presentation.
B-2
<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)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) different than
anticipated competition from new entrants into the local exchange and intraLATA
toll markets, (ii) changes in demand for the Company's products and services,
including optional custom calling features, (iii) different than anticipated
employee levels, capital expenditures, and operating expenses as a result of
unusually rapid, in-region growth, (iv) the gain or loss of significant
customers, (v) pending regulatory actions in state jurisdictions, and (vi)
regulatory changes affecting the telecommunications industry, including changes
that could have an impact on the competitive environment in the local exchange
market.
THE RECAPITALIZATION PLAN
On October 31, 1995, the shareowners 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, shareowners 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 shareowners 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 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 COMMUNICATIONS GROUP
The Communications Group provides telecommunications 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 high-speed data applications, customer premises
equipment ("CPE") and
B-3
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
certain other 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 by permitting competition among local telephone companies,
long-distance companies and cable companies. The Communications Group believes
that its competitors will initially target high-volume business customers in
densely populated urban areas. The resulting loss of local service customers
could affect multiple revenue streams and could have a material, adverse effect
on the Communications Group's operations. Court and state regulatory commission
deliberations on interconnection rates, as well as the Federal Communications
Commission's (the "FCC") current deliberations on access charge reform and
universal service, could also result in significant changes in revenues received
from interexchange carriers and other competitors. However, the Communications
Group expects to counter this competitive threat by expanding services to
include new retail as well as wholesale markets. Planned future service
offerings include interLATA long-distance services, wireless Personal
Communications Services ("PCS"), and interconnection services provided to
competing providers of local services. The Communications Group's ability to
bundle local, long-distance, wireless PCS and other services will also provide a
competitive advantage against emerging local service competitors.
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.
RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
Following are details of the Communications Group reported net income and
earnings per common share ("earnings per share") for 1996 and 1995, normalized
to exclude the effects of certain nonoperating items.
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE
------------------------------------------ ------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- --------------------
1996 1995 $ % 1996 1995(1) $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income..................... $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12 4.8
Adjustments to reported net income:
Gains on sales of rural telephone
exchanges........................... (36) (85) 49 57.6 (0.08) (0.18) 0.10 55.6
Cumulative effect of change in
accounting principle(2)............. (34) -- (34) -- (0.07) -- (0.07) --
Current year effect of change in
accounting principle(2)............. (15) -- (15) -- (0.03) -- (0.03) --
Recapitalization costs................ -- 8 (8) -- -- 0.01 (0.01) --
Early extinguishment of debt.......... -- 8 (8) -- -- 0.02 (0.02) --
--------- --------- --------- --------- --------- --------- --------- ---------
Normalized income....................... $ 1,164 $ 1,107 $ 57 5.1 $ 2.44 $ 2.35 $ 0.09 3.8
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications 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.
(2) Effective January 1, 1996, U S WEST adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See the U S
WEST Communications Group Combined Financial Statements -- Note 3 --
Property, Plant and Equipment.
B-4
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Communications Group's 1996 normalized income was $1,164, an increase of
$57, or 5.1 percent, compared with $1,107 in 1995. Normalized earnings per share
were $2.44, an increase of $0.09, or 3.8 percent, as compared to 1995. The
increase in normalized income is primarily attributable to demand for services,
evidenced by revenue growth of 6.3 percent. Partially offsetting the increased
demand are higher costs incurred to address business growth, service-improvement
initiatives and costs related to new business opportunities.
The Communications Group expects net income growth in the core business to
be partially offset by cost increases related to growth initiatives such as
wireless PCS and interLATA long-distance service. Net income growth could also
be impacted by costs related to implementing the interconnection requirements
and other provisions of the Telecommunications Act of 1996. However, the net
income impact will depend on the nature and timing of the requirements, and the
type of recovery mechanisms provided for by the FCC and state commissions. (See
"Regulatory Environment.")
Increased demand for services resulted in growth in earnings before
interest, taxes, depreciation, amortization and other ("EBITDA") of 5.7 percent
in 1996. EBITDA also excludes gains on sales of certain rural telephone
exchanges in 1996 and 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 the performance of the Communications Group's business or as
an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with GAAP.
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted
in a one-time gain of $34 (net of tax of $22), or $0.07 per share, related to
the cumulative effect of change in accounting principle. See the U S WEST
Communications Group Combined Financial Statements -- Note 3 -- Property, Plant
and Equipment.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
OPERATING REVENUES
An analysis of operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1996 1995 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service.......................... $ 4,770 $ 4,344 $ 413 $ 27 $ 8 $ (22) $ 426
Interstate access...................... 2,507 2,378 250 (48) (69) (4) 129
Intrastate access...................... 770 747 45 (16) -- (6) 23
Long-distance network.................. 1,100 1,189 (53) (7) (1) (28) (89)
Other services......................... 932 826 -- -- -- 106 106
--------- --------- ----- ----- ----- ----- ---------
Total.................................. $ 10,079 $ 9,484 $ 655 $ (44) $ (62) $ 46 $ 595
--------- --------- ----- ----- ----- ----- ---------
--------- --------- ----- ----- ----- ----- ---------
<CAPTION>
%
---------
<S> <C>
Local service.......................... 9.8
Interstate access...................... 5.4
Intrastate access...................... 3.1
Long-distance network.................. (7.5)
Other services......................... 12.8
---
Total.................................. 6.3
---
---
</TABLE>
Approximately 97 percent of the Communications Group's revenues are
attributable to the operations of U S WEST Communications, Inc. ("U S WEST
Communications"), of which approximately 60 percent are derived from the states
of Arizona, Colorado, Minnesota and Washington. Approximately 29 percent
B-5
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 1996, business access lines grew 7.6 percent while
residential access lines increased 4.0 percent, when adjusted for the 1996 sales
of rural telephone access lines.
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 1996, revenues from new product and service
offerings were approximately $840, an increase of 57 percent as compared with
1995. These revenues primarily consist of caller identification, voice
messaging, digital switched services and high-speed data network transmission
services.
Local service revenues include local telephone exchange, local private line
and public telephone services. The 9.8 percent increase in local service
revenues is primarily attributable to growth in access lines and increased
demand for new product and service offerings, and existing central office
features. Total reported access lines increased 629,000 during 1996, or 4.3
percent, of which 244,000 is attributed to second lines. Second line
installations increased 30.5 percent compared with 1995. Access lines grew by
742,000, or 5.0 percent, when adjusted for sales of approximately 113,000 rural
telephone access lines during 1996.
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 30 percent of
access revenues and 10 percent of total revenues are derived from providing
access services to AT&T Corp. ("AT&T").
Higher revenues from interstate access services were driven by access line
growth and an increase of 8.9 percent in interstate billed access minutes of
use. The increased business volume was partially offset by the effects of price
reductions and sharing related accrued refunds to interexchange carriers. The
Communications Group reduced prices for interstate access services in both 1996
and 1995 as a result of FCC orders and competitive pressures. Intrastate access
revenues increased primarily due to higher demand partially offset by the
effects of price reductions.
Long-distance revenues are derived from calls made within the LATA
boundaries of the Region. During 1996, long-distance revenues decreased 7.5
percent, primarily due to the effects of competition and the implementation of
multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in May and October
1996, respectively. The MTCPs essentially allow independent telephone companies
to act as toll carriers. The 1996 impact of the MTCPs was a $27 reduction in
long-distance revenues, offset by increases in intrastate access revenues of $5
and decreases in other operating expenses (i.e., access expense) of $21. Similar
changes in other states are scheduled to occur in 1997, though the impact on
1997 net income is not expected to be material.
Excluding the effects of the MTCPs, long-distance revenues decreased 5.2
percent. Long-distance revenues have declined over the last several years as
customers have migrated to interexchange carriers that have the ability to offer
long-distance 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. The Communications Group expects erosion in
long-distance revenue to continue in 1997 due to the loss of exclusivity of 1+
dialing in Minnesota and Arizona, effective in February and April 1996,
respectively, and continued dial-around activity in other states within the
Region, though management expects the decline to be less than in 1996. The
Communications Group is partially mitigating competitive
B-6
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
losses through competitive pricing of intraLATA long-distance services and
increased promotional efforts to retain customers.
Revenues from other services primarily consist of voice messaging services,
inside wire maintenance services, billing and collection services provided to
interexchange carriers, high-speed data transmission services, and the provision
of CPE.
During 1996, revenues from other services increased $106, or 12.8 percent,
primarily as a result of continued market penetration in voice messaging
services and increased inside wire maintenance services. Also contributing to
other services revenue growth were increased contract revenues related to a
large wire installation project and CPE sales.
Future revenues at U S WEST Communications may be affected by pending
regulatory actions in federal and local regulatory jurisdictions. (See
"Regulatory Environment.")
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE
----------------------
1996 1995 $ %
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Employee-related expenses....................................................... $ 3,594 $ 3,341 $ 253 7.6
Other operating expenses........................................................ 1,634 1,543 91 5.9
Taxes other than income taxes................................................... 389 380 9 2.4
Depreciation and amortization................................................... 2,122 2,042 80 3.9
Interest expense................................................................ 445 427 18 4.2
Other expense -- net............................................................ 41 41 -- --
</TABLE>
Employee-related expenses include salaries and wages (including both basic
and performance-based pay), overtime, benefits (including pension and health
care), payroll taxes and contract labor. During 1996, total employee-related
expenses increased $253 primarily due to continued efforts to address increased
business growth, service-improvement initiatives and new business opportunities.
Salaries and wages and contract labor, which increased by $117 and $172,
respectively, in 1996, are the two primary factors that impact employee-related
expenses. Salaries and wages increased primarily due to inflation-driven and
contractual wage increases. The contract labor increase supported the increased
business growth and the additional marketing organization costs related to the
launch of new products and services. Employee-related expenses also include
approximately $15 for contract labor and overtime as a result of flooding in
Washington and Oregon in first-quarter 1996. Partially offsetting these
increases was a reduction in postretirement benefits costs due to changes in
actuarial assumptions and favorable costs trends, lower conference and travel
expenses and decreased overtime as a result of accelerated cost reduction
efforts in the latter half of 1996.
The Communications Group will add a certain number of employees to address
the needs of new business opportunities such as wireless PCS and interLATA
long-distance service. Costs related to these work force additions could
partially offset the benefits of employee separations achieved through
restructuring. (See "Restructuring Charge.")
Other operating expenses include access charges paid to independent local
exchange carriers (incurred for the routing of long-distance traffic through
their facilities), network software expenses and other general and
administrative costs, including allocated costs from U S WEST. During 1996,
other operating expenses increased primarily due to higher advertising and bad
debt expenses and costs
B-7
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
associated with greater sales of CPE. Also contributing to the increase was a
reserve adjustment associated with billing and collection activities performed
for interexchange carriers and a charge related to the discontinuance of the
Omaha broadband video service trial. Reduced access expense (a portion of which
relates to the 1996 implementation of the MTCPs in Iowa and Nebraska) and a
reduction in allocated costs from U S WEST partially offset these increases.
Allocated costs from U S WEST were $88 and $116 in 1996 and 1995, respectively.
Taxes other than income taxes, which consist primarily of property taxes,
were relatively flat as compared with 1995. In fourth-quarter 1996, taxes other
than income taxes increased by $24, or 32.4 percent, due to favorable property
tax valuations and mill levies recognized during fourth-quarter 1995.
The increase in depreciation and amortization expense is attributed to the
effects of a higher depreciable asset base, partially offset by the effects of
1995 sales of certain rural telephone exchanges and the adoption of SFAS No.
121.
Interest expense increased primarily due to higher average debt levels and a
decrease in the amount of interest capitalized resulting from a lower average
balance of telecommunications plant under construction. The average borrowing
cost was 7.0 percent in 1996, compared with 6.9 percent in 1995. (See "Liquidity
and Capital Resources.")
Other expense was flat in 1996 as compared with 1995. However, other expense
increased $8 in fourth-quarter 1996, primarily as a result of a $13 adjustment
related to the Communications Group's equity investment in Bell Communications
Research, Inc. ("Bellcore"), of which U S WEST Communications has a one-seventh
ownership interest. Partially offsetting the increase were costs incurred in
1995 associated with the Recapitalization Plan.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
-------------
1996 1995 $ %
--------- --------- ----- -----
<S> <C> <C> <C> <C>
Provision for income taxes......................................................... $ 698 $ 662 $ 36 5.4
Effective tax rate................................................................. 36.5% 35.9% -- --
</TABLE>
The increase in the effective tax rate resulted primarily from the effects
of lower investment tax credit amortization.
RESTRUCTURING CHARGE
In 1993, the Communications Group incurred an $880 restructuring charge
(pretax). The related restructuring plan (the "Restructuring Plan"), which is
expected to be substantially complete by the end of 1997, is designed to provide
faster, more responsive customer services, while reducing the costs of
B-8
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
providing these services. Following is a schedule of the incurred costs that
were included in the 1993 restructuring charge:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation..................................................... $ 19 $ 76 $ 102 $ 86 $ 283
Systems development..................................................... 118 129 91 22 360
Real estate............................................................. 50 66 8 6 130
Relocation.............................................................. 21 21 5 -- 47
Retraining and other.................................................... 8 23 20 9 60
--------- --------- --------- ----- ---------
Total................................................................... $ 216 $ 315 $ 226 $ 123 $ 880
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Under the Restructuring Plan, the
Communications Group anticipates the separation of 10,000 employees. Annual
employee separations and employee-separation amounts under the Restructuring
Plan follow:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separations................................................ 2,180 2,325 2,667 2,828 10,000
Employee-separation amounts......................................... $ 75 $ 76 $ 102 $ 86 $ 339
</TABLE>
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
Following are details of the Communications Group reported net income and
earnings per share for 1995 and 1994, normalized to exclude the effects of
certain nonoperating items.
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE(1)
------------------------------------------ ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income..................... $ 1,176 $ 1,150 $ 26 2.3 $ 2.50 $ 2.53 $ (0.03) (1.2)
Adjustments to reported net income:
Gains on sales of rural telephone
exchanges........................... (85) (51) (34) (66.7) (0.18) (0.11) (0.07) (63.6)
Recapitalization costs................ 8 -- 8 -- 0.01 -- 0.01 --
Early extinguishment of debt.......... 8 -- 8 -- 0.02 -- 0.02 --
--------- --------- --------- --------- --------- --------- --------- ---------
Normalized income....................... $ 1,107 $ 1,099 $ 8 0.7 $ 2.35 $ 2.42 $ (0.07) (2.9)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per 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.
B-9
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Communications Group's 1995 normalized income was $1,107, an increase of
$8, or 0.7 percent, compared with $1,099 in 1994. The increase in normalized
income was attributable to revenue growth of 3.4 percent largely offset by
significantly higher costs incurred to improve customer service and meet greater
than expected business growth. Normalized pro forma earnings per share were
$2.35, a decrease of $0.07, or 2.9 percent, from 1994. 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 refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
Revenue growth, partially offset by higher operating costs, provided a 4.8
percent increase in EBITDA in 1995.
OPERATING REVENUES
An analysis of changes in operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1995 1994 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service......................... $ 4,344 $ 4,067 $ 273 $ 35 $ (10) $ (21) $ 277
Interstate access..................... 2,378 2,269 191 (66) (2) (14) 109
Intrastate access..................... 747 729 36 (31) 8 5 18
Long-distance network................. 1,189 1,329 (54) (23) (1) (62) (140)
Other services........................ 826 782 -- -- -- 44 44
--------- --------- ----- ----- ----- ----- ---------
Total................................. $ 9,484 $ 9,176 $ 446 $ (85) $ (5) $ (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>
Local service revenues increased principally as a result of higher demand
for new and existing services, and demand for second lines. Reported total
access lines increased 496,000, or 3.5 percent, of which 161,000 were second
lines. Second line installations increased 25.5 percent compared with 1994.
Access line growth was 4.1 percent when adjusted for sales of rural telephone
access lines during 1995.
Higher revenues from interstate access services were driven by an increase
of 9.2 percent in interstate billed access minutes of use, which more than
offset the effects of price reductions and refunds. Intrastate access revenues
increased primarily due to the impact of increased business volumes and MTCPs,
partially offset by the impact of rate changes.
Long-distance revenues were impacted by the implementation of MTCPs in
Oregon and Washington in 1994. The 1995 impact of the MTCPs was a $62 reduction
in long-distance revenues, partially offset by increases in intrastate access
revenues of $12 and decreases in other operating expenses (i.e., access expense)
of $42. Excluding the effects of the MTCPs, long-distance revenues decreased by
5.9 percent during 1995, primarily due to the effects of competition and rate
reductions.
During 1995, revenues from other services increased 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 was also
attributed to inside wire maintenance services and a large contract related to a
wire installation project. These increases were partially offset by a decrease
in billing and collection service revenues. Revenues for services provided to
Media Group were $20 in 1995 and $29 in 1994.
B-10
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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>
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 in
1995. The increase in employee-related expenses was also attributable to the
hiring of additional employees in 1995 and 1994 to handle the higher than
anticipated volume of business and to meet new business opportunities. Partially
offsetting these cost increases was a reduction in the accrual for
postretirement benefits, a decrease in travel expense and reduced expenses
related to employee separations under reengineering and streamlining
initiatives.
Other operating expenses decreased during 1995 primarily due to the effects
of the MTCPs and a reduction in expenses related to project funding at Bellcore.
These decreases 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 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.
The increase in 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. The increase in other expense was largely attributable to $8 of
costs associated with the Recapitalization Plan.
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.
B-11
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES. Cash provided by operating activities was $3,306,
$2,719, and $2,509 in 1996, 1995 and 1994, respectively. During 1996, cash
provided by operating activities increased $587 to $3,306. The increase was
primarily attributable to business growth, a $157 decrease in the cash funding
of postretirement benefits, and lower restructuring expenditures. These
increases were partially offset by higher 1996 income tax payments. Cash from
operations increased $210 in 1995 compared with 1994, primarily due to increased
business growth and a decrease in the cash funding for postretirement benefits,
partially offset by higher payments for restructuring activities.
The future cash needs could increase with the pursuit of new business
opportunities, including interLATA long-distance service and wireless PCS.
Future cash needs could also increase as the Communications Group begins
implementing the interconnection requirements and other provisions of the
Telecommunications Act of 1996. However, the impact will depend on the nature
and timing of the requirements and the type of recovery mechanisms provided for
by the FCC and state commissions. (See "Regulatory Environment.")
INVESTING ACTIVITIES. Total capital expenditures were $2,419, $2,462 and
$2,254 in 1996, 1995 and 1994, respectively. The 1996 capital expenditures
exceeded 1995 and 1994 levels due to efforts to address strong access line
growth and entry into the wireless PCS market. In 1997, capital expenditures are
expected to approximate $2.5 billion. Included in the 1997 capital expenditures
estimate are additional costs for wireless PCS, entry costs for the interLATA
long-distance market and interconnection costs related to the Telecommunications
Act of 1996. In January 1997, the Communications Group purchased PCS licenses in
the FCC D&E spectrum block auction for approximately $57.
The Communications Group received cash proceeds of $174, $214 and $93 during
1996, 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 268,000 access lines. Estimated
aggregate sales of rural exchanges for 1997 and beyond approximate 70,000 lines.
FINANCING ACTIVITIES. Debt decreased $256 in 1996 and the percentage of
debt to total capital declined to 62.4 percent at year-end 1996 from 66.0
percent at year-end 1995. The decline in the percentage of debt to total capital
is primarily a result of increased net income and equity issuances for the
dividend reinvestment plan, the employee savings plan and the exercise of stock
options. During 1995, debt increased $630, primarily due to the increase in
capital expenditures.
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 after-tax charges of $8, net of tax benefits of $5.
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, 1996. Additional lines of credit aggregating approximately $4.5
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, 1996, U S WEST Communications is permitted to issue
up to $320 of new debt securities. An additional $620 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.
B-12
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On November 15, 1996, Continental Cablevision, Inc. was merged into a wholly
owned subsidiary of U S WEST (the "Merger" or the "Continental Merger"). The
Continental Merger and the regulatory uncertainty surrounding the Washington
State Utilities and Transportation Commission's $91.5 rate reduction order (see
U S WEST Communications Group Combined Financial Statements -- Note 13 --
Contingencies) have resulted in a general downgrading of U S WEST
Communications' credit ratings. U S WEST Communications' senior unsecured debt
and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps
were Aa3, A-plus and AA-minus, and P1, A1 and D-1-plus, respectively, at
December 31, 1996.
Communications Group from time to time engages in preliminary discussions
regarding restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST and the Communications Group. There is no assurance that any such
discussions will result in the consummation of any such transaction.
INTEREST RATE RISK MANAGEMENT. The Communications Group is exposed to
market risk arising from changes in interest rates. Derivative financial
instruments are used to manage this risk. U S WEST 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 over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
Notional amounts of interest rate swaps outstanding were $384 and $784 at
December 31, 1996 and 1995, respectively, with various maturities extending to
2001. A 50 basis point increase in interest rates would create a gain of $1 in
the market value of interest rate swaps. Likewise, a 50 basis point decrease in
interest rates would create a loss of $1 in the market value of interest rate
swaps.
REGULATORY ENVIRONMENT
THE TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act of 1996 (the
"Telecommunications Act") replaces the Modification of Final Judgment, the
antitrust consent decree entered into in 1984 in connection with the divestiture
by AT&T of its local telephone business and the formation of U S WEST and the
other Regional Bell Operating Companies ("RBOCs"). The Telecommunications Act
permits local telephone companies, long-distance carriers and cable television
companies to enter each others' lines of business. The RBOCs will be permitted
to provide interLATA long-distance services by opening their local networks to
facilities-based competition and satisfying a detailed list of requirements,
including providing interconnection and number portability. The
Telecommunications Act also lifts the ban on cross-ownership between cable
television and telephone companies, thereby permitting the RBOCs to enter into
the cable business within their respective service regions so long as such entry
is not achieved through the purchase of existing cable companies, except in
rural communities. The Telecommunications Act also reaffirms the concept of
universal service and directs the FCC and state regulators to determine
universal service funding policy. The FCC and state regulators have been given
the responsibility to interpret and oversee implementation of large portions of
the Telecommunications Act.
On August 8, 1996, the FCC issued an order (the "FCC Order") establishing a
framework of minimum national rules that will enable the states and the FCC to
begin implementing the local
B-13
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
competition provisions of the Telecommunications Act. Key provisions that relate
to U S WEST Communications and other local exchange carriers ("LECs") include:
- Providing interconnection to any requesting telecommunications carrier at
any technically feasible point, equal in quality to that provided by the
incumbent LEC.
- Providing unrestricted access to network services on an unbundled basis.
- Providing physical collocation of equipment necessary for interconnection
at the incumbent LEC, unless physical collocation is not practical for
technical reasons or because of space limitations.
- Offering for resale any telecommunications services that the LEC provides
at retail to subscribers who are not telecommunications carriers.
- Reciprocal compensation arrangements for wireline and wireless local
service providers.
The FCC Order also established rigid costing and pricing rules which, from U
S WEST's perspective, significantly impede negotiations with new entrants to the
local exchange market, state public utility commission ("PUC") interconnection
rulemakings, and interconnection arbitration proceedings. U S WEST appealed the
FCC Order and sought a stay of certain of its provisions, including certain
pricing provisions, pending appellate review. On October 15, 1996, the Eighth
Circuit Court of Appeals ("Eighth Circuit") issued its order granting a stay of
all the pricing provisions of the FCC Order. The stay does not postpone
implementation of the Telecommunications Act. Rather, the effect of the stay is
to have interconnection and network unbundled element pricing be resolved
through negotiations or state PUC arbitration proceedings without the PUCs being
limited in their consideration of relevant costs.
Subsequently, the FCC and certain interexchange carriers requested the
United States Supreme Court (the "Supreme Court") to review and vacate the
Eighth Circuit stay. On October 31, 1996, the Supreme Court denied these
requests. Thereafter, the FCC and certain interexchange carriers petitioned the
Supreme Court for further consideration of vacating the stay. On November 12,
1996, the Supreme Court rejected these further petitions. Thus, the Eighth
Circuit stay will remain in effect until modified by that court or until the
appeal is resolved. A decision on the appeal is expected by May 1997.
The Telecommunications Act will drive key public policy initiatives of U S
WEST Communications in 1997. These include:
- INTERCONNECTION PROCEEDINGS. Despite the FCC Order being stayed by the
Eighth Circuit, interconnection proceedings throughout local regulatory
jurisdictions are continuing. At December 31, 1996, U S WEST
Communications had completed 25 state arbitrations in 11 states. An
additional 32 arbitrations were pending throughout the Region and 41
parties were still in negotiations with U S WEST Communications. U S WEST
Communications advocates that LECs have the right to recover fully the
costs of providing interconnection services and that they must not be
placed at a competitive disadvantage as local and long-distance markets
are opened to competition. U S WEST Communications is aggressively
defending its views in arbitrations and, when necessary, in the courts. U
S WEST Communications cannot provide assurance that it will be able to
fully recover its costs related to providing interconnection services.
- FEDERAL ACCESS REFORM. In December 1996, the FCC issued a Notice of
Proposed Rulemaking related to the pricing, terms and conditions for
long-distance carriers to access LEC networks. The FCC has alternatively
proposed a regulatory approach that entails scheduled fee reductions or a
market-based approach that would allow competition to determine access
pricing. U S WEST Communications advocates a market-based approach that
would permit LECs to gradually reduce access charges as new sources of
revenue are developed through the expansion of wholesale and retail
services and in conjunction with interstate and intrastate rate
rebalancing that would
B-14
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
eliminate implicit subsidies. U S WEST Communications expects new rules to
be issued by May 1997, with implementation of the new rules to occur over
a three- to four-year period.
- UNIVERSAL SERVICE. The Telecommunications Act requires the FCC and state
jurisdictions to preserve universally available and affordable local
telephone service for low-income and high-cost area customers through an
explicit subsidy. A federal-state joint board issued recommendations on
universal service policy during fourth-quarter 1996. Funding
recommendations include an assessment on service providers' gross
telecommunications service revenues net of payments to other carriers. U S
WEST Communications advocates that universal service support be based on
the smallest, high-cost geographic areas that are reasonably identifiable
and that funding occur through a pass-through surcharge on retail
revenues. U S WEST Communications expects new FCC rules on universal
service to be issued by May 1997.
- LEGISLATIVE INITIATIVES. Key legislative initiatives in local regulatory
jurisdictions in 1997 include: (1) achieving accelerated capital recovery;
(2) rebalancing local service prices to cover actual costs; and (3)
eliminating subsidies.
Due to legal and regulatory uncertainties, the impact of the
Telecommunications Act on U S WEST's future results is unknown.
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. The
FCC's price cap plan (the "Price Cap Plan") includes sharing of earnings in
excess of authorized levels. The Price Cap Plan has resulted in reduced access
prices paid by interexchange carriers to LECs.
The price cap index for most services is annually adjusted for inflation,
productivity level and exogenous costs. The Price Cap Plan provides for three
productivity options, including a no-sharing option, and for increased
flexibility for adjusting prices downward in response to competition. In 1996
and 1995, the Communications Group selected the lowest productivity option in
determining prices. Current FCC deliberations on access charge reform and
universal service will likely impact the nature and duration of the interim
rules on price cap regulation.
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 hearing, 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. The range of possible risk is $0 to $155 at December 31,
1996.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995
rate request. In February 1995, U S WEST Communications sought to increase
revenues by raising rates for basic residential services over a four-year
period. The two major issues in this proceeding involve U S WEST Communications'
request for improved capital recovery and elimination of the imputation of
Yellow Pages revenue. Instead of granting U S WEST Communications' rate request,
the Commission ordered approximately $91.5 in annual revenue reductions,
effective May 1, 1996. Based on the above ruling, U S WEST Communications filed
a lawsuit with the King County Superior Court (the "Court") for an appeal of the
order, a temporary stay of the ordered rate reduction and an authorization to
implement a revenue increase.
B-15
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending its decision on U S WEST Communications'
appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. On November 25, 1996, the Court ruled in favor
of the WUTC. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which, on January 22,
1997, granted a stay of the order, pending the State Supreme Court's full review
of the appeal. U S WEST Communications expects the State Supreme Court's review
to begin in the second quarter of 1997.
U S WEST Communications expects its appeal to be successful and has not
accrued any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on the future results of operations.
B-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Combined Balance Sheet of U S WEST
Communications Group (as described in Note 2 to the Combined Financial
Statements) as of December 31, 1996, and the related Combined Statements of
Operations and Cash Flows for the year then ended. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U S WEST Communications
Group as of December 31, 1996, and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1997.
B-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Combined Balance Sheet of U S WEST Communications Group
(as described in Note 2 to the Combined Financial Statements) as of December 31,
1995, and the related Combined Statements of Operations and Cash Flows for each
of the two 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 the combined results of its
operations and its cash flows for each of the two 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.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
B-18
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
Operating revenues:
Local service.................................................................. $ 4,770 $ 4,344 $ 4,067
Interstate access service...................................................... 2,507 2,378 2,269
Intrastate access service...................................................... 770 747 729
Long-distance network services................................................. 1,100 1,189 1,329
Other services................................................................. 932 826 782
--------- --------- ---------
Total operating revenues..................................................... 10,079 9,484 9,176
Operating expenses:
Employee-related expenses...................................................... 3,594 3,341 3,215
Other operating expenses....................................................... 1,634 1,543 1,547
Taxes other than income taxes.................................................. 389 380 388
Depreciation and amortization.................................................. 2,122 2,042 1,908
--------- --------- ---------
Total operating expenses..................................................... 7,739 7,306 7,058
--------- --------- ---------
Operating income................................................................. 2,340 2,178 2,118
Interest expense................................................................. 445 427 376
Gains on sales of rural telephone exchanges...................................... 59 136 82
Other expense -- net............................................................. 41 41 21
--------- --------- ---------
Income before income taxes, extraordinary item and cumulative
effect of change in accounting principle....................................... 1,913 1,846 1,803
Provision for income taxes....................................................... 698 662 653
--------- --------- ---------
Income before extraordinary item and cumulative effect of
change in accounting principle................................................. 1,215 1,184 1,150
Extraordinary item -- early extinguishment of debt -- net of tax................. -- (8) --
--------- --------- ---------
Income before cumulative effect of change in accounting principle................ 1,215 1,176 1,150
Cumulative effect of change in accounting principle -- net of tax................ 34 -- --
--------- --------- ---------
NET INCOME....................................................................... $ 1,249 $ 1,176 $ 1,150
--------- --------- ---------
--------- --------- ---------
Earnings per common share:
Income before extraordinary item and cumulative effect of
change in accounting principle............................................... $ 2.55 $ 2.52 $ 2.53
Extraordinary item -- early extinguishment of debt............................. -- (0.02) --
Cumulative effect of change in accounting principle............................ 0.07 -- --
--------- --------- ---------
EARNINGS PER COMMON SHARE........................................................ $ 2.62 $ 2.50 $ 2.53
--------- --------- ---------
--------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING (thousands).................................... 477,549 470,716 453,316
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
B-19
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 80 $ 172
Accounts and notes receivable, less allowance for
credit losses of $40 and $30, respectively.............................................. 1,622 1,617
Inventories and supplies.................................................................. 144 193
Deferred tax asset........................................................................ 171 259
Prepaid and other......................................................................... 65 51
--------- ---------
Total current assets........................................................................ 2,082 2,292
--------- ---------
Gross property, plant and equipment......................................................... 32,645 31,178
Less accumulated depreciation............................................................... 18,639 17,649
--------- ---------
Property, plant and equipment -- net........................................................ 14,006 13,529
Other assets................................................................................ 827 764
--------- ---------
Total assets................................................................................ $ 16,915 $ 16,585
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt........................................................................... $ 834 $ 1,065
Accounts payable.......................................................................... 989 851
Employee compensation..................................................................... 342 316
Dividends payable......................................................................... 257 254
Current portion of restructuring charge................................................... 123 270
Advanced billing and customer deposits.................................................... 250 223
Accrued property taxes.................................................................... 193 194
Other..................................................................................... 479 434
--------- ---------
Total current liabilities................................................................... 3,467 3,607
--------- ---------
Long-term debt.............................................................................. 5,664 5,689
Postretirement and other postemployment benefit obligations................................. 2,387 2,351
Deferred income taxes....................................................................... 749 689
Unamortized investment tax credits.......................................................... 173 199
Deferred credits and other.................................................................. 558 574
Contingencies
Communications Group equity................................................................. 3,917 3,476
--------- ---------
Total liabilities and equity................................................................ $ 16,915 $ 16,585
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
B-20
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
OPERATING ACTIVITIES
Net income...................................................................... $ 1,249 $ 1,176 $ 1,150
Adjustments to net income:
Depreciation and amortization................................................. 2,122 2,042 1,908
Gains on sales of rural telephone exchanges................................... (59) (136) (82)
Cumulative effect of change in accounting principle........................... (34) -- --
Deferred income taxes and amortization of investment tax credits.............. 91 172 226
Changes in operating assets and liabilities:
Restructuring payments........................................................ (226) (315) (272)
Postretirement medical and life costs, net of cash fundings................... 28 (90) (197)
Accounts receivable........................................................... (5) (117) (64)
Inventories, supplies and other current assets................................ 27 (51) (29)
Accounts payable and accrued liabilities...................................... 98 7 (147)
Other -- net.................................................................. 15 31 16
--------- --------- ---------
Cash provided by operating activities........................................... 3,306 2,719 2,509
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (2,419) (2,462) (2,254)
Proceeds from sales of rural telephone exchanges................................ 174 214 93
Proceeds from (payments on) disposals of property, plant and equipment.......... 15 (18) 3
Other -- net.................................................................... -- (2) 2
--------- --------- ---------
Cash (used for) investing activities............................................ (2,230) (2,268) (2,156)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt -- net............................ 96 (832) 344
Proceeds from issuance of long-term debt........................................ 23 1,647 326
Repayments of long-term debt.................................................... (482) (334) (285)
Dividends paid on common stock.................................................. (939) (926) (886)
Proceeds from issuance of common stock.......................................... 134 50 208
--------- --------- ---------
Cash (used for) financing activities............................................ (1,168) (395) (293)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................. (92) 56 60
Beginning balance............................................................... 172 116 56
--------- --------- ---------
Ending balance.................................................................. $ 80 $ 172 $ 116
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
B-21
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareowners 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,
shareowners 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 shareowners 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., U S WEST Business
Resources, Inc. and U S WEST Long Distance, Inc. The Communications Group
provides telecommunications 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
high-speed data applications, customer premises equipment ("CPE") and certain
other communications services to business customers and governmental agencies
both inside and outside the Region.
The Media Group is comprised of Continental Cablevision, Inc., the third
largest cable television system operator in the United States, U S WEST
Multimedia Communications, Inc., which owns domestic cable television operations
and investments, U S WEST Dex, Inc. (formerly 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 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
B-22
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 shareowners' equity between the Communications Group
and the Media Group for the purpose of preparing the respective financial
statements of such Group, owners of Communications Stock and Media Stock are
subject to risks associated with an investment in a single company and all of U
S WEST's businesses, assets and liabilities. Financial effects arising from
either Group that affect U S WEST's results of operations or financial condition
could, if significant, affect the results of operations or financial position of
the other Group or the market price of the class of 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
shareowners, 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 owners 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 shareowners, including the owners of Communications Stock and the owners 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 $88, $116 and $110 in 1996, 1995 and 1994,
respectively. In 1996, the direct allocations comprised approximately 65 percent
of the total shared corporate services allocated to the Communications Group. It
is not practicable to provide a detailed
B-23
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimate of the expenses which would be recognized if the Communications Group
were 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 were
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 and preferred stock 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 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 and the financial statements of the borrowing Group will reflect the
amount of any such loan and the 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
B-24
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 ("earnings per 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." Approximately 97 percent of the Communications Group's
revenues are attributable to the operations of U S WEST Communications, of which
approximately 60 percent are derived from the states of Arizona, Colorado,
Minnesota and Washington.
SIGNIFICANT CONCENTRATIONS. The largest volume of the Communications
Group's services is provided to AT&T. During 1996, 1995 and 1994, revenues
related to those services provided to AT&T were $1,046, $1,085 and $1,130,
respectively. Related accounts receivable at December 31, 1996 and 1995, totaled
$89 and $91, respectively. As of December 31, 1996, 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-
B-25
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
line group methods using remaining useful (economic) lives based on
industry-wide studies. U S WEST Communications discontinued accounting for its
regulated telephone operations under SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," in 1993. The average depreciable lives used for
the major categories of telephone property, plant and equipment follow:
<TABLE>
<CAPTION>
AVERAGE LIFE
CATEGORY (YEARS)
- ---------------------------------------------------------------- -------------------
<S> <C>
General purpose computers....................................... 6
Digital switch.................................................. 10
Digital circuit................................................. 10
Aerial copper cable............................................. 15
Underground copper cable........................................ 15
Buried copper cable............................................. 20
Fiber cable..................................................... 20
Buildings....................................................... 27-49
</TABLE>
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.
Interest related to qualifying construction projects is capitalized and
reflected as a reduction of interest expense. Amounts capitalized by the
Communications Group were $31, $39 and $36 in 1996, 1995 and 1994, respectively.
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 costs of $187 and $183 at December 31,
1996 and 1995, respectively, are recorded in property, plant and equipment.
Amortization of capitalized computer software costs totaled $81, $69 and $61 in
1996, 1995 and 1994, respectively.
FINANCIAL INSTRUMENTS. Net interest accrued on interest rate swaps is
recognized over the life of the swaps as an adjustment to interest expense.
Gains and losses incurred on executed forward U.S. Treasury Bond contracts, used
to lock in the U.S. Treasury rate component of future debt issues, are deferred
and recognized as an adjustment to interest expense over the life of the
underlying debt. At December 31, 1996, deferred credits of $8 and deferred
charges of $50 on the 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.
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.
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
network services are billed and recorded monthly as services are provided.
B-26
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. 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. Effective January 1, 1996, U S WEST adopted 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. See Note 3 -- Property, Plant and
Equipment -- to the Communications Group Combined Financial Statements.
In 1996, U S WEST adopted 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 has adopted the disclosure provisions of SFAS No. 123 but continues to
account for the stock incentive plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 9 -- Stock
Incentive Plans -- to the Communications Group Combined Financial Statements.
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128 requires
presentation of basic and diluted earnings per share on the face of the income
statement. Adoption of the new standard will not have a material impact on
Communications Group earnings per share.
B-27
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings...................................................... $ 2,415 $ 2,459
Telephone network equipment............................................. 12,925 12,019
Telephone outside plant................................................. 13,148 12,353
General purpose computers and other..................................... 3,558 3,580
Construction in progress................................................ 599 767
--------- ---------
32,645 31,178
--------- ---------
Less accumulated depreciation
Buildings............................................................. 703 686
Telephone network equipment........................................... 7,756 7,221
Telephone outside plant............................................... 8,221 7,851
General purpose computers and other................................... 1,959 1,891
--------- ---------
18,639 17,649
--------- ---------
Property, plant and equipment -- net.................................... $ 14,006 $ 13,529
--------- ---------
--------- ---------
</TABLE>
In 1996, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $243. Consideration received for the sales was $306, including
$174 in cash. In 1995 and 1994, U S WEST Communications sold certain rural
telephone exchanges with a cost basis of $258 and $122, respectively, and
received consideration of $388 (including $214 in cash) during 1995 and $204
(including $93 in cash) during 1994.
ADOPTION OF SFAS NO. 121
Effective January 1, 1996, U S WEST adopted 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. Adoption of SFAS No. 121 resulted in income of $34 (net of tax of
$22) from the cumulative effect of reversing depreciation expense recorded in
prior years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date U S WEST formally committed to a plan to
dispose of the rural telephone exchange assets to January 1, 1996. The income
has been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying values of the rural telephone
exchange assets being held for sale approximates $144 and $338 at December 31,
1996 and 1995, respectively. As a result of adopting SFAS No. 121, depreciation
expense for 1996 was reduced by $24. The combined effects of lower depreciation
expense and the cumulative effect of adoption of the new standard will be
directly offset by lower recognized gains on future rural telephone exchange
sales.
B-28
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper........................................................... $ 701 $ 542
Other...................................................................... -- 62
Current portion of long-term debt............................................ 133 461
--------- ---------
Total........................................................................ $ 834 $ 1,065
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.57 percent and
5.79 percent at December 31, 1996 and 1995, 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, 1996. Additional
lines of credit aggregating approximately $4.5 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 TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- --------------------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................... $ 36 $ - $ 90 $ - $ 149 $ 275 $ 275
Above 5% to 6%..................................... 300 - - 50 211 561 561
Above 6% to 7%..................................... - 71 257 133 1,783 2,244 2,244
Above 7% to 8%..................................... - - - - 2,457 2,457 2,493
Above 8% to 9%..................................... - - - - 250 250 250
Above 9% to 10%.................................... - - 175 - - 175 175
Variable-rate debt indexed to three-month LIBOR and
two- and ten-year constant maturity Treasury
rates............................................ - 155 - - - 155 180
--------- --------- --------- --------- ----------- --------- ---------
$ 336 $ 226 $ 522 $ 183 $ 4,850 6,117 6,178
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other................ 194 195
Unamortized discount -- net........................ (647) (684)
--------- ---------
Total.............................................. $ 5,664 $ 5,689
--------- ---------
--------- ---------
</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
B-29
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: DEBT (CONTINUED)
coupon notes have a yield to maturity of approximately 7.3 percent. The zero
coupon notes are recorded at a discounted value of $289 and $276 at December 31,
1996 and 1995, 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.
Interest payments by the Communications Group, net of amounts capitalized,
were $425, $378 and $356 in 1996, 1995 and 1994, respectively.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
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
accrued under the interest rate swap is accounted for as an adjustment to
interest expense.
During 1995, U S WEST Communications entered into currency swaps to convert
Swiss franc-denominated debt to U.S. 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 was issued
directly.
The following table summarizes terms of swaps pertaining to U S WEST
Communications as of December 31, 1996 and 1995. Variable rates are indexed to
three-month LIBOR and two- and ten-year constant maturity Treasury and 30-day
commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE RATE AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed.............. $ 180 1997-1999 5.51 5.91 $ 580 1996-1999 5.70 6.56
Currency....................... 204 1999-2001 -- 6.55 204 1999-2001 -- 6.55
</TABLE>
The counterparties to swaps or other 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.
B-30
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable and short-term debt approximate carrying values due to their short-term
nature.
The fair values of interest rate swaps are based on estimated amounts U S
WEST Communications would receive or pay to terminate such agreements taking
into account current interest rates and creditworthiness of the counterparties.
The fair 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,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................................... $ 6,498 $ 6,450 $ 6,754 $ 7,050
Interest rate swap agreements -- assets.................................. -- (17) -- (19)
Interest rate swap agreements -- liabilities............................. -- 10 -- 17
----------- --------- ----------- ---------
Debt -- net.............................................................. $ 6,498 $ 6,443 $ 6,754 $ 7,048
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
NOTE 6: RESTRUCTURING CHARGE
In 1993, the Communications Group incurred an $880 restructuring charge
(pretax). The related restructuring plan, which is expected to be substantially
complete by the end of 1997, is designed to provide faster, more responsive
customer services, while reducing the costs of providing these services.
Following is a schedule of the incurred costs that were included in the 1993
restructuring charge:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation..................................................... $ 19 $ 76 $ 102 $ 86 $ 283
Systems development..................................................... 118 129 91 22 360
Real estate............................................................. 50 66 8 6 130
Relocation.............................................................. 21 21 5 -- 47
Retraining and other.................................................... 8 23 20 9 60
--------- --------- --------- ----- ---------
Total................................................................... $ 216 $ 315 $ 226 $ 123 $ 880
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>
B-31
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: 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 $189, $210 and $235 in 1996, 1995 and 1994,
respectively. Minimum future lease payments as of December 31, 1996, under
noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- -------------------------------------------------------------------------------------
<S> <C>
1997................................................................................. $ 131
1998................................................................................. 131
1999................................................................................. 122
2000................................................................................. 113
2001................................................................................. 120
Thereafter........................................................................... 815
---------
Total................................................................................ $ 1,432
---------
---------
</TABLE>
Minimum payments have not been reduced by minimum sublease rentals of $236
due in the future under noncancelable subleases.
NOTE 8: COMMUNICATIONS GROUP EQUITY
Following is a reconciliation of Communications Group equity:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................................ $ 3,476 $ 3,179 $ 2,722
Net income.................................................... 1,249 1,176 1,150
Dividends declared............................................ (1,024) (1,010) (980)
Communications Stock issuances................................ 216 52 --
Equity issuances prior to Recapitalization Plan............... -- 79 287
--------- --------- ---------
Balance at end of period...................................... $ 3,917 $ 3,476 $ 3,179
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST issued 1.7 million shares of Communications Stock during 1995,
subsequent to the November 1, 1995 recapitalization. An additional 6.8 million
shares were issued during 1996. These share issuances were primarily related to
the dividend reinvestment plan, the employee savings plan and the exercise of
stock options. At December 31, 1996 and 1995, there were 480,457,336 and
473,635,025 shares of Communications Stock outstanding, respectively.
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
B-32
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: COMMUNICATIONS GROUP EQUITY (CONTINUED)
principal and interest are paid on the debt. At December 31, 1996, 11,019,157
shares each of Communications Stock and Media Stock had been allocated from the
LESOP to participants' accounts while 1,865,494 and 2,132,291 shares of
Communications Stock and Media Stock, respectively, 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 ($5, $8 and $11 in
1996, 1995 and 1994, 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 in lieu of dividends. 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 $65,
$70 and $68 in 1996, 1995 and 1994, respectively, of which $8, $12 and $16,
respectively, have been classified as interest expense.
NOTE 9: STOCK INCENTIVE PLANS
The Communications Group and Media Group participate in the stock incentive
plans maintained by U S WEST for executives and other employees and
nonemployees, primarily members of the Board. 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.
Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Communications Group and one Media Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
The maximum aggregate number of shares of Communications Stock that may be
granted in any 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 U S WEST'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 granted may be exercised no
later than 10 years after the grant date.
During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in income in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," was $2 and $4 in 1996 and 1995,
respectively, all of which related to the Plan modifications. No compensation
expense was recognized in 1994.
B-33
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK INCENTIVE PLANS (CONTINUED)
U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but continues to account for the Plan under APB
Opinion No. 25. Had compensation cost for the Plan been determined consistent
with the fair value based accounting method under SFAS No. 123, Communications
Group pro forma net income and earnings per share would have been the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995
------------------------ ------------------------
EARNINGS EARNINGS
NET INCOME PER SHARE NET INCOME PER SHARE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
As reported.................................. $ 1,249 $ 2.62 $ 1,176 $ 2.50
Pro forma.................................... 1,247 2.61 1,178 2.50
</TABLE>
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
in 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Risk-free interest rate............................................... 6.50% 6.00%
Expected dividend yield............................................... 6.70% 6.70%
Expected life......................................................... 4.5 years 4.5 years
Expected volatility................................................... 19.6% 19.6%
</TABLE>
B-34
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP U S WEST, INC.
--------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES* PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding January 1, 1994.................... 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(1)................................... 4,814,856 41.12
Exercised.................................... (430,631) 34.03
Canceled or expired(1)....................... (1,927,083) 37.02
------------ -------------
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
------------ ------
Granted...................................... 3,624,602 30.97
Exercised.................................... (1,205,730) 22.37
Canceled or expired.......................... (429,058) 25.01
------------ ------
Outstanding December 31, 1996.................. 11,412,915 $ 26.67
------------ ------
------------ ------
</TABLE>
- ------------------------------
(*) Includes options granted in tandem with SARs.
(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e. stock grant).
Options to purchase 3,881,100 and 2,672,666 shares of Communications stock
at weighted-average exercise prices of $25.71 and $22.22 were exercisable at
December 31, 1996 and 1995, respectively.
B-35
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------- ------------ ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$14.96 - $21.41.................................... 2,560,778 7.27 $ 21.26 505,430 $ 20.64
$21.41 - $24.62.................................... 1,241,669 5.42 22.87 1,037,785 22.74
$24.92 - $26.11.................................... 2,750,886 8.59 26.08 932,931 26.06
$26.34 - $30.63.................................... 2,334,141 7.86 29.82 1,313,137 29.29
$30.88 - $35.88.................................... 2,525,441 9.02 31.74 91,817 32.57
------------ --- ----------- ---------- -----------
Total............................................ 11,412,915 7.89 $ 26.67 3,881,100 $ 25.71
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 3,624,602 and 4,953,165 Communications Group options were granted
in 1996 and 1995, respectively, of which 198,027 and 1,751,936 were modified
options revalued as new grants. The weighted-average grant date fair value of
Communications Group options granted during the year, inclusive of modified
options, using the Black-Scholes option-pricing model was $3.87 and $3.19 for
1996 and 1995, respectively. Excluding the modifications, the weighted-average
grant date fair value was $3.67 and $2.92, respectively. The exercise price of
Communications Group stock options, excluding modified options, equals the
market price on the grant date. The exercise prices of modified stock options
may be greater or less than the market price on the revaluation date.
Approximately 2,950,000 and 2,050,000 shares of Communications Stock were
available for grant under the plans in effect at December 31, 1996 and 1995,
respectively. Approximately 14,360,000 shares of Communications Stock were
reserved for issuance under the Plan at December 31, 1996.
NOTE 10: EMPLOYEE BENEFITS
PENSION PLAN
The Communications Group and the Media Group participate in the defined
benefit pension plan sponsored by U S WEST. Substantially all management and
occupational employees of the Communications Group are covered by 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 it had funded separately its 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. 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 1996, 1995 or 1994. Should funding
be required in the future, funding amounts
B-36
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
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 (credit) and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period................. $ 203 $ 173 $ 197
Interest cost on projected benefit obligation..................... 575 558 561
Actual return on plan assets...................................... (1,509) (1,918) 188
Net amortization and deferral..................................... 726 1,185 (946)
--------- --------- ---------
Net pension cost (credit)........................................... $ (5) $ (2) $ 0
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1996, 1995 and 1994.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $6,544 and
$5,839, respectively........................................................ $ 7,446 $ 6,617
---------- ---------
---------- ---------
Plan assets at fair value, primarily stocks and bonds........................ $ 10,958 $ 9,874
Less: Projected benefit obligation........................................... 8,310 8,450
---------- ---------
Plan assets in excess of projected benefit obligation........................ 2,648 1,424
Unrecognized net (gain)...................................................... (1,502) (101)
Prior service cost not yet recognized in net periodic pension cost........... 31 (62)
Balance of unrecognized net asset at January 1, 1987......................... (626) (705)
---------- ---------
Prepaid pension cost......................................................... $ 551 $ 556
---------- ---------
---------- ---------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
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
B-37
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
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
Communications Group were $(5), $(2) and $0 in 1996, 1995 and 1994,
respectively. The service and interest costs attributed to the Communications
Group for 1996 were $178 and $503, respectively, and the projected benefit
obligation at December 31, 1996, was $7,229.
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 U S WEST'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 medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.............. $ 70 $ 65 $ 75
Interest on accumulated benefit obligation..................... 259 267 260
Actual return on plan assets................................... (231) (415) 4
Net amortization and deferral.................................. 68 286 (99)
--------- --------- ---------
Net postretirement benefit costs............................... $ 166 $ 203 $ 240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1996, 1995 and 1994.
B-38
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees................................................................... $ 2,255 $ 2,137
Fully eligible plan participants........................................... 347 327
Other active plan participants............................................. 1,289 1,224
---------- ---------
Total accumulated postretirement benefit obligation.......................... 3,891 3,688
Unrecognized net gain........................................................ 534 539
Unamortized prior service cost............................................... 32 (34)
Fair value of plan assets, primarily stocks, bonds and life insurance(1)..... (2,063) (1,845)
---------- ---------
Accrued postretirement benefit obligation.................................... $ 2,394 $ 2,348
---------- ---------
---------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155
and $94, respectively, in 1996, and $210 and $112, respectively, in 1995.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
Medical cost trend rate*................................................. 8.00% 9.00%
</TABLE>
- ------------------------------
(*) Medical cost trend rate gradually declines to an ultimate rate of 5.5
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 1996 net postretirement benefit cost by approximately $27 and
increased the 1996 accumulated postretirement benefit obligation by
approximately $299.
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 currently has no
intention to split the plans. For purposes of determining benefit costs, U S
WEST allocates the assets based on historical contributions for postretirement
medical costs, and on the ratio of Group to total salaries for life plan
participants.
POSTRETIREMENT MEDICAL AND LIFE 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
B-39
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
amount is based on its cash requirements with the funding at U S WEST
Communications based on regulatory accounting requirements.
Net postretirement life costs and funding requirements, if any, are
allocated to the Communications Group in the same manner as pension costs. U S
WEST will generally fund the amount allowed for tax purposes. No funding of
postretirement life insurance occurred in 1996, 1995 and 1994. U S WEST believes
its method of allocating postretirement life costs is reasonable.
Net postretirement medical benefit and life costs recognized by the
Communications Group for 1996, 1995 and 1994 were $154, $189 and $226,
respectively. The percentage of postretirement medical assets attributed to the
Communications Group at December 31, 1996 and 1995, based on historical
voluntary contributions was 96 percent. The aggregate accumulated postretirement
medical and life benefit obligation attributable to the Communications Group was
$3,692 at December 31, 1996.
NOTE 11: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................................................. $ 540 $ 434 $ 368
Deferred................................................................ 97 177 233
Investment tax credits -- net........................................... (28) (38) (47)
--------- --------- ---------
609 573 554
--------- --------- ---------
State and local:
Current................................................................. 67 56 58
Deferred................................................................ 22 33 41
--------- --------- ---------
89 89 99
--------- --------- ---------
Provision for income taxes................................................ $ 698 $ 662 $ 653
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST paid $693, $566 and $313 for income taxes in 1996, 1995 and 1994,
respectively, of which $633, $511 and $491 related to the Communications Group.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN PERCENT)
Federal statutory tax rate....................................... 35.0 35.0 35.0
Investment tax credit amortization............................... (0.8) (1.3) (1.7)
State income taxes -- net of federal effect...................... 3.0 3.1 3.6
Other............................................................ (0.7) (0.9) (0.7)
--------- --------- ---------
Effective tax rate............................................... 36.5 35.9 36.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
B-40
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................. $ 1,507 $ 1,433
State deferred taxes -- net of federal effect.................................. 185 180
Other.......................................................................... 74 68
--------- ---------
Deferred tax liabilities..................................................... 1,766 1,681
--------- ---------
Postemployment benefits, including pension..................................... 664 675
Restructuring and other........................................................ 163 231
Unamortized investment tax credit.............................................. 61 70
State deferred taxes -- net of federal effect.................................. 124 133
Other.......................................................................... 176 142
--------- ---------
Deferred tax assets.......................................................... 1,188 1,251
--------- ---------
Net deferred tax liability..................................................... $ 578 $ 430
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $171 and $259 at December
31, 1996 and 1995, respectively, resulting primarily from restructuring charges
and compensation-related items.
NOTE 12: 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 $17, $20 and $29 for these services in 1996,
1995 and 1994, respectively.
TELECOMMUNICATIONS SERVICES. U S WEST Communications sells
telecommunications network access and usage to the domestic wireless operations
of the Media Group. U S WEST Communications charged $43, $40 and $30 in 1996,
1995 and 1994, 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 $97, $95 and $122 in 1996, 1995 and 1994, respectively.
In fourth-quarter 1996, U S WEST Communications and the other Regional Bell
Operating Companies ("RBOCs") entered into an agreement to sell their interests
in Bellcore. The sale is expected to be finalized in late 1997 after the RBOCs
obtain the requisite regulatory approvals. Following the disposition, Bellcore
and other third parties will provide research and development and other services
to the Communications Group on a contract basis.
B-41
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
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 hearing, 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. The range of possible risk is $0 to $155 at December 31,
1996.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995
rate request. In February 1995, U S WEST Communications sought to increase
revenues by raising rates for basic residential services over a four-year
period. The two major issues in this proceeding involve U S WEST Communications'
requests for improved capital recovery and elimination of the imputation of
Yellow Pages revenue. Instead of granting U S WEST Communications' rate request,
the Commission ordered approximately $91.5 in annual revenue reductions,
effective May 1, 1996. Based on the above ruling, U S WEST Communications filed
a lawsuit with the King County Superior Court (the "Court") for an appeal of the
order, a temporary stay of the ordered rate reduction and an authorization to
implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending its decision on U S WEST Communications'
appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. On November 25, 1996, the Court ruled in favor
of the WUTC. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which, on January 22,
1997, granted a stay of the order, pending the State Supreme Court's full review
of the appeal. U S WEST Communications expects the State Supreme Court's review
to begin in the second quarter of 1997.
U S WEST Communications expects its appeal to be successful and has not
accrued any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on the future results of operations.
B-42
<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>
1996
Operating revenues....................................................... $ 2,465 $ 2,500 $ 2,515 $ 2,599
Income before income taxes and cumulative effect of change
in accounting principle................................................ 469 517 455 472
Income before cumulative effect of change in accounting principle........ 294 324 286 311
Net income............................................................... 328 324 286 311
Earnings per common share before cumulative effect of change in
accounting principle................................................... 0.62 0.68 0.60 0.65
Earnings per common share................................................ 0.69 0.68 0.60 0.65
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
Earnings per common share before extraordinary item...................... 0.67 0.62 0.62 0.60
Earnings per common share................................................ 0.67 0.62 0.61 0.59
</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
are assumed to be equal to the average common shares outstanding for U S WEST,
Inc.
1996 first-quarter net income includes the cumulative and current effects of
$34 ($0.07 per share) and $5 ($0.01 per share), respectively, from adopting SFAS
No. 121. 1996 second-quarter net income includes $30 ($0.06 per share) from
gains on the sales of certain rural telephone exchanges and current effects of
$5 ($0.01 per share) from adopting SFAS No. 121. 1996 third-quarter net income
includes $1 (no share impact) from a gain on the sales of certain rural
telephone exchanges and current effects of $3 ($0.01 per share) from adopting
SFAS No. 121. 1996 fourth-quarter net income includes $5 ($0.01 per share) from
gains on the sales of certain rural telephone exchanges and current effects of
$2 ($0.01 per share) from adopting SFAS No. 121.
1995 first-quarter net income includes $39 ($0.08 per share) from gains on
the sales of certain rural telephone exchanges. 1995 second-quarter net income
includes $10 ($0.02 per share) from gains on the sales of certain rural
telephone exchanges. 1995 third-quarter net income includes $21 ($0.04 per
share) from gains 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 gains 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.
B-43
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: 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>
1996
First quarter........................................................ $ 37.500 $ 30.250 $ 32.375 $ 0.535
Second quarter....................................................... 34.625 31.125 32.000 0.535
Third quarter........................................................ 32.250 27.250 29.875 0.535
Fourth quarter....................................................... 33.625 29.250 32.250 0.535
1995
Fourth quarter(1).................................................... $ 36.375 $ 28.375 $ 35.625 $ 0.535
</TABLE>
- ------------------------------
(1) Fourth-quarter 1995 per share market and dividend data is for the period
of November 1, 1995 through December 31, 1995.
B-44
<PAGE>
U S WEST MEDIA GROUP
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Sales and other revenues.................................. $ 2,955 $ 2,374 $ 1,908 $ 1,549 $ 1,384
EBITDA(1)................................................. 937 716 533 485 410
Income (loss) before extraordinary item(2)................ (71) 145 276 85 146
Earnings (loss) available for common stock(2)............. (80) 138 276 85 146
Earnings (loss) per common share(3)....................... (0.16) 0.29 0.61 -- --
Total assets.............................................. 24,061 8,615 7,394 5,446 3,130
Total debt(4)............................................. 8,853 2,101 1,814 1,526 249
Mandatorily redeemable preferred securities(5)............ 1,131 651 51 -- --
Media Group equity........................................ 7,632 4,472 4,203 3,139 2,265
Capital expenditures...................................... 668 401 343 215 169
Average common shares outstanding
(thousands)(3).......................................... 491,924 470,549 453,316 -- --
Common shares outstanding (thousands)(3).................. 608,863 472,314 469,343 -- --
</TABLE>
PROPORTIONATE DATA(6)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS
Sales and other revenues.................................................. $ 6,367 $ 5,115 $ 4,213 $ 2,157
Operating income.......................................................... 459 476 401 195
Income (loss) before extraordinary item(2)................................ (71) 145 276 85
EBITDA(1)................................................................. 1,473 1,149 902 527
Subscribers/advertisers (thousands)....................................... 11,919 5,922 4,199 3,086
</TABLE>
- ------------------------------
(1) Earnings before interest, taxes, depreciation, amortization, and other
("EBITDA"). EBITDA also excludes gains on asset sales, equity losses,
guaranteed minority interest expense, and restructuring charges. The Media
Group considers EBITDA an important indicator of the operating performance
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").
(2) 1996 net losses include a net loss of $71 related to the November 15, 1996
merger (the "Merger") of Continental Cablevision, Inc. into a wholly owned
subsidiary of U S WEST, Inc. ("U S WEST" or "Company") and a charge of $19
from the sale of the Company's cable television interests in Norway, Sweden
and Hungary. 1995 income is before extraordinary item and includes a gain of
$95 from the merger of Telewest Communications plc ("Telewest") with SBC
CableComms (UK) and costs of $9 associated with the November 1, 1995,
recapitalization. 1994 income 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 income was reduced by restructuring
charges totaling $76. 1993 and 1992 income and earnings available for common
stock is from continuing operations.
(3) 1996 average and common shares outstanding includes 150,615,000 shares
issued related to the Merger. Effective November 1, 1995, each share of U S
WEST, Inc. common stock was converted into one share each of U S WEST
Communications Group common stock and U S WEST Media Group common stock.
Earnings per common share for 1995 and 1994 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.
(4) Excludes debt associated with the capital assets segment, which has been
discontinued and is held for sale.
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<PAGE>
U S WEST MEDIA GROUP
FINANCIAL HIGHLIGHTS (CONTINUED)
(5) Includes Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company-guaranteed debentures ("Preferred
Securities") of $1,080 in 1996, $600 in 1995 and preferred stock subject to
mandatory redemption of $51 in 1996, 1995 and 1994.
(6) Selected proportionate data 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
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 which has been discontinued and
is held for sale.
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable, telephony, wireless
and directories markets, (ii) the gain or loss of significant customers, (iii)
regulatory changes affecting the cable and telecommunications industries,
including changes that could have an impact on the competitive environment in
the local exchange market, (iv) a change in economic conditions in the various
markets served by the Company's operations that could adversely affect the level
of demand for cable, wireless, directories or other services offered by the
Company, (v) greater than anticipated competitive activity requiring new pricing
for services, (vi) higher than anticipated start-up costs associated with new
business opportunities, (vii) increases in fraudulent activity with respect to
wireless services, or (viii) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
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 continued 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 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; (ii) assets and liabilities related to
the capital assets segment, which has been discontinued and is held for sale;
(iii) corporate assets and liabilities of U S WEST and related transactions not
identified with the Communications Group; and (iv) 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 MEDIA GROUP
The Media Group is comprised of: (i) cable and telecommunications network
businesses outside of the Communications Group 14 state region and
internationally, (ii) domestic and international wireless
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
communications network businesses and (iii) domestic and international directory
and information services businesses.
CABLE AND TELECOMMUNICATIONS. On November 15, 1996, Continental
Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U
S WEST (the "Merger" or the "Continental Merger"). Continental, the nation's
third largest cable operator, serves 4.5 million domestic customers and passes
7.4 million domestic homes. Continental holds significant domestic and
international investments, including a 50 percent interest in a cable venture in
Argentina, a 25 percent interest in a cable venture in Singapore, an 11 percent
interest in Teleport Communications Group ("TCG"), a 10 percent interest in
PRIMESTAR (a direct broadcast satellite service), telephone access businesses in
Florida and Virginia, and interests in programming that include Time Warner,
Inc., E! Entertainment Television and the Golf Channel. The aggregate
consideration paid by Media Group to shareholders of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock with a market value of $920 million and $1.15
billion in cash. In connection with the Merger, U S WEST also assumed all of
Continental's outstanding indebtedness and other liabilities, which approximated
$7.0 billion at November 15, 1996, for a total purchase price of $11.7 billion.
Media Group has accounted for the Merger by the purchase method of accounting.
Accordingly, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values.
With the Continental Merger and the Company's cable systems in the Atlanta,
Georgia metropolitan area ("the Atlanta Systems"), Media Group now serves 5.0
million domestic customers and passes 8.3 million domestic homes. Media Group's
domestic customers are highly clustered in six large markets -- New England,
California, Chicago, Atlanta, Michigan/Ohio and Florida.
The Media Group's cable and telecommunications businesses also include an
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, and international investments including Telewest Communications,
plc ("Telewest"), the largest provider of combined cable and telecommunications
services in the United Kingdom. The Media Group also owns interests in cable and
telecommunications properties in Argentina, Singapore, the Netherlands, Belgium,
Czech Republic, Malaysia, Indonesia and Japan.
Cable and telephony services are at the core of the Media Group's strategy.
The Media Group believes that hybrid fiber-optic and coaxial ("HFC") broadband
networks provide the best and most economical platform for delivery of video,
data, telephony and broadband services. The Media Group plans to selectively
upgrade its cable systems. Once completed, this upgrade will enhance network
quality and reliability as well as provide capacity for added channels,
pay-per-view offerings and targeted advertising. The upgrade will also permit
the offering of new services to subscribers, such as high-speed Internet access,
telephony and digital video offerings. With the Continental Merger, the Media
Group believes it has achieved the scale and scope necessary to execute its
strategy and capitalize on new market opportunities in enhanced cable, telephony
and high-speed data services.
WIRELESS COMMUNICATIONS. The Media Group provides domestic wireless
communications services, including cellular services, in 12 western and
midwestern states to a rapidly growing customer base. During 1994, Media Group
signed a definitive agreement with AirTouch Communications, Inc. ("AirTouch") to
combine their domestic cellular properties into a partnership in a multi-phased
transaction. During Phase I, which commenced on November 1, 1995, the partners
are operating their cellular properties separately. A Wireless Management
Company (the "WMC") has been formed and is providing services to both companies
on a contract basis. In Phase II, the partners will combine their domestic
properties,
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
subject to certain authorizations and partnership approvals. The passage of the
Telecommunications Act of 1996 has removed significant regulatory barriers to
completion of Phase II. In February 1997, the King County Superior Court in
Washington state ruled that Media Group violated the terms of its partnership
agreement with its minority partners in the Seattle market by entering into the
joint venture agreement with AirTouch. Media Group has obtained a stay of the
ruling pending its appeal. Similar litigation has been filed in other
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. Media Group believes it will ultimately be
successful in all such litigation. Media Group expects that Phase II closing
will occur in the second half of 1997.
Upon implementation of Phase II, management expects the joint venture
interests will be approximately 74 percent AirTouch and 26 percent Media Group
(assuming contribution of all domestic cellular properties). The actual
interests in the joint venture at commencement of Phase II depend, among other
things, on the timing of Phase II closing and the ability of the partners to
combine their domestic properties. Media Group's interest will further adjust
depending on the timing of the contribution of its investment in PrimeCo
Personal Communications L.P. ("PrimeCo"). The timing of such contribution is at
Media Group's discretion and will occur either at the closing of Phase II or a
date selected by Media Group, no later than mid-1998.
Media Group has the right to convert its joint venture interest in the
domestic cellular properties into AirTouch stock ("Phase III"). Media Group's
interest will be valued on a private market basis and the AirTouch common stock
received by Media Group will be based on a fair public market value. In the
event the value to be received by Media Group exceeds 19.9 percent of AirTouch's
outstanding common stock, Media Group will receive the excess in the form of
nonvoting preferred stock. Media Group has the right to initiate Phase III upon
completion of Phase II of the merger and contribution of both Media Group's and
AirTouch's interests in PrimeCo to the joint venture.
Media Group also partnered with AirTouch, Bell Atlantic and NYNEX to form a
venture to provide personal communications services ("PCS"), as well as a
strategic national marketing and technical alliance for their wireless
operations. In November, 1996, PrimeCo launched PCS service reaching 32 million
people in 16 major cities nationwide. The venture purchased 11 licenses in the
Federal Communication Commission's (the "FCC") PCS auction, covering 58 million
people in Chicago, Dallas, Honolulu, Houston, Jacksonville, Miami, Milwaukee,
New Orleans, Richmond, San Antonio and Tampa.
Wireless networks are serving an important component of the networked world,
helping customers to communicate and do business with fewer limitations on time
and mobility. Pursuant to its July 25, 1994 agreement with AirTouch, and the
marketing and technical alliance with Bell Atlantic Corporation and NYNEX
Corporation, the Media Group is positioned to offer national product branding
and achieve scale economies, in addition to negotiating favorable equipment
contracts, providing national roaming capabilities and securing strong
distribution channels.
The Media Group also provides wireless communications services
internationally through its 50 percent joint venture interest in One 2 One,
formerly Mercury One 2 One, 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.
DIRECTORY AND INFORMATION SERVICES. 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 approximately 320 White and Yellow Pages directories in 14 western and
midwestern states and over
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
220 directories in the United Kingdom and Poland. The Media Group also has a 50
percent interest in Listel, Brazil's largest telephone directory publisher.
Directory and information services help buyers and sellers connect with each
other in the networked world. The domestic directory business is investing for
growth, focusing on new and enhanced products and services that extend the
timeliness and reach of its Yellow Pages business. The Media Group is also
evaluating opportunities in new markets, including the full scale rollout of
Yellow Pages on the Internet.
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."
RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.................................................................... $ 1,120 $ 1,058 $ 62 5.9
International............................................................... 139 122 17 13.9
--------- --------- --------- ---------
1,259 1,180 79 6.7
Wireless communications:
Cellular service............................................................ 1,078 845 233 27.6
Cellular equipment.......................................................... 105 96 9 9.4
--------- --------- --------- ---------
1,183 941 242 25.7
Cable and telecommunications:
Domestic.................................................................... 488 215 273 --
International............................................................... 6 -- 6 --
--------- --------- --------- ---------
494 215 279 --
Other......................................................................... 19 38 (19) (50.0)
--------- --------- --------- ---------
Sales and other revenues...................................................... $ 2,955 $ 2,374 $ 581 24.5
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Media Group sales and other revenues increased 24.5 percent, to $2,955 in
1996. Excluding the effects of the Continental Merger, sales and other revenues
increased 13.9 percent. The increase was primarily due to strong growth in
cellular service revenue.
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising, which represents 98 percent of the domestic directory and
information services revenue, increased 7.4 percent, to $1,102 in 1996. The
increases are largely a result of a 5.7 percent increase in revenue per local
advertiser (primarily a result of price increases of approximately 4.0 percent)
combined with an increase of 3,000 in local advertisers during the year.
International directory publishing revenues increased 13.9 percent to $139
in 1996. The increases are primarily a result of publishing more directories in
1996.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 27.6 percent,
to $1,078 in 1996, due to a 40 percent increase in subscribers during the year
(with 22 percent of the additions occurring in December), partially offset by a
12 percent drop in average revenue per subscriber to $53.00 per month. The
increase in subscribers relates to continued growth in demand for wireless
services. Consumers, who use cellular phones for safety and convenience, have
contributed significantly to this growth in demand. The Media Group anticipates
this growth trend to continue, although at decreased rates.
New wireless competitors offering PCS services will create additional
competitive pressures on pricing in Media Group markets in 1997. Pricing
pressures associated with new and existing competitors, combined with the
continuing shift in the customer base from businesses to consumers, will cause
the average revenue per subscriber to continue to decline.
Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a
result of a 61 percent increase in units sold which was somewhat offset by lower
equipment costs. A 30 percent increase in customers added during the year and
the implementation of a phone exchange program for existing customers led to the
increase in units sold.
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues increased $273, to $488 in 1996. The November 15, 1996 Continental
Merger contributed $252 to the increase. Revenues related to the Atlanta Systems
increased 9.8 percent, to $236, as a result of a 3.9 percent increase in revenue
per subscriber to $39.36 per month (primarily a result of price increases of 6
to 7 percent) and a basic subscriber increase of 4.5 percent.
International cable and telecommunications revenues reflect the
third-quarter 1996 consolidation of Kabel Plus a.s. ("Kabel Plus"), Media
Group's cable operation in the Czech Republic. The consolidation of Kabel Plus
is associated with a restructuring whereby the Company's ownership interest
increased to 94 percent.
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
------------------------
1996 1995 $ %
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic................................................................ $ 452 $ 399 $ 53 13.3
International........................................................... 2 (1) 3 --
--------- --------- ----- -----------
454 398 56 14.1
Wireless communications................................................... 243 147 96 65.3
Cable and telecommunications:
Domestic................................................................ (13) 23 (36) --
International........................................................... (7) -- (7) --
--------- --------- ----- -----------
(20) 23 (43) --
Other(1).................................................................. (162) (101) (61) (60.4)
--------- --------- ----- -----------
Operating income.......................................................... $ 515 $ 467 $ 48 10.3
--------- --------- ----- -----------
--------- --------- ----- -----------
</TABLE>
- ------------------------------
(1) Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
During 1996, Media Group operating income increased 10.3 percent, to $515.
Excluding the effects of the November 15, 1996 Continental Merger, Media Group
operating income increased 15.6 percent. Earnings before interest, taxes,
depreciation, amortization and other ("EBITDA") increased 30.9 percent, to $937.
Excluding the effects of the Merger, Media Group EBITDA increased 18.7 percent.
The increases were primarily due to strong growth in wireless communications
operations. The Media Group considers EBITDA an important indicator of the
operating performance 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 GAAP.
DIRECTORY AND INFORMATION SERVICES. During 1996, operating income related
to domestic Yellow Pages directory advertising increased 1.6 percent to $511.
Revenue increases of 7.4 percent were offset by an approximate 10 percent
increase in paper, printing, delivery and distribution costs and a charge of $25
to reorganize and reduce headcount in 1996. The Yellow Pages operation announced
a plan to reorganize the centralized operating management into three regions to
establish greater accountability and to move decision making closer to the
customers. In conjunction with the reorganization, the Yellow Pages operation
reduced headcount by approximately 200 people in 1996. This reorganization will
be fully implemented during 1997.
Operating losses associated with on-going product development activities are
also included in domestic directory and information services. Such losses
reduced domestic directory and information services operating income by $59 in
1996, compared with a reduction of $104 in 1995. The decrease in operating
losses is primarily the result of exiting various product development activities
in 1995.
EBITDA related to domestic Yellow Pages directory advertising services
increased 2.3 percent, to $531 in 1996, including the effects of the $25 charge
to reorganize and reduce headcount in 1996. This charge caused the EBITDA margin
to decline to 48.2 percent in 1996, compared with the 1995 margin of 50.6
percent.
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating income for international directory publishing operations improved
slightly in 1996 as a result of revenue gains associated with publishing more
directories.
WIRELESS COMMUNICATIONS. Cellular operating income increased 65.3 percent,
to $243 in 1996. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has
been more than offset by a combined decrease of 18 percent in the costs incurred
to acquire and support customers. Customer acquisition costs include sales
commissions, advertising, other selling costs and equipment costs. Customer
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, toll calls within local
access and transport area ("LATA") boundaries and fraud. Support costs per
subscriber have declined 24 percent in 1996. The decline is generally a result
of the efficiencies gained from an expanding customer base without corresponding
increases in headcount and infrastructure.
Cellular EBITDA increased 45.5 percent during 1996, to $390. The business is
continuing to realize operating scale efficiencies resulting in lower costs on a
per subscriber basis. The efficiencies have contributed to an increase in 1996
cellular service EBITDA margin to 36.2 percent from 31.7 percent in 1995.
Digital cellular services using code division multiple access technology are
being introduced in the Seattle market in the first quarter of 1997. The Company
plans to expand the service to six additional markets, including Denver and
Phoenix, by the end of 1997. Digital networks offer much greater call capacity
than analog systems.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications results include
an operating loss of $25 related to the November 15, 1996 Continental Merger.
Continental's EBITDA of $87 (for the period since the Merger) was more than
offset by depreciation and amortization expenses totaling $112. The depreciation
and amortization expense reflects the preliminary purchase price allocation.
Continental will generate operating losses for the foreseeable future because of
the effects of amortization of intangible assets and depreciation associated
with network upgrades.
The Atlanta Systems contributed operating income of $12 in 1996, compared
with $23 in 1995. An increase in depreciation expense related to system upgrade
activities has contributed to the decline in operating income.
International cable and telecommunications operating loss reflects the
third-quarter 1996 consolidation of Kabel Plus.
OTHER. Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Other operating losses increased in 1996 primarily as a result of a change in
cost allocation policy. Beginning in 1996, other operating losses include costs
that are not specifically identifiable with an operating company. Previously
such costs were allocated to the operating companies. Other operating losses
also include a charge of $10 related to staff reductions at international
headquarters in 1996.
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<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>
1996 1995 INCREASE
--------- --------- -----------
<S> <C> <C> <C>
Interest expense........................................................................ $ 168 $ 100 $ 68
Equity losses in unconsolidated ventures................................................ 346 207 139
Guaranteed minority interest expense.................................................... 55 14 41
Other expense (income) -- net........................................................... 19 (5) 24
</TABLE>
Interest expense increased $68, or 68 percent, primarily as a result of
assuming $6.5 billion, at market value, in debt related to the Continental
Merger.
Equity losses increased $139 in 1996, primarily due to network expansion
costs and additional financing costs at Telewest and One 2 One. Rapid customer
growth at One 2 One also contributed to the increase. Start-up and other costs
associated with new international investments located in Poland and Malaysia
contributed to the increase, along with losses related to Continental's cable
and telecommunications investments. Domestically, improved results from the TWE
partnership, related to improvements in cable and programming operations, were
more than offset by increased losses at PrimeCo as the partnership launched
service in the fourth quarter of 1996. The Media Group expects PrimeCo to
experience several years of operating losses associated with the start-up phase
of its operations. The Media Group expects equity losses to continue to be
significant in 1997 as expansion activities of its equity investments continue.
Guaranteed minority interest expense reflects an increase of $34 related to
the September 11, 1995 issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Company-guaranteed
debentures ("Preferred Securities") totaling $600, and an increase of $7 related
to an additional $480 issuance of Preferred Securities on October 29, 1996.
Other expense increased $24 in 1996, primarily as a result of a pretax
charge of $31, associated with the sale of the Media Group's cable television
interests in Norway, Sweden and Hungary. This charge was partially offset by
foreign currency translation gains associated with loans to international
ventures.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 (DECREASE)
----- --------- -----------
<S> <C> <C> <C>
Provision (benefit) for income taxes............................................. $ (2) $ 163 $ (165)
Effective tax rate............................................................... 2.7% 52.9% --
</TABLE>
The decrease in the effective tax rate is primarily a result of a shift from
pretax earnings to pretax losses, additional goodwill amortization associated
with the Continental Merger and a one-time benefit associated with the leveraged
lease portfolio.
NET INCOME (LOSS)
During 1996, the Media Group recorded a net loss of $71, ($0.16 per share),
compared to net income before extraordinary item of $145, ($0.30 per share), in
1995. Excluding the effects of the November 15, 1996 Continental Merger, the
Media Group would have been break-even. The decline in 1996 net income,
excluding Continental, is primarily due to the effects of a 1995 gain of $95,
($0.20 per share), from the merger of Telewest with SBC CableComms (UK) and
higher equity losses related to international and
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
domestic growth initiatives. The declines were partially offset by improvement
in the domestic cellular operation. Media Group losses will be significant in
1997 and beyond as a result of the Continental Merger.
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 and incurred
after-tax costs of $9 associated with the Recapitalization Plan.
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
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 sale of
the paging business. 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. The increase was
a result of 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 Media Group'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 year (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.
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.
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<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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.
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 headquarters expenses for shared services and
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 sale of the
paging business. EBITDA increased approximately 16 percent, to $716, on a
comparable basis. 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 $104 in 1995, compared with a reduction of $66 in 1994. This
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.
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.
C-12
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 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 and support customers.
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
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 also contributed to the increase. These increased losses were partially
offset by earnings in the European wireless operations and gains related to
movement in foreign currency exchange rates. Losses related to domestic
investments in TWE and PrimeCo also increased.
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.
C-13
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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.
NET INCOME
1995 net income includes a gain of $95 from the merger of Telewest with SBC
CableComms (UK) and $9 for costs associated with the Recapitalization Plan.
During 1995, the Media Group also incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by TWE.
1994 net income includes gains of $105 from the partial sale of Media
Group's joint venture interest in Telewest and a gain of $41 from the sale of
Media Group's paging operations.
During 1995, net income declined 55 percent, to $59, excluding the effects
of the one-time items. The decline is due primarily to higher equity losses
related to international growth initiatives and increased amortization and
interest expense.
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES. Cash provided by operating activities increased $52
in 1996, to $692. During 1996, a hedging premium payment reduced cash provided
by operations by $32. Adjusted for this payment, cash provided by operations
increased $84, or 13.1 percent. Growth in operations from the cellular business,
the Yellow Pages business and the November 15, 1996 Continental Merger
contributed to the increase. This growth was partially offset by an increase in
interest payments associated with increased debt levels resulting from the
Continental Merger and domestic and international expansion activities.
The Media Group expects that cash from operations will not be adequate to
fund expected cash requirements in the next four to five years. In 1997, asset
sales, primarily related to certain international and Continental investments,
are expected to generate approximately $1 billion in cash. These asset sales,
combined with cash generated from operations, will not be adequate to fund
expected cash requirements in 1997. Additional financing will come primarily
from new short-term debt.
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 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.
INVESTING ACTIVITIES. Total capital expenditures of the Media Group were
$652, $363 and $349 in 1996, 1995 and 1994, respectively. Results include
Continental capital expenditures of $131 incurred since the
C-14
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Continental Merger. The Media Group anticipates that the capital requirements to
upgrade the Continental systems to provide telephony, high-speed data and other
broadband services will be significant over the next four to five years. In
1997, the Media Group anticipates spending $1.3 billion to continue the upgrade
of its domestic cable network. Capital requirements related to the domestic
cellular operations are expected to be approximately $280 in 1997. The actual
domestic cellular capital requirements could vary depending on the timing of
entering Phase II of the joint venture agreement with AirTouch.
In March 1995, 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. In 1996, the Media Group invested an additional $132 to fund
network build activities. Under the PrimeCo partnership agreement, Media Group
is required to fund approximately 24 percent of PrimeCo's operating and capital
costs, including licensing costs. Media Group anticipates that its total funding
obligations to PrimeCo during the next two years will be approximately $250 to
$350. The actual funding requirements could vary depending on the timing of
contribution of the Company's interest in PrimeCo to the WMC.
Investing activities of the Media Group include equity investments in
international ventures. The Media Group invested $243, $681 and $444 in
international ventures in 1996, 1995 and 1994, respectively. Investments in 1996
include loans provided to One 2 One, the purchase of a 23 percent interest in a
venture to provide wireless service in Poland and the purchase of a 28 percent
interest in a venture in Belgium to provide telephony services on the cable
network. In 1995, the Media Group invested $681 in international ventures in
Malaysia, the Netherlands, Czech Republic and 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 $420 in 1997. This
includes investments to provide digital wireless service in India and to fund
expansion at One 2 One. Additionally, Media Group may contribute equity in 1997
to ventures acquired from Continental.
In connection with its review of the financial and operating performance,
market value and capital requirements of its international investment portfolio,
management has identified certain international investments it believes are
appropriate to sell or restructure under acceptable terms. Management expects
that sales proceeds could approximate $300 in 1997. In January 1997, the Company
sold its 5 percent interest in a French wireless venture for proceeds of $82.
Additionally, U S WEST is pursuing a possible sale or restructuring of
Continental's joint venture interest in Optus Vision Pty Ltd, an Australian
cable/ telephony venture.
In 1994, the Media Group received cash proceeds of $143 from the sale of its
paging operations. The Media Group did not receive cash from the 1994 partial
sale of its joint venture interest in Telewest. All proceeds from the 1994 sale
have been used by Telewest for general business purposes, including financing
both construction and operations, and repaying debt.
FINANCING ACTIVITIES. Media Group debt at December 31, 1996 was $8,853, an
increase of $6,752 compared with December 31, 1995. The increase is primarily a
result of assuming Continental debt totaling $6,525 (at market value) on
November 15, 1996. Concurrently, the Company refinanced $3,657 of the assumed
debt with U S WEST commercial paper. In January 1997, the Company issued medium-
and long-term debt totaling $4.1 billion, at a weighted average rate of 7.47
percent. The proceeds were used to refinance the commercial paper. Accordingly,
such commercial paper is classified as long-term debt in the accompanying U S
WEST Media Group Combined Balance Sheet at December 31, 1996. Also in January
1997, the Company paid the cash portion of the Merger consideration totaling
$1,150. This payment was financed with U S WEST commercial paper.
C-15
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The assumption of Continental's debt, in conjunction with the Merger, has
resulted in a downgrading of U S WEST's credit ratings. Senior unsecured debt
and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps
were Baa1, BBB+ and BBB+, and P2, A2, and D-2, respectively. The Media Group
recognizes that the successful implementation of its strategy will require
access to the capital markets at reasonable costs.
Media Group from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST and the Media Group. There is no assurance that any such discussions will
result in the consummation of any such transaction.
In 1996, U S WEST issued $254 of exchangeable notes, or Debt Exchangeable
for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each DECS will be
mandatorily exchanged by U S WEST for shares of Financial Security Assurance
Holdings Ltd. ("FSA") held by Media Group or, at U S WEST's option, redeemed at
the cash equivalent. The capital assets segment currently holds approximately 40
percent of the outstanding FSA common stock. On October 29, 1996, the Company
refinanced commercial paper through the issuance of 8.25 percent Preferred
Securities totaling $480. The payment of interest and redemption amounts to
holders of the Preferred Securities are fully and unconditionally guaranteed by
U S WEST. Subsequent to the Continental Merger, Media Group purchased and placed
into treasury 15,916,000 shares of Media Stock at an average price of $18.66 per
share, for a cost basis of $297. In January 1997, Media Group purchased and
placed into treasury an additional 2,835,000 shares of Media Stock, for a cost
basis of $53.
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 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. At December 31, 1996, the capital assets segment held 30.1 percent
of the outstanding Enhance common stock. These increases in debt were partially
offset by reductions of debt in 1995 related to the investment in TWE and a
refinancing of commercial paper by issuing $600 of Preferred Securities. The
payment of interest and redemption amounts to holders of the Preferred
Securities are fully and unconditionally guaranteed by U S WEST.
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 borrowings.
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Excluding debt associated with the capital assets segment, the Media Group's
percentage of debt to total capital at December 31, 1996, was 50.3 percent
compared with 29.1 percent at December 31, 1995. Including debt associated with
the capital assets segment, Preferred Securities and mandatorily redeemable
preferred stock, the Media Group's percentage of debt to total capital was 57.8
percent at December 31, 1996 and 44.2 percent at December 31, 1995. The increase
in the percentage of debt to total capital in 1996 is a result of the increase
in debt associated with the Continental Merger.
C-16
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 $4.5
billion, which are 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 Securities and Exchange
Commission ("SEC"), as of December 31, 1996, U S WEST is permitted to issue up
to approximately $620 of new debt securities, available to both the Media Group
and the nonregulated subsidiaries of the Communications Group.
Debt related to the capital assets segment, which is held for sale,
decreased $315, $487 and $213 in 1996, 1995 and 1994, respectively, as a result
of funds generated from asset sales. 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.
RISK MANAGEMENT. U S WEST 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 over time and the
debt's interest variability. This is achieved through interest rate swaps, which
adjust the ratio of fixed- to variable-rate debt.
Notional amounts of interest rate swaps and cap agreements outstanding were
$2,265 and $825 as of December 31, 1996 and 1995, respectively. 1996 includes
notional amounts for interest rate swaps and cap agreements of $1,500 that were
assumed in the Continental Merger. These contracts have various maturities that
extend to 2004. A 25 basis point increase in interest rates would create a gain
of $3 in the market value of interest rate contracts. Likewise, a 25 basis point
decrease in interest rates would create a loss of $3 in the market value of
interest rate contracts.
During fourth-quarter 1996, U S WEST purchased put options for $1.5 billion
notional of U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. A deferred gain of $5 was
recognized in January 1997 at contract closing. The deferred gain will be
recognized as a yield adjustment over the life of the debt, which matures at
various dates through 2027.
FOREIGN EXCHANGE RISK MANAGEMENT. U S WEST enters into forward and
zero-cost combination 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 and the repayment of foreign currency denominated short-term
receivables 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.
As of December 31, 1996, 1995 and 1994, notional amounts of foreign exchange
forward and option contracts outstanding were $0, $456 and $170, respectively.
These contracts were primarily for the purchase of Dutch guilders and British
pounds in 1995 and British pounds in 1994. In January and February 1997, the
Company entered into foreign exchange forward contracts in notional amounts
totaling
C-17
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$170 for the purchase and/or sale of British pounds, Japanese yen and French
francs. All foreign exchange contracts have maturities of one year or less.
The Media Group had British pound-denominated receivables in the translated
principal amounts of $250, $139 and $48 at December 31, 1996, 1995 and 1994,
respectively. The Media Group also had foreign exchange risks associated with a
Dutch guilder-denominated payable in the translated principal amount of $216 at
December 31, 1995, which was repaid in February 1996. These positions were
partially hedged in 1996 and 1995. In 1997, these positions are no longer
hedged.
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.
Effective January 1, 1995, the capital assets segment is being accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the SEC, 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
are reevaluated on an ongoing basis with adjustments to the existing reserve, if
any, being charged to continuing operations. No adjustments were required in
1996 or 1995.
During 1994, Media Group 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, Media Group sold
8.1 million shares of FSA common stock and received $154 in net proceeds from a
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 Media Group's ownership interest in FSA to 50.3 percent and its
voting interest to 41.7 percent. During the second quarter of 1996, Media Group
received $98 from the sale of 3,750,000 shares of FSA common stock. This sale
reduced Media Group's ownership in FSA to approximately 40 percent. Also in
second-quarter 1996, U S WEST issued $254 of exchangeable notes, or DECS, due
May 15, 1999. Upon maturity, each DECS will be mandatorily exchanged by U S WEST
for shares of FSA held by Media Group 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. The
shares of FSA to be delivered upon maturity of the DECS, combined with the
exercise of outstanding options held by FFC to purchase FSA shares would, if
consummated, result in a complete disposition of Media Group's ownership in FSA.
U S WEST Real Estate, Inc. has sold various assets totaling $156, $120 and
$327 in 1996, 1995, and 1994, respectively. The sales proceeds were in line with
estimates. Proceeds from building sales were primarily used to repay related
debt. Media Group expects to substantially complete liquidation of this
portfolio by 1998. The remaining balance of assets subject to sale is
approximately $287, net of reserves, as of December 31, 1996.
C-18
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COMPETITIVE AND REGULATORY ENVIRONMENT
CABLE AND TELECOMMUNICATIONS. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") authorizes the FCC to set
standards for governmental authorities to regulate the rates for certain cable
television services, except for services offered on a per-channel or per-program
basis. Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a
series of rate regulations. The FCC also publicly announced that it would
consider "social contracts" as an alternative form of rate regulation for cable
operators. Continental's social contract with the FCC was adopted by the FCC on
August 3, 1995 and amended on August 21, 1996 to include systems recently
acquired by Continental. The social contract is a six-year agreement covering
all of Continental franchises, including those that were unregulated, and
settled Continental's pending rate cases. As part of the resolution, Continental
agreed to, among other things, invest at least $1.7 billion in domestic system
rebuilds and upgrades through 2000, to expand channel capacity and improve
system reliability and picture quality. At December 31, 1996, $870 is remaining
on this commitment. Continental also agreed to reduce its benchmark broadcast
service tier service rates.
The social contract also provides that, if the laws and regulations
applicable to services offered in any Continental franchise change in a manner
that would have a material favorable financial impact on Continental, Media
Group may petition the FCC to terminate the social contract.
The Telecommunications Act of 1996 (the "Telecommunications Act")
establishes a pro-competitive, de-regulatory policy framework for the
telecommunications industry. Under the Telecommunications Act, cable programming
service tier rates are deregulated effective March 31, 1999, or earlier if
competition exists. The Telecommunications Act allows telephone companies to
build and operate cable systems in their local markets and sets forth the
conditions for voice and data competition in the local telephone market. This
legislation will enable the Media Group to provide "one-stop shopping" for
voice, video and data services. 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 Telecommunications
Act, certain long-distance services. The Media Group has negotiated 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 during 1997.
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.
Cable systems 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 also compete 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.
WIRELESS COMMUNICATIONS. The wireless operations are subject to regulation
by federal and some state and local authorities. Pursuant to the Communications
Act of 1934, the FCC regulates the construction, transfer and operation of
cellular systems in the United States and regulates 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.
C-19
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The passage of the Telecommunications Act eliminates long-distance
restrictions imposed by the Modified Final Judgment. As a result, the Media
Group, including its wireless partners, has begun to offer integrated local and
long-distance telecommunications services. On August 8, 1996, the FCC
established a framework of minimum national rules that will enable the states
and the FCC to begin implementing the local competition provision of the
Telecommunications Act. Among other things, the order stipulates that wireline
and wireless carriers are entitled to reciprocal compensation arrangements and
that local exchange carriers ("LEC") may not charge a wireless carrier for
terminating LEC-originated traffic.
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. Media Group is unable to
estimate the impact of the availability of PCS services on its cellular
operations, though it could be significant.
DIRECTORY AND INFORMATION SERVICES. 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 being offered via electronic databases through telephone
company and third party networks. As such offerings expand and are enhanced
through interactivity and other features, Media Group may experience heightened
competition in its directory publishing businesses. With the passage of the
Telecommunications Act, Media Group is able to provide certain information
services across LATA boundaries.
C-20
<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 reflects the significant 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>
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS DIRECTORY AND INFORMATION SERVICES
-------------------------------- ----------------------------------------- ---------------------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
<S> <C> <C> <C> <C> <C> <C>
C Continental Kabel Plus a.s. U S WEST NewVector Russian U S WEST DEX Thomson Directories
O Cablevision (Czech Republic) 91%(1) Telecommunications 100%(2) (UK)
N 100% 94% Development Corp. 100%
S Atlanta (Russia) U S WEST
O Systems 66.5% Polska
L 100% (Poland)
I 100%
D
A
T
E
D
E TWE Telewest PrimeCo One 2 One Listel
Q 25.51% (UK) 24% (UK) (Brazil)
U 26.8% 50% 50%
I A2000 (KTA) Westel
T (Netherlands) Radiotelefon
Y 50% (Hungary)
Binariang 49%
M Communications Westel 900
E Sdn Bhd (Hungary)
T (Malaysia) 46.6%
H 20% EuroTel
O ARIAWEST (Czech & Slovak
D (Indonesia) Republics)
35% 24.5%
Telenet Flanders Polska Telefonia
(Belgium) (Poland)
28% 22.5%
Fintelco BPL U S WEST
(Argentina) Cellular Ltd
50% (India)
49%
</TABLE>
- ------------------------------
(1) Proportionate information reflects an approximate 9 percent minority
interest in NewVector's underlying operations.
(2) Formerly U S WEST Marketing Resources Group, Inc.
C-21
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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 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 table does not reflect financial
data of the capital assets segment, which had net assets of $409, $429 and $302
at December 31, 1996, 1995 and 1994, respectively. Previously reported amounts
have been reclassified to conform with current year presentation.
<TABLE>
<CAPTION>
CABLE AND TELE- WIRELESS DIRECTORY AND
COMMUNICATIONS COMMUNICATIONS INFORMATION SERVICES
------------------------ ------------------------ ------------------------ CORP. &
DOMESTIC(1) INTERN'L DOMESTIC INTERN'L DOMESTIC INTERN'L OTHER(2) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
YEAR ENDED 1996
Revenue...................... $ 3,267 $ 251 $ 1,075 $ 436 $ 1,120 $ 206 $ 12 $ 6,367
EBITDA....................... 776 (50) 307 (2) 488 20 (66) 1,473
Operating income (loss)...... 191 (177) 165 (102) 452 6 (76) 459
Net income (loss)............ (101) (215) 87 (98) 268 1 (13) (71)
Debt......................... 11,722
YEAR ENDED 1995
Revenue...................... $ 2,643 $ 128 $ 818 $ 295 $ 1,058 $ 142 $ 31 $ 5,115
EBITDA....................... 582 (55) 224 (40) 424 3 11 1,149
Operating income (loss)...... 181 (117) 116 (92) 399 (10) (1) 476
Net income (loss)............ (55) 18 56 (80) 247 (13) (32) 141
Debt......................... 4,417
YEAR ENDED 1994
Revenue...................... $ 2,176 $ 85 $ 657 $ 186 $ 997 $ 79 $ 33 $ 4,213
EBITDA....................... 444 (42) 163 (68) 417 2 (14) 902
Operating income (loss)...... 138 (73) 81 (103) 397 (8) (31) 401
Net income (loss)............ (41) 65 74 (68) 252 (4) (2) 276
Debt......................... 3,865
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
C-22
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
CABLE AND TELE- WIRELESS DIRECTORY AND
COMMUNICATIONS COMMUNICATIONS INFORMATION SERVICES
---------------------- ---------------------- --------------------------
DOMESTIC(1) INTERN'L DOMESTIC INTERN'L DOMESTIC INTERN'L TOTAL
----------- --------- ----------- --------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
(THOUSANDS):
YEAR ENDED 1996
Subscribers/advertisers.............. 7,562 1,224 1,882 509 482 260 11,919
Homes passed......................... 12,191 3,015 -- -- -- -- 15,206
POPs(3).............................. -- -- 34,220 77,320 -- -- 111,540
Telephone lines...................... -- 303 -- -- -- -- 303
YEAR ENDED 1995
Subscribers/advertisers.............. 2,908 617 1,339 308 479 271 5,922
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.............. 2,372 226 817 169 468 147 4,199
Homes passed......................... 3,952 576 -- -- -- -- 4,528
POPs(3).............................. -- -- 18,900 38,300 -- -- 57,200
Telephone lines...................... -- 69 -- -- -- -- 69
</TABLE>
- ------------------------------
(1) The proportionate results include 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) Includes costs related to general and administrative services, including
services provided by U S WEST to the Media Group. Beginning in 1996, certain
of these costs are no longer assigned to operating companies.
(3) POPs are the estimated market population multiplied by Media Group's
ownership interest in the market.
PROPORTIONATE RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
In 1996, proportionate Media Group revenue increased 24 percent, to $6.4
billion, and EBITDA increased 28 percent, to $1.47 billion. Excluding the
effects of the Continental Merger, proportionate revenue increased 19 percent
and EBITDA increased 22 percent. Strong growth in both wireless communications
and domestic cable and telecommunications contributed to the increases. Media
Group's objective is to increase proportionate EBITDA at a rate of 20 percent
annually.
CABLE AND TELECOMMUNICATIONS. During 1996, the domestic cable and
telecommunications proportionate revenue increased 24 percent, to $3,267, and
proportionate EBITDA increased 33 percent, to $776. Excluding the effects of the
Continental Merger, proportionate revenue and EBITDA increased 14 percent and 18
percent, respectively. The growth is primarily due to the TWE cable, programming
and filmed entertainment operations. TWE cable improvements are attributed to
normalized subscriber growth of 3.6 percent.
During 1996, international cable and telecommunications proportionate
revenue almost doubled to $251 and proportionate EBITDA improved $5 to ($50).
Approximately one-third of the revenue increase is related to customer growth at
Telewest. The remaining increase is from new ventures, including Continental
ventures, offset by the 1996 sale of the Company's cable television interests in
Norway, Sweden and Hungary. A $14 increase in proportionate EBITDA at Telewest
was more than offset by losses
C-23
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
related to start-up operations, the sale of Norway, Sweden and Hungary and
losses related to Continental ventures. Cable television subscribers of Telewest
and its affiliates increased to 600,000 at December 31, 1996, a 31 percent
increase compared with 1995, and telephone access lines increased 47 percent
during the last twelve months, to 773,000.
WIRELESS COMMUNICATIONS. During 1996, domestic wireless proportionate
revenue increased 31 percent, to $1,075, and proportionate EBITDA increased 37
percent, to $307. Excluding losses generated by the start-up of PrimeCo,
proportionate EBITDA increased 50 percent in 1996. This increase is due to a 40
percent increase in proportionate subscribers partially offset by a decrease in
average revenue per subscriber.
International wireless communications proportionate revenue increased 48
percent, to $436, and proportionate EBITDA increased $38, to ($2). One 2 One and
the Hungarian wireless operations contributed almost two-thirds of the revenue
increase and nearly 90 percent of the EBITDA increase. The remaining
contribution is from new ventures. The increases are a result of rapid growth in
the subscriber base, related to service area expansion and aggressive marketing
in the case of One 2 One and the introduction of digital services in Hungary.
One 2 One customers grew 45 percent in 1996 and account for 50 percent of the
Media Group's international wireless customers. The Media Group's share of
international wireless customers grew to 509,000 at December 31, 1996, a 65
percent increase compared with 1995.
DIRECTORY AND INFORMATION SERVICES. Domestic directory and information
services proportionate revenue increased 6 percent, to $1,120 in 1996, and
proportionate EBITDA increased 15 percent, to $488. The proportionate revenue
increase is due to a 5.7 percent increase in revenue per advertiser. Decreased
spending related to product development activities contributed to the increase
in EBITDA.
International directories proportionate revenue increased $64, to $206 in
1996, and proportionate EBITDA increased $17, to $20. Results for Listel, a
Brazilian directories operation, were included in the Media Group proportionate
results beginning with fourth-quarter 1995 compared with a full year of results
reflected in 1996. This accounts for the majority of the increase in
proportionate revenue and the entire increase in proportionate EBITDA.
PROPORTIONATE DEBT. Proportionate debt increased $7,305 in 1996, primarily
as a result of the Continental Merger and an increase in debt financing at One 2
One.
C-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Combined Balance Sheet of U S WEST Media
Group (as described in Note 2 to the Combined Financial Statements) as of
December 31, 1996, and the related Combined Statements of Operations and Cash
Flows for the year then ended. These combined financial statements and the
Supplementary Selected Proportionate Results of Operations referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and supplementary information
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U S WEST Media Group as of
December 31, 1996, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
We have also audited the Supplementary Selected Proportionate Results of
Operations for the year ended December 31, 1996, presented on page C-67. The
Supplementary Selected Proportionate Results of Operations have been prepared by
management to present relevant financial information that is not provided by the
Combined Financial Statements and is not intended to be a presentation in
conformity with generally accepted accounting principles. In our opinion, the
Supplementary Selected Proportionate Results of Operations referred to above
fairly states, in all material respects, the information set forth therein on
the basis of accounting described on page C-67.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1997.
C-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Combined Balance Sheet of U S WEST Media Group (as
described in Note 2 to the Combined Financial Statements) as of December 31,
1995, and the related Combined Statements of Operations and Cash Flows for each
of the two 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 combined financial statements
and schedule 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 the combined results of its operations and
its cash flows for each of the two 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 two years in the period ended December 31, 1995 presented on
page C-67. The Supplementary Selected Proportionate Results of Operations have
been prepared by management to present relevant financial information that is
not provided by the Combined 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 C-67.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
C-26
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
Sales and other revenues:
Directory and information services............................................. $ 1,259 $ 1,180 $ 1,075
Wireless communications........................................................ 1,183 941 781
Cable and telecommunications................................................... 494 215 18
Other.......................................................................... 19 38 34
--------- --------- ---------
Total sales and other revenues............................................... 2,955 2,374 1,908
Operating expenses:
Cost of sales and other revenues............................................... 966 772 612
Selling, general and administrative expenses................................... 1,052 886 763
Depreciation and amortization.................................................. 422 249 144
--------- --------- ---------
Total operating expenses..................................................... 2,440 1,907 1,519
--------- --------- ---------
Operating income................................................................. 515 467 389
Interest expense................................................................. 168 100 66
Equity losses in unconsolidated ventures......................................... 346 207 121
Gains on merger and partial sale of joint venture interest....................... -- 157 164
Gain on sale of paging assets.................................................... -- -- 68
Guaranteed minority interest expense............................................. 55 14 --
Other expense (income) -- net.................................................... 19 (5) (46)
--------- --------- ---------
Income (loss) before income taxes and extraordinary item......................... (73) 308 480
Provision (benefit) for income taxes............................................. (2) 163 204
--------- --------- ---------
Income (loss) before extraordinary item.......................................... (71) 145 276
Extraordinary item -- early extinguishment of debt, net of tax................... -- (4) --
--------- --------- ---------
NET INCOME (LOSS)................................................................ $ (71) $ 141 $ 276
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock..................................................... 9 3 --
--------- --------- ---------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK....................................... $ (80) $ 138 $ 276
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share:
Income (loss) before extraordinary item........................................ $ (0.16) $ 0.30 $ 0.61
Extraordinary item -- early extinguishment of debt............................. -- (0.01) --
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE................................................. $ (0.16) $ 0.29 $ 0.61
--------- --------- ---------
--------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING (thousands).................................... 491,924 470,549 453,316
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-27
<PAGE>
U S WEST MEDIA GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................. $ 121 $ 20
Accounts and notes receivable, less allowance for
credit losses of $85 and $58, respectively............................................... 508 287
Deferred directory costs................................................................... 259 247
Receivable from Communications Group....................................................... 92 106
Marketable securities...................................................................... 58 --
Other...................................................................................... 101 81
--------- ---------
Total current assets......................................................................... 1,139 741
--------- ---------
Property, plant and equipment -- net......................................................... 4,275 1,148
Investment in Time Warner Entertainment...................................................... 2,477 2,483
Net investment in international ventures..................................................... 1,548 1,511
Intangible assets -- net..................................................................... 12,595 1,798
Net investment in assets held for sale....................................................... 409 429
Other assets................................................................................. 1,618 505
--------- ---------
Total assets................................................................................. $ 24,061 $ 8,615
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt............................................................................ $ 217 $ 836
Due to Continental Cablevision shareholders................................................ 1,150 --
Accounts payable........................................................................... 425 235
Deferred revenue and customer deposits..................................................... 129 87
Other...................................................................................... 795 411
--------- ---------
Total current liabilities.................................................................... 2,716 1,569
--------- ---------
Long-term debt............................................................................... 8,636 1,265
Deferred income taxes........................................................................ 3,600 382
Deferred credits and other................................................................... 346 276
Commitments and Contingencies
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures....................................................... 1,080 600
Preferred stock subject to mandatory redemption.............................................. 51 51
Media Group equity........................................................................... 7,723 4,599
Company LESOP guarantee...................................................................... (91) (127)
--------- ---------
Total equity................................................................................. 7,632 4,472
--------- ---------
Total liabilities and equity................................................................. $ 24,061 $ 8,615
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-28
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
OPERATING ACTIVITIES
Net income (loss)............................................................... $ (71) $ 141 $ 276
Adjustments to net income (loss):
Depreciation and amortization................................................. 422 249 144
Equity losses in unconsolidated ventures...................................... 346 207 121
Gains on merger and partial sale of joint venture interest.................... -- (157) (164)
Gain on sale of paging assets................................................. -- -- (68)
Deferred income taxes......................................................... (86) 102 147
Provision for uncollectibles.................................................. 65 55 36
Changes in operating assets and liabilities:
Restructuring payments........................................................ (16) (19) (10)
Accounts and notes receivable................................................. (101) (103) (76)
Deferred directory costs, prepaid and other................................... 4 (28) (52)
Accounts payable and accrued liabilities...................................... 112 36 143
Other -- net.................................................................... 17 157 54
--------- --------- ---------
Cash provided by operating activities........................................... 692 640 551
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (652) (363) (349)
Investments in international ventures........................................... (243) (681) (350)
Investment in PCS licenses...................................................... (132) (286) --
Cash from net investment in assets held for sale................................ 213 -- --
Investment in Atlanta Systems................................................... -- -- (745)
Proceeds from sale of paging assets............................................. -- -- 143
Other -- net.................................................................... (4) 92 (121)
--------- --------- ---------
Cash (used for) investing activities............................................ (818) (1,238) (1,422)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt -- net............................ 3,891 (449) 936
Repayments of long-term debt.................................................... (4,217) (724) (316)
Proceeds from issuance of Preferred Securities -- net........................... 465 581 --
Proceeds from issuance of long-term debt........................................ 360 1,085 --
Proceeds from issuance of common stock.......................................... 34 57 323
Purchase of treasury stock...................................................... (297) -- --
Dividends paid on preferred stock............................................... (9) (3) --
Proceeds from issuance of mandatorily redeemable preferred stock................ -- -- 50
Other -- net.................................................................... -- (22) --
--------- --------- ---------
Cash provided by financing activities........................................... 227 525 993
--------- --------- ---------
Cash provided by (used for) continuing operations............................... 101 (73) 122
Cash (to) discontinued operations............................................... -- -- (101)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................. 101 (73) 21
Beginning balance............................................................... 20 93 72
--------- --------- ---------
Ending balance.................................................................. $ 121 $ 20 $ 93
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-29
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareowners 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,
shareowners 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 shareowners 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., U S WEST Business
Resources, Inc. and U S WEST Long Distance, Inc. The Communications Group
provides telecommunications 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 LATAs in the Region. The Communications Group
provides other products and services, including high-speed data applications,
customer premises equipment and certain other communications services to
business customers and governmental agencies both inside and outside the Region.
The Media Group is comprised of Continental Cablevision, Inc., the third
largest cable television system operator in the United States, U S WEST
Multimedia Communications, Inc., which owns domestic cable television operations
and investments, U S WEST Dex, Inc. (formerly 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 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
C-30
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, liabilities (including contingent
liabilities) and shareowners' equity between the Communications Group and the
Media Group for the purpose of preparing the respective financial statements of
such Group, owners of Communications Stock and Media Stock are subject to risks
associated with an investment in a single company and all of U S WEST's
businesses, assets and liabilities. Financial effects arising from either Group
that affect U S WEST's results of operations or financial condition could, if
significant, affect the results of operations or financial position of the other
Group or the market price of the class of 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
shareowners, 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 owners 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 shareowners, including the owners of Communications Stock and the owners 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 to Media Group were $41, $41 and $38 in 1996, 1995 and
1994, respectively. In 1996, the direct allocations comprised approximately 44
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,
C-31
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
U S WEST believes that under the Recapitalization Plan, each Group benefits from
synergies with the other, including lower operating costs than might be incurred
if each Group were 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.
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 and preferred stock 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, and the financial
statements of the borrowing Group, will reflect the amount of any such loan and
the 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.
C-32
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 in the foreseeable
future.
EARNINGS PER COMMON SHARE. Earnings per common share ("earnings per share")
for 1995 and 1994 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.
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.
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 -- Net Investment in Assets Held for Sale -- 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 $38, $33 and $8
in 1996, 1995 and 1994, 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 earnings. Continental provides for depreciation using the
straight-line group method over estimated useful lives. Sales or retirements are
generally charged to accumulated depreciation.
COMPUTER SOFTWARE. The cost of computer software, whether purchased or
developed internally, is generally expensed, except for Continental, which
capitalizes the cost of computer software.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and equity securities are
classified as available for sale and are carried at market value with unrealized
gains and losses included in equity.
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.
C-33
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Resulting translation adjustments are recorded as a separate component of
equity. Gains and losses resulting from foreign currency transactions are
included in earnings.
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
for impairment, with other related assets, using the methodology prescribed by
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
FINANCIAL INSTRUMENTS. Net interest accrued 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 earnings.
REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS. Cellular access and cable
television services are generally billed monthly in advance, and revenues are
recognized the following month when services are provided. Revenues derived from
cable pay-per-view, advertising and 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 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.
NEW ACCOUNTING STANDARDS. Effective January 1, 1996, U S WEST adopted 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. The adoption of SFAS No. 121 did
not have a material effect on the financial position or results of operations of
the Media Group.
In 1996, U S WEST adopted 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 has adopted the disclosure provisions of SFAS No. 123 but continues to
account for the stock incentive plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees. See Note 15 -- Stock
Incentive Plans -- to the Media Group Combined Financial Statements.
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128 requires
presentation of basic and diluted earnings per share on the face of the income
statement. Adoption of the new standard will not have a material impact on Media
Group earnings per share.
C-34
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MERGER OF CABLE SYSTEMS
CONTINENTAL CABLEVISION, INC. On November 15, 1996, Continental
Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U
S WEST (the "Merger" or the "Continental Merger"). Continental is the third
largest cable television system operator in the United States. The aggregate
consideration paid by Media Group to shareowners of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock with a market value of $920 million and $1.15
billion in cash. In connection with the Merger, U S WEST also assumed all of
Continental's outstanding indebtedness and other liabilities, which approximated
$7.0 billion at November 15, 1996, for a total purchase price of $11.7 billion.
Continental serves 4.5 million domestic customers, passes 7.4 million domestic
homes and holds significant other domestic and international properties.
Media Group has accounted for the Merger by the purchase method of
accounting. Accordingly, the purchase price is allocated to the assets acquired
and liabilities assumed based on their estimated fair values. The $8.0 billion
excess of the purchase price over the net tangible assets acquired and the
goodwill related to a deferred income tax liability of $3.3 billion is being
amortized over 25 years, except for intangible assets allocated to Continental's
equity method investments, which are being amortized over 15 years. Amortization
related to Continental's equity method investments is recorded as a component of
equity losses in unconsolidated ventures. The intangible assets acquired consist
principally of the cable television franchises of Continental and goodwill.
Continental's results of operations have been included in the combined results
of operations of the Media Group since the Merger date.
Following are summarized, combined, unaudited pro forma results of
operations for the Media Group for the years ended December 31, 1996 and 1995,
assuming the Merger occurred as of the beginning of respective periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
SUMMARIZED RESULTS OF OPERATIONS 1996 1995
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues................................................................... $ 4,662 $ 4,156
Loss before extraordinary item............................................. (513) (349)
Net loss................................................................... (513) (353)
Loss per common share before extraordinary item............................ (0.90) (0.64)
</TABLE>
Loss before extraordinary item, net loss and loss per common share before
extraordinary item are before nonrecurring items directly attributable to the
Merger. The final allocation of the purchase price is dependent upon certain
valuations and other studies that have not progressed to the stage where there
is sufficient information to make a final allocation in the Combined Financial
Statements. Accordingly, the purchase price allocations made in connection with
the Combined Financial Statements are preliminary.
The impact on the financial position of the Media Group from the disposition
of certain Continental properties as required by federal rules governing
cross-ownership by telephone companies of cable companies and provision of
interLATA services within the Communications Group region is not expected to be
material.
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
C-35
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MERGER OF CABLE SYSTEMS (CONTINUED)
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 acquisition date.
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.
NOTE 4: INDUSTRY SEGMENTS
The Media Group operates in four industry segments: directory and
information services, wireless communications, cable and telecommunications and
capital assets, which is held for sale. Supplemental Media Group information on
a proportionate basis is presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The cable and telecommunications segment consists of cable television
properties serving 5.0 million domestic subscribers and passing 8.3 million
domestic homes. 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 12 western and midwestern states.
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>
1996
Sales and other revenues............. $ 1,259 $ 1,183 $ 494 $ 19 $ 2,955
Operating income (loss).............. 454 243 (20) (162) 515
Identifiable assets.................. 685 1,579 15,504 6,293 24,061
Depreciation and amortization........ 48 147 212 15 422
Capital expenditures................. 36 264 353 15 668
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).............. 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
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
C-36
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
(FOOTNOTES FOR PRECEDING TABLE)
- ------------------------------
(1) Includes revenues from directory publishing activities in Europe of $139,
$122 and $78, and identifiable assets of $154, $133 and $124 in 1996, 1995
and 1994, respectively.
(2) Results for Continental and the Atlanta Systems have been included since
the dates of Merger and acquisition. 1996 includes revenues of $6, operating
losses of $7, and identifiable assets of $133 from cable operations in the
Czech Republic.
(3) Identifiable assets include Media Group's investments in debt and equity
securities, equity and cost method investments and the capital assets
segment, which has been discontinued and is held for sale.
Operating income (loss) represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other expense (income) and income taxes. For the year ended December
31, 1996, operating income of the directory and information services segment
includes a charge of $25 to reorganize and reduce headcount.
Corporate and Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Corporate and Other operating losses increased in 1996 primarily as a result of
a change in cost allocation policy. Beginning in 1996, other operating losses
include costs that are not specifically identifiable with an operating company.
Previously such costs were allocated to the operating companies. Corporate and
Other operating losses also include a charge of $10 related to staff reductions
at international headquarters in 1996.
Identifiable assets are those assets used in each segment's operations.
Corporate and Other assets consist primarily of cash, debt and equity
securities, investments in international ventures, the investment in Time Warner
Entertainment, the net investment in assets held for sale and other assets.
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. Approximately 75 percent
of the Media Group's major cellular markets is comprised of Motorola equipment.
During 1994, Media Group signed a definitive agreement with AirTouch
Communications, Inc. ("AirTouch") to combine their domestic cellular properties
into a partnership in a multi-phased transaction. During Phase I, which
commenced on November 1, 1995, the partners are operating their cellular
properties separately. A Wireless Management Company (the "WMC") has been formed
and is providing services to both companies on a contract basis. In Phase II,
the partners will combine their domestic properties subject to obtaining certain
authorizations and partnership approvals. The passage of the Telecommunications
Act of 1996 has removed significant regulatory barriers to completion of Phase
II. In February 1997, the King County Superior Court in Washington state ruled
that Media Group violated the terms of its partnership agreement with its
minority partners in the Seattle market by entering into the joint venture
agreement with AirTouch. The Company has obtained a stay of the ruling pending
its appeal. Similar litigation has been filed in other jurisdictions regarding
other cellular partnerships by the same minority partner that brought the
Seattle litigation. The Company believes it will ultimately be successful in all
such litigation. Media Group expects that Phase II closing will occur in the
second half of 1997.
Upon the implementation of Phase II, management expects the joint venture
interests will be approximately 74 percent AirTouch and 26 percent Media Group
(assuming contribution of all domestic cellular properties). The actual
interests in the joint venture at commencement of Phase II depend, among other
things, on the timing of the Phase II closing and the ability of the partners to
combine their domestic properties. Media Group's interest will further adjust
depending on the timing of the contribution of its
C-37
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
investment in PrimeCo. The timing of such contribution is at Media Group's
discretion and will occur either at the closing of Phase II or a date selected
by Media Group, no later than mid-1998.
Media Group has the right to convert its joint venture interest in the
domestic cellular properties into AirTouch stock ("Phase III"). Media Group's
interests will be valued on a private market basis and the AirTouch common stock
received by Media Group will be based on a fair public market value. In the
event the value to be received by Media Group exceeds 19.9 percent of AirTouch's
outstanding common stock, Media Group will receive the excess in the form of
nonvoting preferred stock. Media Group has the right to initiate Phase III upon
completion of Phase II of the merger and contribution of both Media Group's and
AirTouch's interests in PrimeCo to the joint venture.
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, Media Group 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 Media Group'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.
Media Group 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 Media Group 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.
C-38
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
TIME LIMITED PARTNERS
PRIORITY WARNER ------------------------
CONTRIBUTED CAPITAL RATES GENERAL TIME U S
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) OF RETURN(B) PARTNERS WARNER WEST
- ----------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(% PER ANNUM
COMPOUNDED
QUARTERLY) (OWNERSHIP %)
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 13.25%(e) 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 to Time Warner in three
annual installments beginning July 1, 1997 with the initial distribution
expected to be $535 million.
(d) 11.00 percent to the extent concurrently distributed.
(e) 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 Media
Group.
Media Group accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by Media Group'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 $(4), $(31) and $(18) in 1996, 1995 and 1994, 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 were
recorded to other income in 1996, 1995 and 1994, respectively. The Media Group
Combined Balance Sheet includes management fee receivables of $56 and $50 at
December 31, 1996 and 1995, respectively, and a note payable to TWE of $169 at
December 31, 1995.
C-39
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1996 1995 1994
- ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues........................................................ $ 10,852 $ 9,517 $ 8,460
Operating expenses(1)........................................... 9,774 8,557 7,612
Interest and other expense, net(2).............................. 798 777 647
--------- --------- ---------
Income before income taxes and extraordinary item............... 280 183 201
Income before extraordinary item................................ 210 97 161
Net income...................................................... 210 73 161
</TABLE>
- ------------------------------
(1) Includes depreciation and amortization of $1,235, $1,039 and $943 in 1996,
1995 and 1994, respectively.
(2) Includes corporate services of $69, $64 and $60 in 1996, 1995 and 1994,
respectively, and minority interest expense of $207 and $133 in 1996 and
1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
SUMMARIZED FINANCIAL POSITION 1996 1995
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Current assets(3)....................................................... $ 3,146 $ 2,909
Noncurrent assets(4).................................................... 16,827 15,996
Current liabilities..................................................... 4,075 3,214
Noncurrent liabilities, including minority interest..................... 7,781 7,787
Senior preferred capital................................................ 1,543 1,426
Partners' capital(5), (6)............................................... 6,574 6,478
</TABLE>
- ------------------------------
(3) Includes cash of $216 and $209 at December 31, 1996 and 1995,
respectively.
(4) Includes a loan receivable from Time Warner of $400 at December 31, 1996
and 1995, respectively.
(5) Net of a note receivable from Media Group of $169 at December 31, 1995.
(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 partners' capital as reflected in
the Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
Time Warner has announced its intention to restructure TWE in a manner that
would decrease its interest in the cable businesses and increase its interest in
the entertainment and cable programming businesses of TWE. Any change in the
structure of TWE would require Media Group's approval in addition to certain
creditors' and regulatory approvals.
C-40
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES
The significant components of net investment in international ventures
follow:
<TABLE>
<CAPTION>
NET INVESTMENT AT
DECEMBER 31,
LINE OF OWNERSHIP --------------------
VENTURE LOCATION BUSINESS PERCENTAGE 1996 1995
- ---------------------------- ------------------- -------------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Telewest.................... United Kingdom Cable & Telecom. 26.8 $ 454 $ 540
Binariang Sdn Bhd........... Malaysia Cable & Telecom. 20 205 224
A2000 (KTA)................. Netherlands Cable & Telecom. 50 96 218
All other................... 793 529
--------- ---------
Total..................... $ 1,548 $ 1,511
--------- ---------
--------- ---------
</TABLE>
In connection with the Continental Merger, Media Group acquired a 50 percent
interest in Fintelco, S.A., a cable venture in Argentina and a 25 percent
interest in a cable venture in Singapore. The purchase price assigned to these
ventures is preliminary.
At December 31, 1996, the difference between the carrying amount and Media
Group's interest in the underlying equity of the international ventures was
approximately $365. This difference has been allocated primarily to licenses and
cable franchises and is being amortized over lives ranging from five to twenty
years.
The following table shows summarized combined financial information for the
Media Group's equity method investments in international ventures.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
COMBINED RESULTS OF OPERATIONS 1996 1995 1994
- ------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................................... $ 1,869 $ 1,163 $ 580
Operating loss.................................................... (540) (373) (244)
Net loss.......................................................... (857) (514) (308)
</TABLE>
- ------------------------------
Note: Combined Results of Operations for Continental ventures have been included
since the date of Merger.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1996 1995
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets............................................................. $ 1,126 $ 1,469
Property, plant and equipment -- net....................................... 5,105 3,545
Other assets............................................................... 2,226 1,644
--------- ---------
Total assets............................................................... $ 8,457 $ 6,658
--------- ---------
--------- ---------
Current liabilities........................................................ $ 1,275 $ 1,260
Long-term debt............................................................. 3,880 2,065
Other liabilities.......................................................... 478 58
Owners' equity............................................................. 2,824 3,275
--------- ---------
Total liabilities and equity............................................... $ 8,457 $ 6,658
--------- ---------
--------- ---------
</TABLE>
C-41
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
In November 1994, Telewest Communications plc ("Telewest") made an initial
public offering of its ordinary shares. Following the offering, in which Media
Group sold part of its 50 percent joint venture interest, Media Group 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 Media Group's policy to recognize in
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, Media Group and Tele-
Communications, Inc., the major shareowners, 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 of Media Group for
which a quoted market price is available, had a market value of $786 and $914 at
December 31, 1996 and 1995, respectively.
FOREIGN CURRENCY TRANSACTIONS. Media Group has entered into forward and
zero-cost combination option contracts to manage foreign currency risk. Under a
forward contract, Media Group agrees with another party to exchange a foreign
currency and U.S. dollars at a specified price at a future date. Under the
combination options, Media Group combined purchased options to cap the foreign
exchange rate to be paid at a future date with written options to finance the
premium on the purchased options. The commitments, forward contracts and
combination options are for periods of one year or less. For the years ended
December 31, 1996 and 1995, the notional amounts of foreign exchange contracts
outstanding were $0 and $489, respectively. In 1997, the Media Group entered
into foreign exchange forward contracts in notional amounts totaling $170 for
the purchase and/or sale of British pounds, Japanese Yen and French Francs.
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 earnings upon sale of the investment. Gains or losses on the portion of the
contracts designated to offset translation of investee net income were recorded
in earnings.
Forward contracts were also used to hedge foreign denominated receivables.
These contracts were carried at market value with gains or losses recorded in
earnings. Foreign currency transaction pretax gains of $27 and pretax hedging
losses of $24 were included in earnings in the year ended December 31, 1996.
Cumulative deferred gains on foreign exchange contracts of $9 and deferred
losses of $28, including deferred taxes (benefits) of $4 and $(11),
respectively, are included in Media Group equity at December 31, 1996.
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.
The counterparties to these contracts are major financial institutions.
Media Group 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.
C-42
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings......................................................... $ 307 $ 168
Cable distribution systems................................................. 2,640 167
Cellular systems........................................................... 897 733
General purpose computers and other........................................ 856 471
Construction in progress................................................... 411 167
--------- ---------
5,111 1,706
Less accumulated depreciation.............................................. 836 558
--------- ---------
Property, plant and equipment -- net....................................... $ 4,275 $ 1,148
--------- ---------
--------- ---------
</TABLE>
During 1996, property, plant and equipment increased $2,635 as a result of
the Continental Merger. This increase was primarily attributed to cable and
distribution systems. Media Group depreciates buildings between 10 to 40 years,
cable distribution systems between 3 to 15 years, cellular systems between 5 to
15 years, and general purpose computer and other between 3 to 20 years.
Depreciation expense was $289, $173, and $121 in 1996, 1995 and 1994,
respectively.
NOTE 8: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value........................ $ 8,388 $ 1,183
Goodwill................................................................. 4,465 743
--------- ---------
12,853 1,926
Less accumulated amortization............................................ 258 128
--------- ---------
Total intangible assets -- net........................................... $ 12,595 $ 1,798
--------- ---------
--------- ---------
</TABLE>
During 1996, identified intangibles (primarily franchise value) increased
$7,203 and goodwill increased $3,710 as a result of the Continental Merger.
Amortization expense was $133, $76 and $23 in 1996, 1995 and 1994, respectively.
C-43
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper............................................................... $ 141 $ 203
Bank loan...................................................................... -- 216
Other.......................................................................... 55 --
Current portion of long-term debt................................................ 167 568
Allocated to the capital assets segment -- net................................... (146) (151)
--------- ---------
Total............................................................................ $ 217 $ 836
--------- ---------
--------- ---------
</TABLE>
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. The weighted-average interest rate on commercial paper was 5.76 percent
and 5.79 percent at December 31, 1996 and 1995, respectively. Additional lines
of credit aggregating approximately $4.5 billion are available to the Media
Group as well as the nonregulated subsidiaries of the Communications Group in
accordance with their borrowing needs.
Other notes payable at December 31, 1996 include $50 associated with the
Media Group's increase in ownership of a cable venture in the Czech Republic.
This note was paid in January 1997. At December 31, 1995, the bank loan, in the
translated principal amount of $216, was denominated in Dutch Guilders. The loan
was repaid in February 1996.
In January 1997, the Media Group paid the cash portion of the Continental
Merger consideration totaling $1,150. This payment was financed with commercial
paper.
The Media Group expects that cash from operations combined with asset sales
will not be adequate to fund expected cash requirements in 1997. Additional
financing will come primarily from new short-term debt.
LONG-TERM DEBT
On November 15, 1996, U S WEST assumed Continental debt totaling $6,525 (at
market value) in conjunction with the Merger. Concurrently, U S WEST refinanced
$3,657 of the assumed debt with commercial paper. In January 1997, U S WEST
issued medium- and long-term debt totaling $4.1 billion, at a weighted-average
interest rate of 7.47 percent. The net proceeds were used to refinance
outstanding commercial paper. Such commercial paper is classified as long-term
debt in the accompanying U S WEST Media Group Combined Balance Sheets and the
following tables.
C-44
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
The components of long-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Senior unsecured notes, debentures and refinanced commercial paper............. $ 7,230 $ 1,138
Zero coupon subordinated notes, 7.3 percent yield to maturity convertible at
any time into equal shares of Communications Stock and Media Stock............ 718 737
Senior subordinated debt....................................................... 400 --
Debt exchangeable for common stock............................................. 384 130
Insurance company notes........................................................ 68 --
Leveraged employee stock ownership plans ("LESOP")............................. 53 91
Capital lease obligations...................................................... 12 2
Other.......................................................................... 68 17
Unamortized discount -- net.................................................... (471) (494)
Unamortized premium -- net..................................................... 335 --
Allocated to the capital assets segment -- net................................. (161) (356)
--------- ---------
Total.......................................................................... $ 8,636 $ 1,265
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996, long-term debt includes senior unsecured notes and
debentures totaling $2.0 billion, senior subordinated debt of $400 and insurance
company notes of $68 assumed in connection with the Continental Merger. The
senior unsecured notes and debentures and the senior subordinated debt totaling
$2.4 billion are not guaranteed by U S WEST. The notes and debentures limit
Continental's ability to, among other things, pay dividends, create liens, incur
additional debt, dispose of property, investments and leases, and requires a
minimum ratio of cash flow to debt.
On May 13, 1996, U S WEST issued $254 of DECS due May 15, 1999, in the
principal amount of $26.63 per note. The notes bear interest at 7.625 percent.
Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of
Financial Security Assurance Holdings Ltd. ("FSA") held by Media Group or the
cash equivalent, at Media Group's option. The number of shares to be delivered
at maturity varies based on the per share market price of FSA. If the market
price is $26.63 per share or less, one share of FSA will be delivered for each
note; if the market price is between $26.63 and $32.48 per share, a fractional
share is delivered so that the value at maturity is equal to $26.63; if the
market value is greater than $32.48 per share, .8197 shares are delivered for
each note. The capital assets segment currently owns approximately 40 percent of
the outstanding FSA common stock.
In 1995, U S WEST issued $130 of DECS, due December 15, 1998, in the
principal amount of $24.00 per note. The notes bear interest at 7.625 percent.
Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of
Enhance Financial Services Group, Inc. ("Enhance") held by Media Group 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 for each note. At December 31,
1996, the capital assets segment owned 30.1 percent of the outstanding Enhance
common stock.
C-45
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- ----------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%................................. $ -- $ -- $ -- $ -- $ 6 $ 6 $ --
Above 5% to 6%........................... 130 -- -- -- 10 140 130
Above 6% to 7%........................... -- 309 48 38 2,089 2,484 1,018
Above 7% to 8%........................... -- -- 13 -- 3,428 3,441 737
Above 8% to 9%........................... 42 11 -- 240 1,475 1,768 147
Above 9% to 10%.......................... -- 15 25 10 525 575 79
Above 10%................................ 34 35 2 2 434 507 2
--------- --------- --------- --------- ----------- --------- ---------
$ 206 $ 370 $ 88 $ 290 $ 7,967 8,921 2,113
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations......................................................................... 12 2
Unamortized discount -- net....................................................................... (471) (494)
Unamortized premium -- net........................................................................ 335 --
Allocated to the capital assets segment -- net.................................................... (161) (356)
--------- ---------
Total............................................................................................. $ 8,636 $ 1,265
--------- ---------
--------- ---------
</TABLE>
Interest payments, net of amounts capitalized, were $233, $140, and $167 for
1996, 1995 and 1994, respectively, of which $59, $87 and $134, respectively,
relate to the capital assets segment.
C-46
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 9: DEBT (CONTINUED)
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
Under an interest rate swap, Media Group 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 accrued under
an interest rate swap is accounted for as an adjustment to interest expense. In
1996, U S WEST assumed interest rate swaps in the notional amount of $1,000 and
interest cap agreements in the notional amount of $500 in connection with the
Continental Merger. The interest rate cap agreements protect against large
increases in interest rates and have various maturities through 1998. Interest
payments received under the terms of a cap agreement would be accounted for as
an adjustment to interest expense.
The table summarizes terms of interest rate swaps. Variable rates are
indexed to the 30-day commercial paper rate.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------------------
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............... $ 1,055 1997-2004 5.73 7.06 $ 55 1997-2004 5.85 9.30
</TABLE>
During fourth-quarter 1996, U S WEST purchased put options for $1.5 billion
notional of U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. The contracts closed in January
1997 and a deferred gain of $5 was recognized. The deferred gain will be
recognized as a yield adjustment over the life of the debt, which matures at
various dates through 2027.
The counterparties to 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 10: 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 quoted market prices or discounting future cash flows,
approximate the carrying values. The fair value of foreign exchange contracts
and interest rate cap agreements, based on estimated amounts Media Group would
receive or pay to terminate such agreements, approximate the carrying values. It
is not practicable to estimate the fair value of financial guarantees because
there are no quoted market prices for similar transactions.
C-47
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: 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 Media Group 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 and Preferred Securities, 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,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)................... $ 9,334 $ 9,400 $ 2,897 $ 3,000
Interest rate swap agreements -- assets.............. -- (5) -- (13)
Interest rate swap agreements -- liabilities......... 17 37 -- 34
----------- --------- ----------- ---------
Debt -- net.......................................... $ 9,351 $ 9,432 $ 2,897 $ 3,021
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Preferred Securities................................. $ 1,080 $ 1,074 $ 600 $ 636
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Investments in debt and equity securities are classified as available for
sale and are carried at market value. The debt 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.
Equity securities totaling $713 acquired in the Continental Merger are
included in the following table. The amortized cost and estimated market value
of debt and equity securities follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------------------- ---------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED
SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES
- ---------------------------------- --------- ------------- ------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity securities................. $ 713 $ 2 $ -- $ 715 $ -- $ -- $ --
Corporate debt.................... 20 -- -- 20 20 -- --
Securitized loan.................. 55 -- (6) 49 55 -- (5)
--------- ----- ----- --------- --------- ----- -----
Total............................. $ 788 $ 2 $ (6) $ 784 $ 75 $ -- $ (5)
--------- ----- ----- --------- --------- ----- -----
--------- ----- ----- --------- --------- ----- -----
<CAPTION>
FAIR
SECURITIES VALUE
- ---------------------------------- ---------
<S> <C>
Equity securities................. $ --
Corporate debt.................... 20
Securitized loan.................. 50
---------
Total............................. $ 70
---------
---------
</TABLE>
Net unrealized losses on marketable securities are included in equity. 1996
net unrealized gains are $1 (net of deferred taxes) and 1995 net unrealized
losses are $3 (net of a deferred tax benefit of $2).
C-48
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: LEASING ARRANGEMENTS
Media Group has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $63, $60 and
$63 in 1996, 1995 and 1994, respectively. Minimum future lease payments as of
December 31, 1996, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ----------------------------------------------------------------------------
<S> <C>
1997........................................................................ $ 69
1998........................................................................ 57
1999........................................................................ 46
2000........................................................................ 37
2001........................................................................ 24
Thereafter.................................................................. 83
---------
Total....................................................................... $ 316
---------
---------
</TABLE>
NOTE 12: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
On October 29, 1996, U S WEST Financing II, a wholly owned subsidiary of U S
WEST ("Financing II") issued $480 of 8.25 percent Trust Originated Preferred
Securities (the "Preferred Securities") and $15 of common securities. U S WEST
holds all of the outstanding common securities of Financing II. Financing II
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"), $495 principal
amount of Capital Funding's 8.25 percent Subordinated Deferrable Interest Notes
due 2036 (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 II are and will be the Deferrable Notes and the Debt
Guarantee.
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 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 Capital Funding $619 principal amount of Capital Funding's 7.96
percent Subordinated Debt Securities due 2025, the obligations under which are
fully and unconditionally guaranteed by U S WEST. The sole assets of Financing I
are and will be the Subordinated Debt Securities and the Debt Guarantee.
U S WEST has guaranteed the payment of interest and redemption amounts to
holders of Preferred Securities when Financing I and II have funds available for
such payments (the "Payment Guarantee") as well as Capital Funding's undertaking
to pay all of Financing I and II'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 and II'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 and II.
C-49
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
(CONTINUED)
The 7.96 percent 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, 1996
and 1995, 24,000,000 7.96 percent Preferred Securities were outstanding.
The 8.25 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after October 29, 2001, 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 II is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1996,
19,200,000 8.25 percent Preferred Securities were outstanding.
NOTE 13: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On September 2, 1994, U S WEST 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 -- Net Investment in
Assets Held for Sale -- to the U S WEST Media Group Combined Financial
Statements.) The preferred stock was recorded at fair market value of $51 at the
issue date. Media Group has the right, commencing September 2, 1999, to redeem
the shares for one thousand dollars per share plus unpaid dividends and a
redemption premium. The shares are mandatorily redeemable in 2004 at face value
plus unpaid dividends. At the option of FFC, the preferred stock can also be
redeemed for common shares of Financial Security Assurance, an investment held
by the capital assets segment. The market value of the option was $35 and $20
(based on the Black-Scholes Model) at December 31, 1996 and 1995, respectively,
with no carrying value.
C-50
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: MEDIA GROUP EQUITY
Following is a reconciliation of Media Group equity:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................................... $ 4,472 $ 4,203 $ 3,139
Net income (loss).............................................. (71) 141 276
Equity issuance for Continental Merger......................... 2,590 -- --
Series D Preferred Stock issuance for Continental Merger....... 920 -- --
Other Media Stock issuances.................................... 38 7 --
Stock option hedging premium................................... (32) -- --
Company LESOP guarantee........................................ 36 60 56
Market value adjustment for debt and equity securities......... (6) 36 (64)
Foreign currency translation................................... (1) (9) 6
Preferred dividends............................................ (9) (3) --
Equity issuances prior to recapitalization..................... -- 37 790
Treasury stock purchases....................................... (297) -- --
Other.......................................................... (8) -- --
--------- --------- ---------
Balance at end of period......................................... $ 7,632 $ 4,472 $ 4,203
--------- --------- ---------
--------- --------- ---------
</TABLE>
In connection with the Continental Merger, U S WEST issued 150,615,000
shares of Media Stock to Continental shareowners, valued at $2,590. The Company
also purchased and placed into treasury 15,916,000 shares of Media Stock at an
average price per share of $18.66 and a cost basis of $297.
On November 15, 1996, U S WEST issued 20,000,000 shares of 4.5 percent, 20
year, Series D Convertible Preferred Stock (the "Preferred Stock") to
Continental shareowners. Dividends are payable quarterly on the nonvoting
Preferred Stock as and when declared by the Board of Directors out of funds
legally available. The Preferred Stock has a liquidation value of $50 per share
and is recorded at the November 15, 1996 market value of $46 per share. The
Preferred Stock is convertible, at the option of the holder, into shares of
Media Stock at $26.25 per share. Between November 15, 1999 and November 15,
2001, the Preferred Stock is redeemable at par, at the option of U S WEST, into
shares of Media Stock if the Media common shares have closed at $34.44 per share
for at least 20 of the 30 consecutive trading days prior to the notice of
redemption. After November 15, 2001, the Preferred Stock is redeemable at par,
at the option of U S WEST, in cash, Media Stock, or any combination of cash and
stock. If Media Stock is elected, the number of shares to be issued will be
determined based on the average market price for the ten consecutive trading
days ending on the third business day prior to redemption, reduced by five
percent. On November 15, 2016, U S WEST is required to redeem the Preferred
Stock, at its election, for cash, Media Stock, or any combination of cash and
stock. Upon certain events, including the disposition of all or substantially
all of the properties and assets attributed to the Media Group, the Preferred
Stock becomes mandatorily redeemable. The Preferred Stock ranks senior to all
classes of U S WEST common stock, is subordinated to any senior debt and ranks
pari passu with the Preferred Securities.
U S WEST issued 152,468,000 and 392,000 shares of Media Stock in 1996 and
1995 (since the November 1, 1995 recapitalization), respectively, and had
608,863,000 and 472,314,000 shares outstanding at December 31, 1996 and 1995,
respectively.
C-51
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: MEDIA GROUP EQUITY (CONTINUED)
Included in Media Group equity is the cumulative foreign currency
translation adjustment of $(39), $(38) and $(29) at December 31, 1996, 1995 and
1994, respectively, net of income tax benefits of $24, $24 and $18,
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 Continental, 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, 1996, 11,019,157 shares each of Media Stock and Communications
Stock had been allocated from the LESOP to participants' accounts while
2,132,291 and 1,865,494 shares of Media Stock and Communications Stock,
respectively, 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 Media Group and the Communications
Group as well as dividends on unallocated shares held by the LESOP ($5, $8 and
$11 in 1996, 1995 and 1994, respectively), are used for debt service. Beginning
with the dividend paid in fourth-quarter 1995, dividends on allocated shares are
paid annually to participants. Previously, dividends on allocated shares were
used for debt service with participants receiving additional shares from the
LESOP in lieu of dividends. Tax benefits related to dividend payments on
eligible shares in the savings plan have been allocated to the Communications
Group, which paid the dividends.
Media Group recognizes expense based on the cash payments method.
Contributions to the plan related to the Media Group were $12, $16 and $12 in
1996, 1995 and 1994, respectively, of which $2, $3 and $3, respectively, have
been classified as interest expense.
NOTE 15: STOCK INCENTIVE PLANS
The Media Group and Communications Group participate in the stock incentive
plans maintained by U S WEST for executives and other employees and
nonemployees, primarily members of the Board. 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.
Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Media Group and one Communications Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
The maximum aggregate number of shares of Media Stock that may be granted in
any 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 U S WEST's treasury) on the first day of such calendar year. In the
C-52
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: STOCK INCENTIVE PLANS (CONTINUED)
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 granted may be exercised no
later than 10 years after the grant date.
During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in earnings in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," was $1 and $3
in 1996 and 1995, respectively all of which related to Plan modifications. No
compensation expense was recognized in 1994.
U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but continues to account for the Plan under APB
Opinion No. 25. Had compensation cost for the Plan been determined consistent
with the fair value based accounting method under SFAS No. 123, Media Group pro
forma net income (loss) and earnings (loss) per share would have been the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995
------------------------ --------------------------
LOSS PER EARNINGS
NET LOSS SHARE NET INCOME PER SHARE
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
As reported.................................... $ (71) $ (0.16) $ 141 $ 0.29
Pro forma...................................... (82) (0.18) 140 0.29
</TABLE>
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
C-53
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: STOCK INCENTIVE PLANS (CONTINUED)
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
in 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Risk-free interest rate......................................................... 6.30% 6.00%
Expected life................................................................... 5.0 years 5.0 years
Expected volatility............................................................. 28.5% 28.5%
</TABLE>
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
MEDIA GROUP U S WEST, INC.
------------------------- ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES* PRICE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding January 1, 1994.......................... 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(1)......................................... 4,814,856 41.12
Exercised.......................................... (430,631) 34.03
Canceled or expired(1)............................. (1,927,083) 37.02
----------- -----------
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
------------ -----------
Granted............................................ 5,523,728 19.36
Exercised.......................................... (507,329) 14.93
Canceled or expired................................ (610,471) 17.86
------------ -----------
Outstanding December 31, 1996........................ 14,114,094 $ 17.49
------------ -----------
------------ -----------
</TABLE>
- ------------------------------
* Includes options granted in tandem with SARs.
(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e. stock grant).
Options to purchase 4,867,207 and 3,021,166 shares of Media stock at
weighted-average exercise prices of $16.74 and $14.89 were exercisable at
December 31, 1996 and 1995, respectively.
C-54
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------------------------------------- ------------ ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$10.10 - $14.46.......................... 3,009,307 6.81 $ 14.23 937,900 $ 13.73
$14.51 - $16.93.......................... 2,920,683 6.86 15.75 1,608,658 15.38
$16.98 - $17.88.......................... 2,827,829 8.63 17.64 928,958 17.63
$17.94 - $20.50.......................... 2,938,175 8.10 19.85 1,391,691 19.74
$20.63 - $21.13.......................... 2,418,100 9.24 20.63 -- --
------------ --- ----------- ---------- -----------
Total................................ 14,114,094 7.87 $ 17.49 4,867,207 $ 16.74
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 5,523,728 and 4,886,436 Media Group options were granted in 1996
and 1995, respectively, of which 249,827 and 1,751,936 were modified options
revalued as new grants. The weighted-average grant date fair value of Media
Group options granted during the year, inclusive of modified options, using the
Black-Scholes option-pricing model was $7.10 and $6.07 for 1996 and 1995,
respectively. Excluding the modifications, the weighted-average grant date fair
value was $7.23 and $6.45, respectively. The exercise price of Media Group stock
options, excluding modified options, equals the market price on the grant date.
The exercise prices of modified stock options may be greater or less than the
market price on the revaluation date.
Approximately 2,200,000 and 1,420,000 shares of Media Stock were available
for grant under the plans in effect at December 31, 1996 and 1995, respectively.
Approximately 16,314,000 shares of Media Stock were reserved for issuance under
the Plan at December 31, 1996.
NOTE 16: 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.
Effective January 1, 1997, Continental's defined benefit pension plan was merged
into the U S WEST plan. 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 it had funded separately its
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
C-55
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
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
1996, 1995 or 1994. 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 (credit) and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period....................... $ 203 $ 173 $ 197
Interest cost on projected benefit obligation........................... 575 558 561
Actual return on plan assets............................................ (1,509) (1,918) 188
Net amortization and deferral........................................... 726 1,185 (946)
--------- --------- ---------
Net pension cost (credit)................................................. $ (5) $ (2) $ 0
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1996, 1995 and 1994.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$6,544 and $5,839, respectively................................................... $ 7,446 $ 6,617
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds.............................. $ 10,958 $ 9,874
Less: Projected benefit obligation................................................. 8,310 8,450
--------- ---------
Plan assets in excess of projected benefit obligation.............................. 2,648 1,424
Unrecognized net (gain)............................................................ (1,502) (101)
Prior service cost not yet recognized in net periodic pension cost................. 31 (62)
Balance of unrecognized net asset at January 1, 1987............................... (626) (705)
--------- ---------
Prepaid pension cost............................................................... $ 551 $ 556
--------- ---------
--------- ---------
</TABLE>
C-56
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate.................................................................................. 7.50% 7.00%
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 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 in 1996, 1995 and 1994. The service and interest costs attributed
to the Media Group for 1996 were $25 and $72, respectively, and the projected
benefit obligation at December 31, 1996 was $1,081.
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 U S WEST'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.
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 medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.............................. $ 70 $ 65 $ 75
Interest on accumulated benefit obligation..................................... 259 267 260
Actual return on plan assets................................................... (231) (415) 4
Net amortization and deferral.................................................. 68 286 (99)
--------- --------- ---------
Net postretirement benefit costs............................................... $ 166 $ 203 $ 240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1996, 1995 and 1994.
C-57
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees........................................................................... $ 2,255 $ 2,137
Fully eligible plan participants................................................... 347 327
Other active plan participants..................................................... 1,289 1,224
--------- ---------
Total accumulated postretirement benefit obligation.................................. 3,891 3,688
Unrecognized net gain................................................................ 534 539
Unamortized prior service cost....................................................... 32 (34)
Fair value of plan assets, primarily stocks, bonds and life insurance(1)............. (2,063) (1,845)
--------- ---------
Accrued postretirement benefit obligation............................................ $ 2,394 $ 2,348
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155
and $94, respectively, in 1996, and $210 and $112, respectively, in 1995.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate......................................................................... 7.50% 7.00%
Medical cost trend rate*.............................................................. 8.00% 9.00%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5.5
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 1996 net postretirement benefit cost by approximately $27 and
increased the 1996 accumulated postretirement benefit obligation by
approximately $299.
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 currently has no
intention to split the plans. For purposes of determining benefit costs, U S
WEST allocates the assets based on historical contributions for postretirement
medical costs, and on the ratio of Group to total salaries for life plan
participants.
POSTRETIREMENT MEDICAL AND LIFE COSTS. The service and interest components
of net postretirement medical benefit costs are calculated for the Media Group
based on the population characteristics of the Group. Since funding of
postretirement medical costs is voluntary, return on assets is attributed to the
Media Group based on historical funding. The Media Group has historically funded
the maximum annual
C-58
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
tax deductible contribution for management employees and the amount of annual
expense for occupational employees. The Media Group periodically reviews its
funding strategy and future funding amounts, if any, will be based upon the cash
requirements of the Group.
Net postretirement life costs, and funding requirements, if any, are
allocated to the Media Group in the same manner as pension costs. U S WEST will
generally fund the amount allowed for tax purposes. No funding of postretirement
life insurance occurred in 1996, 1995 and 1994. U S WEST believes its method of
allocating postretirement life costs is reasonable.
Net postretirement medical benefit and life costs recognized by the Media
Group for 1996, 1995 and 1994 were $12, $14 and $11, respectively. The
percentage of postretirement medical assets attributed to the Media Group at
December 31, 1996 and 1995, based upon historical voluntary contributions, was 4
percent. The aggregate accumulated postretirement medical and life benefit
obligation attributable to the Media Group was $199 at December 31, 1996.
NOTE 17: INCOME TAXES
The components of the provision (benefit) for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.............................................................. $ 61 $ 47 $ 50
Deferred............................................................. (92) 48 104
--- --------- ---------
(31) 95 154
Foreign:
Current.............................................................. 2 6 --
Deferred............................................................. 30 33 14
--- --------- ---------
32 39 14
State and local:
Current.............................................................. 8 8 (6)
Deferred............................................................. (11) 21 42
--- --------- ---------
(3) 29 36
--- --------- ---------
Provision (benefit) for income taxes................................... $ (2) $ 163 $ 204
--- --------- ---------
--- --------- ---------
</TABLE>
U S WEST paid $693, $566 and $313 for income taxes in 1996, 1995 and 1994,
respectively, inclusive of the capital assets segment, of which $60, $55 and
($178) related to the Media Group.
C-59
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 17: INCOME TAXES (CONTINUED)
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN PERCENT)
Federal statutory tax rate.......................................... 35.0 35.0 35.0
Foreign taxes -- net of federal effect.............................. (28.2) 8.3 1.9
State income taxes -- net of federal effect......................... 2.7 6.1 4.9
Amortization of goodwill............................................ (19.9) 2.5 --
Leverage lease rate adjustment...................................... 14.6 -- --
Other............................................................... (1.5) 1.1 0.7
--------- --------- ---------
Effective tax rate.................................................. 2.7 53.0 42.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
"Other" tax rate adjustments include prior period adjustments, meals and
entertainment expense disallowance, lobbying expense disallowance and
miscellaneous other deductions and disallowances.
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.............................................. $ 384 $ 107
Leases..................................................................... 673 662
State deferred taxes -- net of federal effect.............................. 956 178
Intangible assets.......................................................... 2,415 112
Investments................................................................ 373 213
Other...................................................................... 57 12
--------- ---------
Deferred tax liabilities................................................. 4,858 1,284
--------- ---------
Postemployment benefits, including pension................................. 34 22
Assets held for sale and other............................................. 138 98
Currency translation....................................................... 22 15
Start-up expenditures...................................................... 13 17
Net operating loss and tax credit carryforwards............................ 466 --
Valuation allowance........................................................ (387) --
State deferred taxes -- net of federal effect.............................. 99 33
Other...................................................................... 244 55
--------- ---------
Deferred tax assets...................................................... 629 240
--------- ---------
Net deferred tax liability................................................. $ 4,229 $ 1,044
--------- ---------
--------- ---------
</TABLE>
In connection with the Continental Merger, Media Group acquired net
operating loss carryforwards of approximately $1,164 for federal income tax
purposes, expiring in various years through 2011. Media Group also acquired
investment tax credit carryforwards of approximately $50, expiring in various
years through 2005. A valuation allowance of $387 has been established for the
carryforwards due to limitations on utilization which exist for U S WEST. If in
future periods the realization of the carryforwards becomes
C-60
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: INCOME TAXES (CONTINUED)
more likely than not, any reduction in the valuation allowance will be allocated
to reduce goodwill and acquired intangible assets.
The current portion of the deferred tax asset was $42 and $24 at December
31, 1996 and 1995, respectively, resulting primarily from compensation-related
items.
The net deferred tax liability includes $671 and $686 in 1996 and 1995,
respectively, related to the capital assets segment.
In 1996 and 1995 foreign operations contributed pretax losses of $315 and
$35, respectively, in 1994 foreign operations contributed pretax earnings of
$43.
NOTE 18: 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 $17, $20 and $29 in 1996, 1995
and 1994, respectively.
TELECOMMUNICATIONS SERVICES. The domestic wireless operations purchase
telecommunications network access and usage from the Communications Group. The
services are purchased at market price or fully distributed cost. The charges
for these services were $43, $40 and $30 in 1996, 1995 and 1994, respectively.
CABLE TELEVISION PROGRAMMING. The domestic cable operations purchase cable
television programming from TWE. The programming is purchased at market price.
The charges for these services were $23 and $10 in 1996 and 1995, respectively.
NOTE 19: COMMITMENTS AND CONTINGENCIES
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Continental and the Federal Communications Commission have entered into a
"social contract" as an alternative form of rate regulation for cable operators.
The social contract is a six-year agreement covering all of Continental
franchises. The social contract requires Continental to, among other things,
invest at least $1.7 billion in domestic system rebuilds and upgrades through
2000 to expand channel capacity and improve system reliability and picture
quality. At December 31, 1996, $870 is remaining on this commitment.
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 approved a plan to dispose of the capital assets
segment through the sale of segment assets and businesses. 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.
C-61
<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
and 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 1996 or 1995. Prior to January 1, 1995, the
entire capital assets segment was accounted for as discontinued operations in
accordance with APB Opinion No. 30.
Through a series of transactions in 1995 and 1994, Media Group reduced its
ownership in FSA to 50.3 percent and its voting interest to 41.7 percent. During
the second quarter of 1996, Media Group received $98 from the sale of 3,750,000
shares of FSA common stock. This sale reduced Media Group's ownership in FSA to
approximately 40 percent. Also in second-quarter 1996, U S WEST issued DECS due
May 15, 1999. The shares of FSA to be delivered upon maturity of the DECS,
combined with the exercise of outstanding options held by Fund American
Enterprises Holdings, Inc. to purchase FSA shares would, if consummated, result
in a complete disposition of Media Group's ownership in FSA. (See Note 9 -- Debt
- -- to the U S WEST Media Group Combined Financial Statements.)
In fourth-quarter 1995, U S WEST issued DECS to reduce its investment in
Enhance Financial Services Group, Inc. ("Enhance") by December 1998. The shares
of Enhance to be delivered upon maturity of the DECS would, if consummated,
result in a complete disposition of Media Group's ownership in Enhance. (See
Note 9 -- Debt -- to the U S WEST Media Group Combined Financial Statements.)
U S WEST Real Estate, Inc. has sold various assets for proceeds of $156,
$120 and $327 in each of the three years ended December 31, 1996, respectively.
The sales proceeds were in line with estimates. Proceeds from sales were
primarily used to repay related debt. Media Group expects to substantially
complete the liquidation of this portfolio by 1998. The remaining balance of
assets subject to sale is approximately $287, net of reserves, as of December
31, 1996.
Building sales and operating revenues of the capital assets segment were
$223, $237 and $553 in 1996, 1995 and 1994, respectively. Subsequent to June 1,
1993, income (loss) from the capital assets segment 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.
C-62
<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,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 21 $ 38
Finance receivables -- net............................................... 869 953
Investment in real estate -- net of valuation allowance.................. 182 368
Bonds, at market value................................................... 146 149
Investment in FSA........................................................ 326 384
Other assets............................................................. 165 177
--------- ---------
Total assets............................................................. $ 1,709 $ 2,069
--------- ---------
--------- ---------
LIABILITIES
Debt..................................................................... $ 481 $ 796
Deferred income taxes.................................................... 671 686
Accounts payable, accrued liabilities and other.......................... 137 148
Minority interests....................................................... 11 10
--------- ---------
Total liabilities........................................................ 1,300 1,640
--------- ---------
Net investment in assets held for sale................................... $ 409 $ 429
--------- ---------
--------- ---------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases that Media Group 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,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Receivables................................................................ $ 821 $ 921
Unguaranteed estimated residual values..................................... 444 447
--------- ---------
1,265 1,368
Less: Unearned income...................................................... 380 390
Credit loss and other allowances...................................... 16 25
--------- ---------
Finance receivables -- net................................................. $ 869 $ 953
--------- ---------
--------- ---------
</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.
The amortized cost of $147 and $149 at December 31, 1996 and 1995,
respectively, of investments in debt securities approximates market value. 1996
net unrealized losses of $7 (net of deferred taxes of $5) and 1995 net
unrealized gains of $39 (net of deferred taxes of $21), are included in Media
Group equity.
C-63
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
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 2001 1996 1995
- ------------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Above 5% to 6%.................................. $ -- $ -- $ -- $ -- $ -- $ -- $ 10
Above 6% to 7%.................................. 15 -- -- -- -- 15 54
Above 7% to 8%.................................. -- -- -- -- -- -- 5
Above 8% to 9%.................................. -- -- 150 4 -- 154 138
Above 9% to 10%................................. -- 5 -- -- -- 5 53
Above 10% to 11%................................ -- -- -- -- -- -- 29
--------- --------- --------- --------- --------- --------- ---------
$ 15 $ 5 $ 150 $ 4 $ -- 174 289
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allocated to the capital assets
segment -- net................................ 307 507
--------- ---------
Total........................................... $ 481 $ 796
--------- ---------
--------- ---------
</TABLE>
Debt of $71 at December 31, 1995, 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,
-------------------------------------
DECEMBER 31,
--------------------------------------------------
1995
1996 -------------------------------------
-------------------------------------------------- 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(1).............. $ 350 1997 5.55 9.01 $ 380 1996-1997 5.96
Fixed to variable(1).............. 350 1997 7.32 5.61 380 1996-1997 7.29
Variable-rate basis
adjustment(2)................... 10 1997 6.42 5.81 10 1997 5.92
<CAPTION>
PAY
---------
<S> <C>
Variable to fixed(1).............. 9.03
Fixed to variable(1).............. 5.87
Variable-rate basis
adjustment(2)................... 5.85
</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 U.S. Treasury rates is swapped to a
LIBOR-based interest rate.
C-64
<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 OF MATURITY 1996 1995
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
0 to 5 Years................................................................. $ 416 $ 639
5 to 10 Years................................................................ 436 450
10 to 15 Years............................................................... 8 10
--------- ---------
Total........................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1996 1995
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate..................................................... $ 341 $ 442
Corporate secured.......................................................... 519 657
--------- ---------
Total........................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</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 1996 1995 1994
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................... $ 26 $ 44 $ 54
Net finance receivables.......................................... 859 931 981
Total assets..................................................... 1,058 1,085 1,331
Total debt....................................................... 236 274 533
Total liabilities................................................ 998 1,024 1,282
Equity........................................................... 60 61 49
</TABLE>
C-65
<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>
1996
Sales and other revenues............................... $ 613 $ 658 $ 694 $ 990
Income (loss) before income taxes...................... 20 2 39 (134)
Net income (loss)...................................... 3 (11) 18 (81)
Earnings (loss) per common share....................... -- (0.03) 0.04 (0.16)
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
Earnings per common share before
extraordinary item................................... 0.03 0.05 0.07 0.15
Earnings per common share.............................. 0.03 0.05 0.06 0.15
</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
are assumed to be equal to the average common shares outstanding for U S WEST,
Inc.
1996 second-quarter net income includes a charge of $19 ($0.04 per share)
related to the sale of the Company's cable television interests in Norway,
Sweden and Hungary. 1996 fourth-quarter net income includes net losses of $71
and losses available for common stock of $77 ($0.15 per share) related to the
Continental Merger.
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.
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------------
HIGH LOW CLOSE
--------- --------- ---------
<S> <C> <C> <C>
(WHOLE DOLLARS)
PER SHARE MARKET DATA
1996
First quarter................................................ $ 23.000 $ 18.875 $ 20.625
Second quarter............................................... 21.000 16.875 18.250
Third quarter................................................ 18.875 14.375 16.875
Fourth quarter............................................... 19.875 15.375 18.375
1995
Fourth quarter(1)............................................ $ 20.000 $ 17.375 $ 19.000
</TABLE>
- ------------------------------
(1) Fourth-quarter 1995 per share market data is for the period November 1,
1995 through December 31, 1995.
C-66
<PAGE>
U S WEST MEDIA GROUP
(DOLLARS IN MILLIONS)
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,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Sales and other revenues......................................... $ 6,367 $ 5,115 $ 4,213
Operating expenses............................................... 4,894 3,966 3,311
--------- --------- ---------
EBITDA(1)........................................................ 1,473 1,149 902
Depreciation and amortization.................................... 1,014 673 501
--------- --------- ---------
Operating income................................................. 459 476 401
Income (loss) before extraordinary item.......................... (71) 145 276
Net income (loss)................................................ $ (71) $ 141 $ 276
--------- --------- ---------
--------- --------- ---------
</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.
C-67
<PAGE>
abcde
[LOGO]
PRINTED ON RECYCLED PAPER
<PAGE>
EXHIBIT 10j
U S WEST
EXECUTIVE FINANCIAL COUNSELING PLAN
ARTICLE I
PURPOSE
The U S WEST Executive Financial Counseling Plan (the "Plan") has been
established by U S WEST, Inc. to provide certain officers and executives of
U S WEST, Inc. and its subsidiaries (the "Company") with the opportunity to
understand more fully and maximize the value of the compensation and benefits
they receive from the Company through comprehensive financial counseling and
related services. By this document, the Human Resources Committee of the Board
of Directors of U S WEST, Inc. has amended and restated the Plan, effective as
of July 1, 1996.
ARTICLE II
DEFINITIONS
2.1 "Cause" shall mean (unless another definition is agreed to in writing by
U S WEST, Inc. and the Participant) termination by the Company because of (a)
the Participant's willful and continued failure to substantially perform his or
her duties (other than any such failure resulting from the Participant's
incapacity due to physical or mental impairment) after a written demand for
substantial performance is delivered to the Participant by the Company, which
demand specifically identifies the manner in which the Company believes the
Participant has not substantially performed his or her duties, (b) the willful
conduct of the Participant which is demonstrably and materially injurious to the
Company, monetarily or otherwise, or (c) the conviction of the Participant for a
felony by a court of competent jurisdiction.
2.2 "Committee" shall mean the Human Resources Committee of the U S WEST Board
of Directors, or its delegate.
2.3 "Company" shall mean U S WEST, Inc., its subsidiaries, affiliates and any
successors thereof.
2.4 "Consultant" shall mean a firm or individual that is a professional
provider of financial counseling and related services.
2.5 "Participant" shall mean those individuals of the Company selected to
participate in the Plan as set forth in Article III.
2.6 "Plan" shall mean the U S WEST Executive Financial Counseling Plan.
2.7 "Plan Year" shall mean the year beginning on July 1 and ending on June 30.
1
<PAGE>
2.8 "Preferred Provider" shall mean a Consultant with whom the U S WEST, Inc.
has entered into an agreement for such Consultant to provide Services at a
negotiated fee for those Participants who so elect to receive their Services.
2.9 "Retirement" shall mean, for any Participant, that such Participant has
retired from the Company 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 U S WEST, Inc. and the Participant.
2.10 "Services" shall mean financial counseling and related services
provided to a Participant by a Consultant, including without limitation,
estate planning, insurance planning, retirement planning, and tax planning
and preparation, except that Services shall not include services provided in
connection with a tax audit.
ARTICLE III
ELIGIBILITY
3.1 Eligibility Criteria. Eligibility for participation in the Plan shall be
limited to (i) the Chief Executive Officer of U S WEST, Inc.; (ii) Band I, Band
II, and Band III officers of the Company; and (iii) such other Company
executives selected to participate in the Plan by the Committee or its delegate.
Except as provided in Section 3.2, individuals who are eligible to participate
in the Plan on any day during a Plan Year shall be eligible for the full
financial counseling allowance provided under the Plan for such Plan Year as set
forth in Article IV.
3.2 Discontinuance of Employment; Ineligibility. A Participant who ceases to
meet the eligibility criteria for participation in the Plan during any Plan Year
as set forth in Section 3.1 due to the Participant's discontinuance of
employment with the Company (other than for Cause) or change of position within
the Company shall continue to be eligible to participate in the Plan or, within
the sole discretion of the Committee, to receive a payment equal to the value of
such continued participation, for the remainder of the Plan Year and for such
additional period, if any, as provided by written agreement between the
Participant and the Company. If a Participant's employment with the Company
terminates for Cause, such Participant's participation in the Plan shall cease
immediately.
3.3 Retirement. A Participant who ceases to meet the eligibility criteria for
participation in the Plan during any Plan Year as set forth in Section 3.1 due
to Retirement shall be eligible to participate in the Plan or, within the sole
discretion of the Committee, to receive a payment equal to the value of such
continued participation, for an additional Plan Year in addition to, and
immediately following, the continued eligibility for participation set forth in
Section 3.2.
2
<PAGE>
ARTICLE IV
FINANCIAL COUNSELING ALLOWANCE
4.1 Chief Executive Officer and Band I Officers of the Company. The Chief
Executive Officer and each Band I officer of the Company shall be entitled to
receive a benefit equal to 100 percent of the cost of Services incurred by the
Participant during any Plan Year, whether or not provided by a Preferred
Provider, up to such amount as may be determined by the Committee or its
delegate from time to time.
4.2 Band II and Band III Officers of the Company and Other Participants. Each
Band II and Band III officer of the Company and any other Participant shall be
entitled to receive Services from a Consultant during any Plan Year. If such
Consultant is a Preferred Provider, U S WEST, Inc. shall pay to such Preferred
Provider a flat fee for Services provided during the Plan Year in such amount as
may be negotiated by U S WEST, Inc. and approved by the Committee or its
delegate from time to time. Alternatively, each such Participant shall be
entitled to receive, upon submission of invoice to the U S WEST, Inc.,
reimbursement in an amount equal to 75 percent of the cost of Services provided
by any Consultants other than a Preferred Provider, up to a total of $4,500,
incurred by the Participant during any Plan Year. If a Participant submits
invoices for reimbursement under the Plan for Services from any Consultants
other than a Preferred Provider at any time during the Plan Year, the total
benefit payable for Services provided to such Participant for the Plan Year
shall not exceed $4,500 in the aggregate.
4.3 Preferred Provider. If a Participant other than the Chief Executive
Officer or a Band I officer of the Company elects to receive Services from a
Preferred Provider, such Participant will be deemed to have received a benefit
for each quarter of a Plan Year (or part thereof) in which the Participant
maintains a relationship with such Preferred Provider, regardless of the amount
of Services actually provided to the Participant. The value of such benefit to
the Participant shall be equal to the fee paid by U S WEST, Inc. to the
Preferred Provider, the amount of which shall be negotiated by U S WEST, Inc.
and approved by the Committee or its delegate from this to time. A Participant
may discontinue his or her relationship with a Preferred Provider at any time,
effective upon the expiration of the current quarter of the Plan Year, by
providing written notice to U S WEST, Inc. and the Preferred Provider.
ARTICLE V
ARBITRATION
5.1 Scope of Arbitration. Any claim, controversy or dispute between a
Participant and the Company, whether sounding in contract, statute, tort,
fraud, misrepresentation, discrimination or any other legal theory,
including, but not limited to, disputes relating to the interpretation of
this 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
3
<PAGE>
1993; claims under the Americans with Disabilities Act of 1990, as
amended; claims under the Fair Labor Standards Act of 1938, as amended; claims
under the Employee Retirement Income Security Act of 1974, as amended; claims
under the Colorado Anti-Discrimination Act; or claims under any other similar
federal, state or local law or regulation, whenever brought, shall be resolved
by arbitration. The only legal claims between Participant and the Company that
are not included for arbitration within this Plan are claims by Participant for
workers' compensation or unemployment compensation benefits and/or claims for
benefits under any Company benefit plan, if the plan does not provide for
arbitration of such disputes. In consideration of any benefit provided to a
Participant under the terms of this Plan, such Participant voluntarily,
knowingly and intelligently waives any right he or she may otherwise have to
seek remedies in court or other forums, including the right to a jury trial and
the right to recover punitive damages on any common law and/or contract claims.
The Federal Arbitration Act, 9 U.S.C. Sections 1-16 ("FAA") shall govern the
arbitrability of all claims, provided that they are enforceable under the FAA,
as it may be amended from time to time. In the event the FAA does not govern,
the Colorado Uniform Arbitration Act shall apply. Additionally, the substantive
law of Colorado, to the extent it is consistent with the terms stated in this
Plan for arbitration, shall apply to any common law claims. This arbitration
provision supersedes any other arbitration agreement between Participant and the
Company to the extent they are inconsistent.
5.2 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 directly
or indirectly to Participant's employment with the Company or to the termination
of Participant's employment will be conducted under the AAA Employment Dispute
Resolution Rules, effective November 1993. The arbitrator shall be chosen from
a state other than Participant's state of residence and other than Colorado.
Other than as set forth herein, the arbitrator shall have no authority to add
to, detract from, change, amend, or modify existing law. All arbitration
proceedings, including without limitation, settlements and awards, under this
Plan will be confidential. The parties shall share equally the hourly fees of
the arbitrator. The Company shall pay the expenses (such as travel and lodging)
of the arbitrator. The prevailing party in any arbitration may be entitled to
receive reasonable attorneys' fees. The arbitrator's decision and award shall be
final and binding, as to all claims that were, or could have been, raised in the
arbitration, and judgment upon the award rendered by the arbitrator may be
entered to any court having jurisdiction thereof. If any party hereto files a
judicial or administrative action asserting claims subject to this arbitration
provision, and another party successfully stays such action and/or compels
arbitration of such claims, the party filing said action shall pay the other
party's costs and expenses incurred in seeking such stay and/or compelling
arbitration, including reasonable attorneys' fees.
5.3 Reformation. If any provision of this Article V is held by any
arbitrator or court of competent jurisdiction to be enforceable only if such
provision is modified in scope, then the Company and the Participant shall
consider such provision to be so amended and
4
<PAGE>
modified to comply with such determination or
order. All other terms and provisions of the Plan shall remain in full force
and effect as originally written or modified pursuant to Section 6.6.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.1 Costs and Expenses. The costs and expenses of administering the Plan shall
be borne by U S WEST, Inc. and shall not be charged against any Participant or
the Plan benefit of any Participant.
6.2 Responsibility Limit of the Company. The Company shall not be responsible
or otherwise held liable for any advice or any other Service or other matters
whatsoever provided or not provided to a Participant by any Consultant, whether
or not a Preferred Provider, or for failure of a Consultant to provide any such
Service, advice or other matter or for any loss or other loss experienced by any
Participant or by any other party as a result of any such advice or service. To
the extent the Company is held so liable, the Company shall be indemnified in
full by any Consultant involved in any way with the matter giving rise to the
liability.
6.3 Inalienability of Benefits. A Participant's right to benefits under the
Plan are not subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, attachment or garnishment by creditors of the
Participant or the Participant's beneficiary.
6.4 Taxation. The Company shall have the right to deduct from a Participant's
regular salary any federal, state or local income and employment taxes that it
is required by law to withhold.
6.5 Effect on Employment. Nothing contained in this Plan or any related
agreement or other related documentation shall affect, or be construed as
affecting, the terms of employment of any Participant. Nothing contained in
this Plan or any related agreement shall impose, or be construed as imposing,
any obligation on the Company to continue the employment of any Participant or
any Participant to remain in the employ of the Company or alter the "at will"
nature of any Participant's employment.
6.6 Amendment or Termination of Plan. The Committee or its delegate shall have
the right to amend, modify, suspend or terminate this Plan at any time for any
reason and without prior notice to Participants.
6.7 Administration. The Plan shall be administered and interpreted 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 other agents, such
duties as it may deem advisable, and the Committee or any person to whom it has
delegated such duties may employ one or
5
<PAGE>
more persons to render advice on any responsibility that the Committee or
such person or any Participant may have under the Plan. The Company shall
indemnify members of the Committee and any agent of the Committee who is also
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
gross negligence or willful misconduct.
6.8 Governing Law. This Plan and actions taken in connection with this Plan
shall be governed and construed in accordance with the laws of the State of
Colorado.
6
<PAGE>
EXHIBIT 10w
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Post Post Office Box 6508
Englewood, Colorado 80155-6508
303 793 6500
Richard D. McCormick
Chairman and Chief Executive Officer
[LOGO]
January 31, 1997
Charles P. Russ, III
Executive Vice President, General Counsel and Secretary
U S WEST, Inc.
7800 E. Orchard Road, Suite 200
Englewood, CO 80111
Dear Charlie:
Congratulations on the expansion of your responsibilities! The experience and
expertise that you bring to your new role will continue to add value toward
meeting U S WEST's objectives. This letter supplements all prior
agreements that set forth the terms of your employment and supersedes
those prior agreements only as to the terms specifically addressed in this
letter.
In connection with your expanded role, effective January 1, 1997, your
annual base salary will be $490,000. Your opportunity for salary growth is
based on your performance in a range that is both competitive and
consistent with your responsibilities. Also effective January 1, 1997, your
target Short Term Incentive Award opportunity will be 75% of your base
salary, or $367,500.
You will continue to participate in the U S WEST long term incentive
programs (LTIP). The LTIP provides the potential for you to earn a
significant level of compensation linked directly to the performance of
the Company over the long term. In conjunction with your new role, your
1997 LTIP opportunity is $1,000,000. Your LTIP will take the form of Dividend
Equivalent Units (DEUs) and stock options as follows. You will be
granted 65,000 DEUs for the 1997- 1999 performance period. Any DEU payout
will be based on achievement of U S WEST Communications" strategic
imperatives and be subject to plan provisions. You also will be granted
38,000 options to purchase shares of U S WEST Communications Group stock and
63,000 options to purchase shares of U S WEST Media Group stock. These
options are nonqualified grants that vest in one-third increments each year
for three years, as governed by the terms of the Stock Option Agreements and
the 1994 U S WEST Stock Plan. The grant prices of these stock option grants
was determined based upon the closing prices of the stock on the date of
grant (January 2, 1997).
Enclosed is your personalized one page summary outlining your
opportunities this year. Enclosed also is your Long Term Incentive
grant, including your Stock Option Agreement. Please retain one copy
of the Agreement for your files and return the signed original in the
enclosed envelope to Debbie Meadors in the Executive Compensation
organization by March 15, 1997.
<PAGE>
Charles P. Russ, III
January 31, 1997
Page 2
For all outstanding vested stock options that you hold upon leaving the
Company, you shall receive the same treatment as all "retired"
employees under the terms of the 1994 U S WEST Stock Plan.
Specifically, under that plan, vested stock options held at the time of
retirement are exercisable for the full life of the option, subject to other
applicable terms of the option agreements. For unvested stock options
that you hold upon leaving the Company, the vesting terms of your
original offer letter dated May 11, 1992, which provide for immediate vesting
of all stock options granted to you between 1992 and 1996, shall
continue to apply. Any unvested stock options granted to you subsequent
to 1996 that you hold upon leaving the Company shall continue to vest, as
currently provided for all retirees under the 1994 U S WEST Stock Plan. All
unvested stock options that you hold upon leaving the Company, regardless of
their date of grant, once vested, shall be exercisable for the full life of
the option, as currently provided for all retirees under the 1994 U S
WEST Stock Plan.
Upon leaving the Company, you are entitled to a supplemental pension
arrangement as approved by the Human Resources Committee of the Board of
Directors on June 7, 1996. The supplemental pension arrangement
provides for an increase to you, for each year of your employment with the
Company between age 52 and age 65, of the percentage of final average
compensation (FAC') to be provided to you as a pension benefit. The
calculation of your FAC shall be as defined in the U S WEST Nonqualified
Pension Plan, except that your FAC shall be calculated based on the highest
consecutive 60 months of your employment regardless of whether those
months are in the last 120 months of employment.
The table below shows the percentage of FAC that you will receive as an
annual pension benefit, from all U S WEST qualified and nonqualified pension
plans, depending on the age at which you leave the Company:
Age Age
Upon Termination Percent Upon Termination Percent
- ---------------- ------- ---------------- -------
52 39% 59 52%
53 41% 60 54%
54 42% 61 56%
55 44% 62 57%
56 46% 63 58%
57 48% 64 59%
58 50% 65 60%
In keeping with the Human Resources Committee's intent to provide you with an
enhancement of the pension benefit in your original offer letter
dated May 11, 1992, you shall receive the greater benefit of (i) the
supplemental pension benefit set forth in this letter (as offset by the
NCR pension piece thereof as described further below) or (ii) the
supplemental pension benefit set forth in your original offer letter.
<PAGE>
Charles P. Russ, III
January 31, 1997
Page 3
You may elect to receive your pension benefit in the form of a lump sum or an
annuity, as further described below. If you leave the Company other than on
your birthday, the percentages will be adjusted upward on a pro rata basis,
using the number of days since your latest birthday divided by 365. For
example, if you leave the Company at age 60 and six months, the percentage
will be approximately 55%. The percentages shown will be applied against your
FAC, less any pension amount payable to you by your former employer, NCR. The
resulting annual benefit would then be paid in the same form of payment
that you have elected to receive your U S WEST Nonqualified Pension Plan
benefit. To determine the amount by which your U S WEST pension benefit shall
be offset, any such pension payments due to you from NCR over your expected
life shall be converted actuarially into the same form of payment that you
have elected to receive your U S WEST pension benefit, using the
assumptions set forth in the U S WEST Nonqualified Pension Plan. In making
this calculation of your pension benefit, no deduction shall be made for
any pension amounts paid to you by NCR in prior years.
In the event that NCR does not continue to make your current annual pension
payment, at any time, for any reason, U S WEST then will make you whole
immediately for the loss in the value to you of such unpaid
NCR pension amounts. If NCR ceases to make pension payments to you prior
to the date upon which your U S WEST pension is paid or begins to be paid, U
S WEST shall make payments to you in the amount of the NCR pension
payments, on the same schedule as you were receiving such payments
from NCR. U S WEST shall continue to make such payments through the
date on which your U S WEST pension is paid or begins to be paid. At
that time, you would then receive your U S WEST pension with no offset for
any NCR payments due but unpaid from NCR. If you elect to receive your U S
WEST pension benefit as a lump sum, and NCR ceases to make pension
payments to you at some point after your U S WEST pension is paid, U S WEST
shall pay to you the actuarial present value of the payments that remain
due to you from NCR, using the assumptions set forth in the U S WEST
Nonqualified Pension Plan. If you elect to receive your U S WEST pension as
an annuity, and NCR ceases to make pension payments to you after your U S
WEST pension payments begin, the amount of such payments shall be
increased by the amount of the NCR payments. The commitment of U
S WEST, as described above, to make you whole for the loss in value of any
unpaid NCR pension amounts shall extend fully and immediately to your
designated beneficiary, or any contingent beneficiaries, in the event of
your death, with payments commencing immediately upon discontinuation
of payments from NCR, for whatever reason, whether that discontinuance occurs
prior to, concurrent with, or after receipt of pension benefits from U S WEST.
Under the new disability benefit feature to the qualified U S WEST Pension
Plan recently approved by the Board of Directors for all management
employees, any disability benefit paid to a participant does not
affect the level of such participant's pension benefit. Consistent with this
Board approval, any disability benefit you may receive from U S WEST,
including without limitation, any incidental disability benefit from a
pension plan or any benefit under the executive disability plan
(whether received prior to, after or concurrent with any pension benefit),
<PAGE>
Charles P. Russ, III
January 31, 1997
Page 4
shall not be considered to be a pension payment and shall not offset any
pension payment from U S WEST.
Your benefit under the qualified U S WEST Pension Plan will be paid in
accordance with your distribution election made at the time you leave the
Company. The balance of your pension benefit, including this
supplemental pension benefit, will be paid in accordance with the
distribution election that you have made to receive your U S WEST
Nonqualified Pension Plan benefit.
Consistent with the design of your original offer letter to provide to you
pension features similar to those that you would have had if you
remained employed at NCR, in addition to the optional forms of
distribution set forth in the U S WEST Pension Plan, you may elect to receive
your nonqualified pension benefit, including this supplement, as an unreduced
life annuity with a 75 percent survivor benefit payable to your spouse over
her life or, in the event of your spouse's death, to any of your
children until they reach age 22. All available optional forms of benefit
will be calculated as provided for in the U S WEST Nonqualified Pension
Plan. As set forth previously in this letter, any such survivor benefit
election shall apply to your spouse or children only if you die after you
retire. In the event of your death prior to retirement, your designated
beneficiary or you:r contingent beneficiaries will receive the full value of
your personal retirement benefits, without limitation, assuming you
retired the day before your death.
Upon your retirement on or after your fifty-fifth birthday, or upon your
involuntary severance at any time, including without limitation,
severance on account of long-term disability or death, you will be
eligible for benefits as if "service pension eligible" and will receive the
equivalent benefits provided to service pension eligible employees
under all U S WEST plans and programs. If you terminate voluntarily
before age 55, while you will receive a pension benefit as noted in the above
table, you would not be considered as having "retired" nor would you be
eligible for benefits as if you were "service pension eligible," except to
the extent provided for in this letter, any Company plans or in other
letters or written agreements you may have with the Company.
The terms and conditions of this letter are binding on the Company's
successors and assigns, whether by law or otherwise, including without
limitation, in the event of a change of control of the Company.
The Human Resources Committee's approval of the compensation opportunities
and modified pension benefit described above reflects the Company's desire to
maintain appropriate incentives to retain your highly valued services in
the future.
Charlie, I look forward to your acceptance of these employment terms and
anticipate your continued strong performance and the contribution
you will make to the success of U S WEST.
<PAGE>
Charles P. Russ, III
January 31, 1997
Page 5
Please indicate your acceptance by signing below and returning to me at your
earliest convenience.
Sincerely,
Richard D. McCormick
I acknowledge receipt of this letter and accept the terms of my expanded
responsibilities as stated, which is conditioned upon my acceptance of the
terms stated in the letter.
- -------------------- --------------------
Charles P. Russ, III Date
cc: Sharon Naylor
<PAGE>
EXHIBIT 10y
Date
Name
U S WEST, Inc. Officer Title
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Englewood, Colorado 80111
Dear ________:
U S WEST, Inc., on behalf of itself, its subsidiaries and stockholders, and
any successor or surviving entity, wishes to encourage your continued service
and dedication in the performance of your duties, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined in
Subsection I(i)) of the Company (as defined in Subsection I(k)). The Board of
Directors of the Company (the "Board") believes that the prospect of a pending
or threatened Change of Control inevitably creates distractions, personal risks
and uncertainties for its executives, and that it is in the best interests of
U S WEST, Inc. and its stockholders to minimize such distractions to certain
executives. The Board further believes that it is in the best interests of the
Company to encourage its executives' full attention and dedication to their
duties, both currently and in the event of any threatened or pending Change of
Control.
Accordingly, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued retention of certain members of
the Company's management, including yourself, and the attention and dedication
of management to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change of
Control.
In order to induce you ("Executive") to remain in the employ of the
Company, and in consideration of your continued service to the Company, the
Company agrees that you shall receive the benefits set forth in this letter
agreement (the "Agreement") in the event that your employment with the Company
is terminated subsequent to a Change of Control in the circumstances described
herein. For purposes of this Agreement, references to employment with the
Company shall include employment with a Subsidiary of the Company (as defined in
Subsection I(y)).
I. Definitions
The meaning of each defined term that is used in this Agreement is set
forth below.
(a) AAA. The American Arbitration Association.
(b) Additional Pay. The meaning of this term is set forth in Subsection
IV(b).
(c) Agreement. The meaning of this term is set forth in the third
paragraph of this Agreement.
<PAGE>
(d) Agreement Payments. The meaning of this term is set forth in
Subsection IV(e)(i).
(e) Beneficiaries. The meaning of this term is set forth in Subsection
VI(c).
(f) Board. The meaning of this term is set forth in the first paragraph of
this Agreement.
(g) Business Combination. The meaning of this term is set forth in
Subsection I(i)(iii).
(h) Cause. For purposes of this Agreement, "Cause" shall mean Executive's
willful breach or failure to perform his employment duties. For purposes of
this Subsection I(h), no act, or failure to act, on the part of Executive shall
be deemed "willful" unless done, or omitted to be done, by Executive not in good
faith and without reasonable belief that such action or omission was in the best
interest of the Company. Notwithstanding the foregoing, Executive's employment
shall not be deemed to have been terminated for Cause unless and until the
Company delivers to Executive a certificate of a resolution duly adopted by the
affirmative vote of not less than seventy-five percent (75%) of the entire
membership of the Board, at a meeting of the Board called and held for such
purpose (after reasonable notice to Executive and an opportunity for Executive,
together with Executive's counsel, to be heard before the Board), finding that
in the good faith opinion of the Board, Executive has engaged in such willful
conduct and specifying the details of such willful conduct.
(i) Change of Control. For purposes of this Agreement, a "Change of
Control" shall be deemed to have occurred if there is a change of control of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided that, without limitation, such a
Change of Control shall be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)(2),
as currently in effect, of the Exchange Act) is or becomes a "beneficial
owner" (as determined for purposes of Regulation 13D-G, as currently in
effect, under the Exchange Act), directly or indirectly, of securities
representing twenty percent (20%) or more of the total voting power of all
of the Company's then outstanding voting securities. For purposes of this
Agreement, the term "person" shall not include: (i) the Company or any of
its Subsidiaries; (ii) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its Subsidiaries;
or (iii) an underwriter temporarily holding securities pursuant to an
offering of such securities;
(ii) during any period of two (2) consecutive calendar years,
individuals who at the beginning of such period constitute the Board and
any new director(s) whose election by the Board or nomination for election
by the Company's 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 such period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a majority
of the Board, but excluding for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A,
as currently in effect, of the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than
the Board;
(iii) the stockholders of the Company approve a merger, consolidation
or sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in each case, unless following such
Business Combination: (i) all or substantially all of the
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individuals and entities who were the "beneficial owners" (as determined for
purposes of Regulation 13D-G, as currently in effect, of the Exchange Act)
of the outstanding voting securities of the Company immediately prior to
such Business Combination beneficially own, directly or indirectly,
securities representing more than seventy percent (70%) of the total voting
power of the then outstanding voting securities of the corporation resulting
from such Business Combination or the parent of such corporation (the
"Resulting Corporation"); (ii) no "person" (as such term is used in Sections
13(d) and 14(d)(2), as currently in effect, of the Exchange Act), other than
a trustee or other fiduciary holding securities under an employee benefit
plan of the Company or the Resulting Corporation, is the "beneficial owner"
(as determined for purposes of Regulation 13D-G, as currently in effect, of
the Exchange Act), directly or indirectly, of voting securities
representing twenty percent (20%) or more of the total voting power of the
then outstanding voting securities of the Resulting Corporation; and (iii)
at least a majority of the members of the board of directors of the
Resulting Corporation were members of the Board at the time of the
execution of the initial agreement, or at the time of the action of the
Board, providing for such Business Combination;
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company;
(v) the Company: (A) redeems substantially all of the outstanding
shares of U S WEST Communications Group Common Stock or U S WEST Media
Group Common Stock in exchange for shares of one or more wholly-owned
subsidiaries of the Company that hold all or substantially all of the
assets that are attributed to that Group; (B) distributes to the
stockholders of U S WEST Communications Group or U S WEST Media Group the
shares of one or more wholly-owned subsidiaries that hold all or
substantially all of the assets attributed to that Group; (C) converts all
of the outstanding shares of U S WEST Communications Group Common Stock
into the shares of U S WEST Media Group Common Stock, or vice versa; (D)
distributes the stock of one or more wholly-owned subsidiaries holding all
or substantially all of the assets of the Company, under applicable law, at
a time when there are no classes of Common Stock that separately track the
performance of certain Company businesses; or (E) sells or otherwise
disposes of all or substantially all of the assets of the U S WEST
Communications Group or the U S WEST Media Group and distributes the net
proceeds of such sale or disposition to the holders of the common stock
related to such Group by dividend or redemption; or
(vi) any other event that a simple majority of the Board, in its sole
discretion, shall determine constitutes a Change of Control;
(vii) Notwithstanding any terms to the contrary contained in this
Subsection I(i), the following shall not constitute a Change of Control for
purposes of this Agreement: if (i) the stockholders of the Company approve
a merger of the Company and (ii) in connection with such merger or
immediately prior to such merger (A) substantially all of the assets of the
Company are contributed to Newco (as defined below) and (B) the
stockholders of the U S WEST Communications Group receive shares of Newco
Communications Group Common Stock (as defined below) for each share of U S
WEST Communications Group Common Stock held and the stockholders of the U S
WEST Media Group receive shares of Newco Media Group Common Stock (as
defined below) for each share of U S WEST Media Group Common Stock held.
As used herein, "Newco" shall mean a newly formed subsidiary of the Company
that has two classes of Common Stock, one of which reflects the performance
of businesses that comprise the businesses of the U S WEST Communications
Group ("Newco Communications Group Common Stock") and one of which reflects
the performance of businesses that comprise the businesses of the U S WEST
Media Group ("Newco Media Group Common Stock"). This
3
<PAGE>
limited exception to the definition of "Change of Control" set forth in this
Subsection I(i)(vii) shall not apply, and a Change of Control shall be
deemed to have occurred, if one or more transaction(s), whether structured
as set forth in this Subsection I(i)(vii) or otherwise, alone or in the
aggregate, result(s) in the sale, transfer, exchange or disposition of all
or substantially all of the assets of the Communications Group, the Media
Group or the Company as a whole, as each of those entities is constituted
as of the date of this Agreement.
(j) Code. The meaning of this term is set forth in Subsection IV(e)(i).
(k) Company. The meaning of this term is set forth in Subsection VI(a).
(l) Controlled Group. For purposes of this Agreement, "Controlled Group"
shall mean the Company and all of the Company's Subsidiaries.
(m) Disability. For purposes of this Agreement, "Disability" shall mean an
illness, injury or similar incapacity which, 52 weeks after its commencement,
continues to render Executive unable to perform the material and substantial
duties of Executive's position or any occupation or employment for which
Executive is qualified or may reasonably become qualified by training, education
or experience. Any dispute as to the existence of a Disability upon which
Executive and the Company cannot agree shall be resolved by a qualified
independent physician selected by Executive (or, if Executive is unable to make
such selection, by any adult member of Executive's immediate family or
Executive's legal representative), and approved by the Company, such approval
not to be unreasonably withheld. The decision of such physician made in writing
to both the Company and Executive shall be final and conclusive for all purposes
of this Agreement.
(n) Employer. For purposes of this Agreement, "Employer" shall mean the
Company or the Subsidiary, as the case may be, with which Executive has an
employment relationship.
(o) Exchange Act. This term shall have the meaning set forth in Subsection
I(i).
(p) Executive. This term shall have the meaning set forth in the third
paragraph of this Agreement.
(q) Excise Tax. This term shall have the meaning set forth in Subsection
IV(e)(i).
(r) Good Reason. For purposes of this Agreement, "Good Reason" shall mean
the occurrence, without Executive's prior express written consent, of any of the
following circumstances:
(i) The assignment to Executive of any duties inconsistent with
Executive's status or responsibilities as in effect immediately prior to a
Change of Control, including imposition of travel obligations which differ
materially from required business travel immediately prior to the Change of
Control;
(ii) Any diminution in the status or responsibilities of Executive's
position from that which existed immediately prior to the Change of
Control, whether by reason of the Company ceasing to be a public company
under the Exchange Act, becoming a subsidiary of a successor public
company, or otherwise;
(iii) (A) A reduction in Executive's annual base salary as in effect
immediately before the Change of Control; or (B) the failure to pay a bonus
award to which Executive otherwise is entitled under any short-term
incentive plan(s) or
4
<PAGE>
program(s) or any long-term incentive plan(s) or program(s) in which
Executive participates, or any companion, amended, successor or other
incentive compensation plan(s) or program(s), at the time such awards are
usually paid;
(iv) A change in the principal place of Executive's employment, as in
effect immediately prior to the Change of Control, to a location more than
thirty-five (35) miles distant from the location of such principal place at
such time;
(v) The failure by the Company to continue in effect any incentive
compensation or stock or stock option plan in which Executive participates
immediately prior to the Change of Control, unless participation in an
equivalent alternative compensation or stock or stock option arrangement
(embodied in an ongoing substitute or alternative plan) has been provided
to Executive, or the failure by the Company to continue Executive's
participation in any such compensation or stock or stock option plan on a
substantially equivalent or more beneficial basis, both in terms of the
nature and amount of benefits provided and the level of Executive's
participation relative to other participants, as existed immediately prior
to the time of the Change of Control;
(vi) (A) Except as required by law, the failure by the Company to
continue to provide to Executive benefits substantially equivalent or more
beneficial, in the aggregate, to those enjoyed by Executive under the
qualified and non-qualified employee benefit and welfare plans of the
Company, including, without limitation, any pension, deferred compensation,
life insurance, medical, dental, health and accident, disability,
retirement or savings plan(s) or program(s) in which Executive was eligible
to participate immediately prior to the Change of Control; (B) the taking
of any action by the Company that would, directly or indirectly, materially
reduce or deprive Executive of any other perquisite or benefit enjoyed by
Executive immediately prior to the Change of Control (including, without
limitation, Company-paid and/or reimbursed club memberships, financial
counseling fees and the like); or (C) the failure by the Company to treat
Executive under the Company's vacation policy, past practice or special
agreement in the same manner and to the same extent as was in effect
immediately prior to the Change of Control;
(vii) The failure of the Company to obtain a satisfactory written
agreement from any successor prior to consummation of the Change of Control
to assume and agree to perform this Agreement, as contemplated in
Subsection VI(a); or
(viii) Any purported termination by the Company of Executive's
employment that is not effected pursuant to a Notice of Termination
satisfying the requirements of Subsection III(b) or, if applicable,
Subsection I(h). For purposes of this Agreement, no such purported
termination shall be effective except as constituting Good Reason.
Executive's continued employment with the Company or any Subsidiary shall not
constitute a consent to, or a waiver of rights with respect to, any
circumstances constituting Good Reason hereunder.
(s) Gross-Up Payment. The meaning of this term is set forth in Subsection
IV(e)(i).
(t) Notice of Termination. The meaning of this term is set forth in
Subsection III(b).
(u) Other Payments. The meaning of this term is set forth in Subsection
IV(e)(i).
(v) Payments. The meaning of this term is set forth in Subsection
IV(e)(i).
(w) Resulting Corporation. The meaning of this term is set forth in
Subsection I(i)(iii).
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<PAGE>
(x) Retirement. For purposes of this Agreement, "Retirement" shall mean
Executive's voluntary termination of employment with the Company, other than for
Good Reason, and in accordance with the Company's retirement policy generally
applicable to its employees or in accordance with any prior or contemporaneous
retirement agreement or arrangement between Executive and the Company.
(y) Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean
any corporation of which fifty percent (50%) or more of the voting stock is
owned, directly or indirectly, by the Company.
(z) Tax Consultant. The meaning of this term is set forth in Subsection
IV(e)(ii).
(aa) Terminate(d) or Termination. The meaning of this term is set forth in
Subsection III(a).
(bb) Termination Date. For purposes of this Agreement, "Termination Date"
shall mean:
(i) If Executive's employment is terminated for Disability, thirty
(30) calendar days after Notice of Termination is given (provided that
Executive shall not have returned to the full-time performance of his
duties during such thirty-day period); and
(ii) If Executive's employment is terminated for Cause or Good Reason
or for any reason other than death or Disability, the date specified in the
Notice of Termination (which in the case of a termination for Cause shall
not be less than thirty (30) calendar days and in the case of a
termination for Good Reason shall not be less than thirty (30) calendar
days nor more than sixty (60) calendar days, respectively, from the date
such Notice of Termination is given).
II. Term of Agreement
(a) General. Upon execution by Executive, this Agreement shall commence as
of February 7, 1997. This Agreement shall continue in effect through December
31, 2000; provided, however, that commencing on January 1, 2001, and every third
January 1 thereafter, the term of this Agreement shall automatically be extended
for three (3) additional years unless, not later than ninety (90) calendar days
prior to the January 1 on which this Agreement otherwise automatically would be
extended, the Company shall have given notice to Executive that it does not wish
to extend this Agreement; provided further, however, that if a Change of Control
of the Company shall have occurred during the original or any extended term of
this Agreement, this Agreement shall continue in effect for a period of
thirty-six (36) months beyond the month in which the Change of Control occurred.
The term of this Agreement automatically shall be extended for three (3)
additional years from the date of any public announcement of an event that would
constitute a Change of Control as defined in this Agreement; provided however,
that if any such announced event is not consummated within that three (3) year
period, the original renewal term thereafter shall apply.
(b) Disposition of Employer. In the event Executive is employed by a
Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold
or otherwise disposed of prior to the date on which a Change of Control occurs,
unless Executive continues in employment with the Controlled Group after such
sale or other disposition. If Executive's Employer is sold or disposed of on or
after the date on which a Change of Control occurs, this Agreement shall
continue through its original term or any extended term then in effect.
(c) Deemed Change of Control. If Executive's employment with Employer is
terminated prior to the date on which a Change of Control occurs, and such
termination was at the request of a third party who has taken steps to effect a
Change of Control, or otherwise was in connection with the Change of Control,
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<PAGE>
then for all purposes of this Agreement, a Change of Control shall be deemed to
have occurred prior to such termination.
(d) Expiration of Agreement. No termination or expiration of this
Agreement shall affect any rights, obligations or liabilities of either party
that shall have accrued on or prior to the date of such termination or
expiration.
III. Termination Following Change of Control
(a) Entitlement to Benefits. If a Change of Control shall have occurred,
Executive shall be entitled to the benefits provided in Section IV hereof upon
the subsequent Termination (as defined below) of his employment with the Company
within three (3) years after the date of the Change of Control. For purposes of
this Agreement, "Termination" shall mean a termination of Executive's employment
that is not as a result of Executive's death, Retirement or Disability and (x)
if by the Company, is not for Cause, or (y) if by Executive, is for Good Reason.
(b) Notice of Termination. Any purported termination of Executive's
employment by either the Company or Executive shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section VIII.
For purposes of this Agreement, a "Notice of Termination" shall mean a written
notice that indicates the specific provision(s) of this Agreement relied upon
and sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision(s)
so indicated. If Executive's employment shall be terminated by the Company for
Cause or by Executive for other than Good Reason, the Company shall pay
Executive his full base salary through the Termination Date at the salary level
in effect at the time Notice of Termination is given and shall pay any amounts
to be paid to Executive pursuant to any other compensation or stock or stock
option plan(s), program(s) or employment agreement(s) then in effect, and the
Company shall have no further obligations to Executive under this Agreement.
If, within thirty (30) calendar days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the grounds for termination, then,
notwithstanding the meaning of "Termination Date" set forth in Subsection I(bb),
the Termination Date shall be the date on which the dispute is finally resolved,
whether by mutual written agreement of the parties or by a decision rendered
pursuant to Section XI; provided that the Termination Date shall be extended by
a notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the Company will
continue to pay Executive his full compensation including, without limitation,
base salary, bonus, incentive pay and equity grants, in effect when the notice
of the dispute was given, and continue Executive's participation in all benefits
plans or other perquisites in which Executive was participating, or which he was
enjoying, when the Notice of Termination giving rise to the dispute was given,
until the dispute is finally resolved. Amounts paid under this Subsection
III(b) are in addition to and not in lieu of all other amounts due to Executive
under this Agreement and shall not be offset against or reduce any other amounts
due to Executive under this Agreement.
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IV. Compensation Upon a Termination
Following a Change of Control, upon Executive's Termination, Executive
shall be entitled to the following benefits, provided that such Termination
occurs during the three (3) year period immediately following the date of the
Change of Control:
(a) Standard Benefits. The Company shall pay to Executive, in cash, no
later than the second business day following the Termination Date:
(i) his full base salary through the Termination Date at the salary level
in effect on either (x) the day on which Notice of Termination is given, or
(y) the day immediately preceding the date of the Change of Control,
whichever is higher;
(ii) the annual bonus payable to Executive under any short-term incentive
plan(s) or program(s) of the Company in which Executive participates
following a termination of employment after a change of control, as defined
in such plan(s) or program(s). If a change of control has not occurred
within the meaning of such plan(s) or program(s), a change of control shall
be deemed to have occurred with respect to Executive for the purpose of
determining the bonus payable to Executive based on a Change of Control
occurring within the meaning of this Agreement; and
(iii) the annual grant value of any long-term incentive award payable to
Executive under any long-term incentive plan(s) or program(s) of the
Company in which Executive participates following a termination of
employment after a change of control, as defined in such plan(s) or
program(s). If a change of control has not occurred within the meaning of
such plan(s) or program(s), a change of control shall be deemed to have
occurred with respect to Executive based on a Change of Control occurring
within the meaning of this Agreement.
In addition, the Company shall cause: (x) all unvested stock options held by
Executive on the Termination Date immediately to vest and be fully exercisable
as of the Termination Date; (y) any restrictions on all restricted stock held by
Executive on the Termination Date immediately to lapse and all shares of such
stock to fully vest as of the Termination Date; and (z) any accrued benefit or
deferred arrangement of the Company that Executive otherwise would become
entitled to if he continued employment with the Company immediately to vest as
of the Termination Date.
(b) Additional Benefits. The Company shall pay to Executive as additional
pay ("Additional Pay"), the product of (i) the lesser of (x) three (3) or (y)
the difference between sixty-five (65) and Executive's age as of the date of the
Notice of Termination (calculated to the nearest twelfth of a year), multiplied
by (ii) the sum of (x) Executive's annual base salary in effect immediately
prior to the Termination Date, (y) Executive's annual bonus amount under any
short-term incentive plan(s) or program(s) in which Executive participates, such
bonus amount to be calculated on the basis of the extent to which the
performance factors targeted by the Human Resources Committee of the Board have
been achieved (for this purpose, the Company's performance through the
Termination Date shall be annualized based upon the actual number of days
elapsed from the beginning of the fiscal year in which the Termination occurs
through the Termination Date over a year of 360 days), which shall be deemed to
be one hundred percent (100%) unless the performance actually achieved is
greater than one hundred percent (100%), in which case the actual performance
level shall be utilized, and (z) the dollar value of the most recent annual
grant to Executive prior to the Termination Date under any long-term incentive
plan(s), program(s) or grant(s) in which Executive participates, whether such
value is in the form of stock, stock options, Dividend Equivalent Units or any
other form of long term incentive compensation, such grant value to be
calculated as if the performance measures set forth in any such plan(s),
program(s) or grant(s) (e.g., Dividend Equivalent Units)
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for the applicable performance period shall be deemed to be one hundred percent
(100%). The Company shall pay the Additional Pay to Executive in a lump sum, in
cash, not later than the fifteenth calendar day following the Termination Date.
The Company also shall provide Executive with office space and shared
administrative support for the three (3) year period immediately following the
Termination Date, in the county of Executive's residence, at a location to be
designated by the Company, which office space and support shall be similar to
that currently provided by the Company to retired senior officers. The Company
shall maintain for Executive for the three (3) year period immediately following
the Termination Date, all perquisites and benefits enjoyed by Executive
immediately prior to the Termination Date.
(c) Retirement Plan Benefits. If not already vested, Executive shall be
deemed fully vested as of the Termination Date in any Company retirement plan(s)
or other written agreement(s) between Executive and the Company relating to pay
or other benefits upon retirement in which Executive was a participant, party or
beneficiary immediately prior to the Change of Control, and any additional
plan(s) or agreement(s) in which such Executive became a participant, party or
beneficiary thereafter. In addition to the foregoing, for purposes of
determining the amounts to be paid to Executive under such plan(s) or
agreement(s), the years of service with the Company and the age of Executive
under all such plans and agreements shall be deemed increased by the lesser of
thirty-six (36) months or such shorter period of time as would render Executive
sixty-five (65) years of age. For purposes of this Subsection IV(c), the term
"plan(s)" includes, without limitation, the Company's qualified pension plan,
non-qualified and mid-career pension plans and any companion, successor or
amended plan(s), and the term "agreement(s)" encompasses, without limitation,
the terms of any offer letter(s) leading to Executive's employment with the
Company where Executive was a signatory thereto, any written amendment(s) to the
foregoing and any subsequent written agreement(s) on such matters. In the event
the terms of the plans referenced in this Subsection IV(c) do not for any reason
coincide with the provisions of this Subsection IV(c) (e.g., if plan amendments
would cause disqualification of qualified plans), Executive shall be entitled to
receive from the Company, under the terms of this Agreement, an amount equal to
all amounts he would have received, at the time he would have received such
amounts, had all such plans continued in existence as in effect on the date of
this Agreement after being amended to coincide with the terms of this Subsection
IV(c).
(d) Health and Other Benefits. Following the Termination Date, the Company
shall provide substantially the same level of health, vision and dental benefits
to Executive and Executive's eligible dependents that the Company would provide
to Executive and Executive's eligible dependents if Executive were first
eligible for retiree health, vision and dental benefits immediately prior to the
Change of Control. The eligibility of Executive's dependents shall be
determined by the terms of any retiree health, vision and dental benefit plan(s)
or program(s) in effect immediately prior to the Change of Control. Following
the Termination Date, (i) ownership of any Basic Executive Life Insurance held
by the Company for the benefit of Executive immediately shall be transferred to
a third party trustee and held in an irrevocable rabbi trust for the benefit of
Executive, and (ii) any collateral assignment by Executive to the Company under
any Supplemental Executive Life Insurance (SELI) owned by Executive shall be
subordinated to Executive's right to the maximum cash value under the SELI
measured against a death benefit equal to fifty percent (50%) of the SELI
coverage in effect immediately prior to the Change of Control, without the SELI
becoming a modified endowment contract.
(e) Gross-Up Payments.
(i) In the event any payment(s) or the value of any benefit(s)
received or to be received by Executive in connection with Executive's
Termination or contingent upon a Change of Control (whether received or to
be received pursuant to the terms of this Agreement (the "Agreement
Payments") or of any other plan, arrangement or agreement of the Company,
its successors, any person whose actions result in a Change of Control or
any person affiliated with any of them (or
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which, as a result of the completion of the transaction(s) causing a Change
of Control, will become affiliated with any of them) ("Other Payments" and,
together with the Agreement Payments, the "Payments")), in the opinion of
the Tax Consultant (as defined below in Subsection IV(e)(ii)), would be
subject to an excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") or any other federal, state or local
excise tax (any such excise or other tax, together with any interest and
penalties, are hereinafter collectively referred to as the "Excise Tax"), as
determined as provided below, the Company shall pay to Executive an
additional amount such that the net amount retained by Executive, after
deduction of the Excise Tax on Agreement Payments and Other Payments and any
federal, state and local income and employment tax and Excise Tax upon the
Payment(s) provided for by this Subsection IV(e)(i), and any interest,
penalties or additions to tax payable by Executive with respect thereto,
shall be equal to the total present value of the Agreement Payments and
Other Payments at the time such Payments are to be made (the "Gross-Up
Payment(s)"). The intent of the parties is that the Company shall be
responsible in full for, and shall pay, any and all Excise Tax on any
Payments and Gross-Up Payment(s) and any and all income and employment taxes
(including, without limitation, penalties and interest) imposed on any
Gross-Up Payment(s) as well as any loss of deduction caused by or related
to the Gross-Up Payment(s).
(ii) All determinations required to be made under this Subsection
IV(e), including, without limitation, whether and when a Gross-Up Payment
is required, and the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determinations, unless otherwise set forth
in this Agreement, shall be made by tax consultant(s) selected by the
Company and reasonably acceptable to Executive ("Tax Consultant"). For
purposes of determining the amount of any Gross-Up Payment, Executive shall
be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment
is to be made, and state and local income taxes at the highest marginal
rate of taxation in the state and locality of Executive's residence on the
Termination Date, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes. The
Company shall cause the Tax Consultant to provide detailed supporting
calculations to the Company and Executive within fifteen (15) business days
after notice is given by Executive to the Company that any or all of the
Payments have occurred, or such earlier time as is requested by the
Company. Within two (2) business days after such notice is given to the
Company, the Company shall instruct the Tax Consultant to timely provide
the data required by this Subsection IV(e) to Executive. All fees and
expenses of the Tax Consultant shall be paid in full by the Company. Any
Excise Tax as determined pursuant to this Subsection IV(e) shall be paid by
the Company to the Internal Revenue Service or any other appropriate taxing
authority on Executive's behalf within five (5) business days after receipt
of the Tax Consultant's determination. If the Tax Consultant determines
that there is substantial authority (within the meaning of Section 6662 of
the Code) that no Excise Tax is payable by Executive, the Tax Consultant
shall furnish Executive with a written opinion that failure to disclose or
report the Excise Tax on Executive's federal income tax return will not
constitute a substantial understatement of tax or be reasonably likely to
result in the imposition of a negligence or any other penalty. Any
determination by the Tax Consultant shall be binding upon the Company and
Executive in the absence of material mathematical or legal error. As a
result of the uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Tax Consultant hereunder, it
is possible that Gross-Up Payments will not have been made by the Company
that should have been made or that Gross-Up Payments have been made that
should not have been made, in each case, consistent with the calculations
required to be made hereunder. In the event the Company exhausts its
remedies pursuant to Subsection IV(e)(iii) below, and Executive is
thereafter required to make a payment of any Excise Tax or any interest,
penalties or addition to tax, the Tax Consultant shall determine the amount
of underpayment of Excise Taxes
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that has occurred and any such underpayment and any interest, penalties or
addition to tax shall promptly be paid by the Company to the Internal
Revenue Service or other appropriate taxing authority on Executive's behalf
or, if such underpayment has been previously paid by Executive to the
appropriate taxing authority, to Executive. In the event the Tax Consultant
determines that an overpayment of Gross-Up Payment(s) has occurred, any such
overpayment shall be treated for all purposes as a loan to Executive with
interest at the applicable federal rate provided for in Section 7872(f)(2)
of the Code, due and payable within ninety (90) calendar days after written
demand to Executive by the Company; provided, however, that Executive shall
have no duty or obligation whatsoever to repay such loan if Executive's
receipt of the overpayment, or any portion thereof, is includible in
Executive's income and Executive's repayment of the same is not deductible
by Executive for federal and state income tax purposes.
(iii) Executive shall notify the Company in writing of any claim of
which he is aware by the Internal Revenue Service or state or local taxing
authority, that, if successful, would result in any Excise Tax or an
underpayment of any Gross-Up Payment(s). Such notice shall be given as
soon as practicable but no later than fifteen (15) business days after
Executive is informed in writing of the claim by the taxing authority, and
Executive shall provide written notice to the Company of the nature of the
claim, the administrative or judicial appeal period, and the date on which
any payment of the claim must be paid. Executive shall not pay any portion
of the claim prior to the expiration of the thirty (30) day period
following the date on which Executive gives such notice to the Company (or
such shorter period ending on the date that any amount under the claim is
due). If the Company notifies Executive in writing prior to the expiration
of such thirty (30) day period that it desires to contest the claim,
Executive shall:
(A) give the Company any information reasonably requested by the
Company relating to the claim;
(B) take such action in connection with contesting the claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
concerning the claim by an attorney selected by the Company who is
reasonably acceptable to Executive; and
(C) cooperate with the Company in good faith in order to
effectively contest the claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including, without limitation, additional interest and
penalties and attorneys' fees) incurred in such contests and shall
indemnify and hold Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including, without limitation, interest and
penalties thereon) imposed as a result of such representation. Without
limitation upon the foregoing provisions of this Subsection IV(e)(iii),
except as provided below, the Company shall control all proceedings
concerning such contest and, in its sole opinion, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with
the taxing authority pertaining to the claim. At the written request of the
Company and upon payment to Executive of an amount at least equal to the
claim plus any additional amount necessary to obtain the jurisdiction of
the appropriate tribunal and/or court, Executive shall pay the same to the
appropriate taxing authority and sue for a refund. Executive agrees to
prosecute in cooperation with the Company any contest of a claim to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company requests Executive to pay
the claim and sue for a refund, the Company shall advance the full amount
of such payment
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to Executive, on an interest-free basis, and shall indemnify and hold
Executive harmless on an after-tax basis, from any Excise Tax or income tax
(including, without limitation, interest and penalties thereon) imposed on
such advance or for any imputed income on such advance. Any extension of
the statute of limitations relating to assessment of any Excise Tax for
the taxable year of Executive which is the subject of the claim is to be
limited solely to the claim. Furthermore, the Company's control of the
contest shall be limited to issues for which a Gross-Up Payment would be
payable hereunder. Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(iv) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Subsection IV(e)(iii) above, Executive receives from
the taxing authority any refund of a claim or any additional amount that
was necessary to obtain jurisdiction, Executive shall promptly pay to the
Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Subsection
IV(e)(iii) above, a determination is made that Executive shall not be
entitled to any refund of the claim, and the Company does not notify
Executive in writing of its intent to contest such denial of refund of a
claim prior to the expiration of thirty (30) calendar days after such
determination, then the portion of such advance attributable to a claim
shall be forgiven by the Company and shall not be required to be repaid by
Executive. The amount of such advance attributable to a claim shall
offset, to the extent thereof, the amount of the underpayment required to
be paid by the Company to Executive.
(v) If, after the advance by the Company of an additional amount
necessary to obtain jurisdiction, there is a final determination made by
the taxing authority that Executive is not entitled to any refund of such
amount, or any portion thereof, then such advance shall be repaid to the
Company by Executive within thirty (30) calendar days after Executive
receives notice of such final determination. A final determination shall
occur when the period to contest or otherwise appeal any decision by an
administrative tribunal or court of initial jurisdiction has been waived or
the time for contesting or appealing the same has expired.
(f) Legal Fees and Expenses. The Company shall pay to Executive all legal
fees and expenses as and when incurred by Executive in connection with this
Agreement, including all such fees and expenses, if any, incurred in contesting
or disputing any Termination or in seeking to obtain or enforce any right,
payment or benefit provided by this Agreement, regardless of the outcome,
unless, in the case of a legal action brought by or in the name of Executive, a
decision is rendered pursuant to Section XI, or in any other proper legal
proceeding, that such action was not brought by Executive in good faith.
(g) No Mitigation. Executive shall not be required to mitigate the amount
of any payment or benefit provided for in this Section IV by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Section IV be reduced by any compensation earned by Executive as the
result of employment with another employer or by retirement or other benefits
received from whatever source after the Termination Date or otherwise, except as
specifically provided in this Section IV. The Company's obligation to make
payments to Executive provided for in this Agreement and otherwise to perform
its obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action that the Company or Employer
may have against Executive or other parties.
V. Death and Disability Benefits
In the event of the death or Disability of Executive after a Change of
Control , Executive, or in the case of death, Executive's Beneficiaries (as
defined below in Subsection VI.(c)), shall receive the benefits to
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which Executive or his Beneficiaries are entitled under this Agreement and any
and all retirement plans, pension plans, disability policies and other
applicable plans, programs, policies, agreements or arrangements of the Company.
VI. Successors; Binding Agreement
(a) Obligations of Successors. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company is required to perform it. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive had terminated
employment for Good Reason following a Change of Control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Termination Date. As used in this
Agreement, the term "Company" shall mean U S WEST, Inc., including any surviving
entity or successor to all or substantially all of its business and/or assets
and the parent of any such surviving entity or successor.
(b) Joint and Several Liability. Upon the occurrence of a Change of
Control as defined in Subsection I(i)(v)(A), (B), (D) or (E), the Company and
the Subsidiary whose stock is distributed (by redemption or dividend) to the
stockholders of the Company as described therein shall be jointly and severally
liable for all of the obligations of the Company under this Agreement, and prior
to the occurrence of such event, the Company shall require such Subsidiary to
expressly agree in writing to perform this Agreement jointly and severally with
the Company.
(c) Enforceable by Beneficiaries. This Agreement shall inure to the
benefit of and be enforceable by Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees (the "Beneficiaries"). In the event of the death of Executive while
any amount would still be payable hereunder if such death had not occurred, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Executive's Beneficiaries.
(d) Employment. Except in the event of a Change of Control and,
thereafter, only as specifically set forth in this Agreement, nothing in this
Agreement shall be construed to: (i) limit in any way the right of the Company
or a Subsidiary to terminate Executive's employment at any time for any reason,
or for no reason; or (ii) be evidence of any agreement or understanding,
expressed or implied, that the Company or a Subsidiary will employ Executive in
any particular position, on any particular terms or at any particular rate of
remuneration.
VII. Confidential Information.
Executive shall hold in a fiduciary capacity for the benefit of the Company
all secret or confidential information, knowledge or data relating to the
Company, the Subsidiaries and their respective businesses, which shall have been
obtained during Executive's employment with the Employer and which shall not be
public knowledge (other than by acts by Executive or his representatives in
violation of this Agreement). After termination of Executive's employment with
the Company or any Employer within the Controlled Group, Executive shall not,
without prior written consent of the Company or the Employer, communicate or
divulge any such information, knowledge or data to anyone other than the
Company, the Employer or those designated by them. In no event shall an
asserted violation of this Section VII constitute a basis for deferring or
withholding any amounts otherwise payable to Executive under this Agreement.
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VIII. Notice
All notices and communications, including, without limitation, any Notice
of Termination hereunder, shall be in writing and shall be given either by hand
delivery to the other party, by registered or certified mail, return receipt
requested, postage prepaid, or by overnight delivery service, addressed as
follows:
If to Executive:
Name
U S WEST, Inc. Officer Title
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Englewood, Colorado 80111
If to the Company:
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Englewood, Colorado 80111
Attn.: Vice President - Law and Human Resources
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be deemed
given and effective when actually received by the addressee.
IX. Miscellaneous
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed by
Executive and the Company's Chief Executive Officer or other authorized officer
designated by the Board or an appropriate committee of the Board. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any conditions or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Delaware. All references to sections of the Code or the Exchange Act shall be
deemed also to refer to any successor provisions of such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Company under
Sections IV and V shall survive the expiration of the term of this Agreement.
X. Validity
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
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XI. Arbitration
Executive may agree in writing with the Company (in which case this Article
XI shall have effect but not otherwise) that any dispute that may arise directly
or indirectly in connection with this Agreement, Executive's employment or the
termination of Executive's employment, whether arising in contract, statute,
tort, fraud, misrepresentation, discrimination or other legal theory, shall be
resolved by arbitration in Denver, Colorado, under the applicable rules and
procedures of the AAA. The only legal claims between Executive and the Company
or any Subsidiary that would not be included in this agreement to arbitration
are claims by Executive for workers' compensation or unemployment compensation
benefits, claims for benefits under a Company or Subsidiary benefit plan if the
plan does not provide for arbitration of such disputes, and claims by Executive
that seek judicial relief in the form of specific performance of the right to be
paid until the Termination Date during the pendency of any applicable dispute or
controversy. If this Article XI is in effect, any claim with respect to this
Agreement, Executive's employment or the termination of Executive's employment
must be established by a preponderance of the evidence submitted to an impartial
arbitrator. A single arbitrator engaged in the practice of law shall conduct
any arbitration under the applicable rules and procedures of the AAA. The
arbitrator shall have the authority to order a pre-hearing exchange of
information by the parties including, without limitation, production of
requested documents, and examination by deposition of parties and their
authorized agents. If this Article XI is in effect, the decision of the
arbitrator: (i) shall be final and binding; (ii) shall be rendered within
ninety (90) days after the impanelment of the arbitrator; and (iii) shall be
kept confidential by the parties to such arbitration. The arbitration award may
be enforced in any court of competent jurisdiction. The Federal Arbitration
Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims.
If this Agreement sets forth the terms of our understanding on the subject
matter hereof, kindly sign both originals of this letter and return to the Vice
President - Law and Human Resources of the Company one of the fully executed
originals of this letter which will then constitute our Agreement on this
subject.
Sincerely,
U S WEST, Inc.
By:___________________________________
Chairman, President and Chief Executive Officer
______________________________________
Name
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EXHIBIT 10z
Date
Name
Chairman, Chief Executive Officer
and President
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Englewood, Colorado 80111
Dear _______:
U S WEST, Inc., on behalf of itself, its subsidiaries and stockholders,
and any successor or surviving entity, wishes to encourage your continued
service and dedication in the performance of your duties, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined in
Subsection I(i)) of the Company (as defined in Subsection I(k)). The Board
of Directors of the Company (the "Board") believes that the prospect of a
pending or threatened Change of Control inevitably creates distractions,
personal risks and uncertainties for its executives, and that it is in the
best interests of U S WEST, Inc. and its stockholders to minimize such
distractions to certain executives. The Board further believes that it is in
the best interests of the Company to encourage its executives' full attention
and dedication to their duties, both currently and in the event of any
threatened or pending Change of Control.
Accordingly, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued retention of certain members
of the Company's management, including yourself, and the attention and
dedication of management to their assigned duties without distraction in the
face of potentially disturbing circumstances arising from the possibility of
a Change of Control.
In order to induce you ("Executive") to remain in the employ of the
Company, and in consideration of your continued service to the Company, the
Company agrees that you shall receive the benefits set forth in this letter
agreement (the "Agreement") in the event that your employment with the
Company is terminated subsequent to a Change of Control in the circumstances
described herein. For purposes of this Agreement, references to employment
with the Company shall include employment with a Subsidiary of the Company
(as defined in Subsection I(y)).
I. Definitions
The meaning of each defined term that is used in this Agreement is set
forth below.
(a) AAA. The American Arbitration Association.
(b) Additional Pay. The meaning of this term is set forth in Subsection
IV(b).
<PAGE>
(c) Agreement. The meaning of this term is set forth in the third
paragraph of this Agreement.
(d) Agreement Payments. The meaning of this term is set forth in
Subsection IV(e)(i).
(e) Beneficiaries. The meaning of this term is set forth in Subsection
VI(c).
(f) Board. The meaning of this term is set forth in the first paragraph of
this Agreement.
(g) Business Combination. The meaning of this term is set forth in
Subsection I(i)(iii).
(h) Cause. For purposes of this Agreement, "Cause" shall mean Executive's
willful breach or failure to perform his employment duties. For purposes of
this Subsection I(h), no act, or failure to act, on the part of Executive shall
be deemed "willful" unless done, or omitted to be done, by Executive not in good
faith and without reasonable belief that such action or omission was in the best
interest of the Company. Notwithstanding the foregoing, Executive's employment
shall not be deemed to have been terminated for Cause unless and until the
Company delivers to Executive a certificate of a resolution duly adopted by the
affirmative vote of not less than seventy-five percent (75%) of the entire
membership of the Board, at a meeting of the Board called and held for such
purpose (after reasonable notice to Executive and an opportunity for Executive,
together with Executive's counsel, to be heard before the Board), finding that
in the good faith opinion of the Board, Executive has engaged in such willful
conduct and specifying the details of such willful conduct.
(i) Change of Control. For purposes of this Agreement, a "Change of
Control" shall be deemed to have occurred if there is a change of control of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), whether or not the Company is then
subject to such reporting requirement; provided that, without limitation, such a
Change of Control shall be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)(2),
as currently in effect, of the Exchange Act) is or becomes a "beneficial
owner" (as determined for purposes of Regulation 13D-G, as currently in
effect, under the Exchange Act), directly or indirectly, of securities
representing twenty percent (20%) or more of the total voting power of all
of the Company's then outstanding voting securities. For purposes of this
Agreement, the term "person" shall not include: (i) the Company or any of
its Subsidiaries; (ii) a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or any of its Subsidiaries;
or (iii) an underwriter temporarily holding securities pursuant to an
offering of such securities;
(ii) during any period of two (2) consecutive calendar years,
individuals who at the beginning of such period constitute the Board and
any new director(s) whose election by the Board or nomination for election
by the Company's 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 such period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a majority
of the Board, but excluding for this purpose, any such individual whose
initial assumption of office occurs as a result of an actual or threatened
election contest (as such terms are used in Rule 14a-11 of Regulation 14A,
as currently in effect, of the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on behalf of a person other than
the Board;
(iii) the stockholders of the Company approve a merger, consolidation
or sale or other disposition of all or substantially all of the assets of
the Company (a "Business Combination"), in
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each case, unless following such Business Combination: (i) all or
substantially all of the individuals and entities who were the
"beneficial owners" (as determined for purposes of Regulation 13D-G,
as currently in effect, of the Exchange Act) of the outstanding voting
securities of the Company immediately prior to such Business Combination
beneficially own, directly or indirectly, securities representing more than
seventy percent (70%) of the total voting power of the then outstanding
voting securities of the corporation resulting from such Business
Combination or the parent of such corporation (the "Resulting
Corporation"); (ii) no "person" (as such term is used in Sections 13(d) and
14(d)(2), as currently in effect, of the Exchange Act), other than a
trustee or other fiduciary holding securities under an employee benefit
plan of the Company or the Resulting Corporation, is the "beneficial owner"
(as determined for purposes of Regulation 13D-G, as currently in effect, of
the Exchange Act), directly or indirectly, of voting securities
representing twenty percent (20%) or more of the total voting power of the
then outstanding voting securities of the Resulting Corporation; and (iii)
at least a majority of the members of the board of directors of the
Resulting Corporation were members of the Board at the time of the
execution of the initial agreement, or at the time of the action of the
Board, providing for such Business Combination;
(iv) the stockholders of the Company approve a plan of complete
liquidation or dissolution of the Company;
(v) the Company: (A) redeems substantially all of the outstanding
shares of U S WEST Communications Group Common Stock or U S WEST Media
Group Common Stock in exchange for shares of one or more wholly-owned
subsidiaries of the Company that hold all or substantially all of the
assets that are attributed to that Group; (B) distributes to the
stockholders of U S WEST Communications Group or U S WEST Media Group the
shares of one or more wholly-owned subsidiaries that hold all or
substantially all of the assets attributed to that Group; (C) converts all
of the outstanding shares of U S WEST Communications Group Common Stock
into the shares of U S WEST Media Group Common Stock, or vice versa; (D)
distributes the stock of one or more wholly-owned subsidiaries holding all
or substantially all of the assets of the Company, under applicable law, at
a time when there are no classes of Common Stock that separately track the
performance of certain Company businesses; or (E) sells or otherwise
disposes of all or substantially all of the assets of the U S WEST
Communications Group or the U S WEST Media Group and distributes the net
proceeds of such sale or disposition to the holders of the common stock
related to such Group by dividend or redemption; or
(vi) any other event that a simple majority of the Board, in its sole
discretion, shall determine constitutes a Change of Control;
(vii) Notwithstanding any terms to the contrary contained in this
Subsection I(i), the following shall not constitute a Change of Control for
purposes of this Agreement: if (i) the stockholders of the Company approve
a merger of the Company and (ii) in connection with such merger or
immediately prior to such merger (A) substantially all of the assets of the
Company are contributed to Newco (as defined below) and (B) the
stockholders of the U S WEST Communications Group receive shares of Newco
Communications Group Common Stock (as defined below) for each share of U S
WEST Communications Group Common Stock held and the stockholders of the U S
WEST Media Group receive shares of Newco Media Group Common Stock (as
defined below) for each share of U S WEST Media Group Common Stock held.
As used herein, "Newco" shall mean a newly formed subsidiary of the Company
that has two classes of Common Stock, one of which reflects the performance
of businesses that comprise
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the businesses of the U S WEST Communications
Group ("Newco Communications Group Common Stock") and one of which reflects
the performance of businesses that comprise the businesses of the U S WEST
Media Group ("Newco Media Group Common Stock"). This limited exception to
the definition of "Change of Control" set forth in this Subsection
I(i)(vii) shall not apply, and a Change of Control shall be deemed to have
occurred, if one or more transaction(s), whether structured as set forth in
this Subsection I(i)(vii) or otherwise, alone or in the aggregate,
result(s) in the sale, transfer, exchange or disposition of all or
substantially all of the assets of the Communications Group, the Media
Group or the Company as a whole, as each of those entities is constituted
as of the date of this Agreement.
(j) Code. The meaning of this term is set forth in Subsection IV(e)(i).
(k) Company. The meaning of this term is set forth in Subsection VI(a).
(l) Controlled Group. For purposes of this Agreement, "Controlled Group"
shall mean the Company and all of the Company's Subsidiaries.
(m) Disability. For purposes of this Agreement, "Disability" shall mean an
illness, injury or similar incapacity which, 52 weeks after its commencement,
continues to render Executive unable to perform the material and substantial
duties of Executive's position or any occupation or employment for which
Executive is qualified or may reasonably become qualified by training, education
or experience. Any dispute as to the existence of a Disability upon which
Executive and the Company cannot agree shall be resolved by a qualified
independent physician selected by Executive (or, if Executive is unable to make
such selection, by any adult member of Executive's immediate family or
Executive's legal representative), and approved by the Company, such approval
not to be unreasonably withheld. The decision of such physician made in writing
to both the Company and Executive shall be final and conclusive for all purposes
of this Agreement.
(n) Employer. For purposes of this Agreement, "Employer" shall mean the
Company or the Subsidiary, as the case may be, with which Executive has an
employment relationship.
(o) Exchange Act. This term shall have the meaning set forth in Subsection
I(i).
(p) Executive. This term shall have the meaning set forth in the third
paragraph of this Agreement.
(q) Excise Tax. This term shall have the meaning set forth in Subsection
IV(e)(i).
(r) Good Reason. For purposes of this Agreement, "Good Reason" shall mean
the occurrence, without Executive's prior express written consent, of any of the
following circumstances:
(i) The assignment to Executive of any duties inconsistent with
Executive's status or responsibilities as in effect immediately prior to a
Change of Control, including imposition of travel obligations which differ
materially from required business travel immediately prior to the Change of
Control;
(ii) Any diminution in the status or responsibilities of Executive's
position from that which existed immediately prior to the Change of
Control, whether by reason of the Company ceasing to be a public company
under the Exchange Act, becoming a subsidiary of a successor public
company, or otherwise;
(iii) (A) A reduction in Executive's annual base salary as in effect
immediately before the Change of Control; or (B) the failure to pay a bonus
award to which Executive otherwise is entitled
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under any short-term incentive plan(s) or program(s) or any long-term
incentive plan(s) or program(s) in which Executive participates, or any
companion, amended, successor or other incentive compensation plan(s) or
program(s), at the time such awards are usually paid;
(iv) A change in the principal place of Executive's employment, as in
effect immediately prior to the Change of Control, to a location more than
thirty-five (35) miles distant from the location of such principal place at
such time;
(v) The failure by the Company to continue in effect any incentive
compensation or stock or stock option plan in which Executive participates
immediately prior to the Change of Control, unless participation in an
equivalent alternative compensation or stock or stock option arrangement
(embodied in an ongoing substitute or alternative plan) has been provided
to Executive, or the failure by the Company to continue Executive's
participation in any such compensation or stock or stock option plan on a
substantially equivalent or more beneficial basis, both in terms of the
nature and amount of benefits provided and the level of Executive's
participation relative to other participants, as existed immediately prior
to the time of the Change of Control;
(vi) (A) Except as required by law, the failure by the Company to
continue to provide to Executive benefits substantially equivalent or more
beneficial, in the aggregate, to those enjoyed by Executive under the
qualified and non-qualified employee benefit and welfare plans of the
Company, including, without limitation, any pension, deferred compensation,
life insurance, medical, dental, health and accident, disability,
retirement or savings plan(s) or program(s) in which Executive was eligible
to participate immediately prior to the Change of Control; (B) the taking
of any action by the Company that would, directly or indirectly, materially
reduce or deprive Executive of any other perquisite or benefit enjoyed by
Executive immediately prior to the Change of Control (including, without
limitation, Company-paid and/or reimbursed club memberships, financial
counseling fees and the like); or (C) the failure by the Company to treat
Executive under the Company's vacation policy, past practice or special
agreement in the same manner and to the same extent as was in effect
immediately prior to the Change of Control;
(vii) The failure of the Company to obtain a satisfactory written
agreement from any successor prior to consummation of the Change of Control
to assume and agree to perform this Agreement, as contemplated in
Subsection VI(a); or
(viii) Any purported termination by the Company of Executive's
employment that is not effected pursuant to a Notice of Termination
satisfying the requirements of Subsection III(b) or, if applicable,
Subsection I(h). For purposes of this Agreement, no such purported
termination shall be effective except as constituting Good Reason.
Executive's continued employment with the Company or any Subsidiary shall not
constitute a consent to, or a waiver of rights with respect to, any
circumstances constituting Good Reason hereunder.
(s) Gross-Up Payment. The meaning of this term is set forth in Subsection
IV(e)(i).
(t) Notice of Termination. The meaning of this term is set forth in
Subsection III(b).
(u) Other Payments. The meaning of this term is set forth in Subsection
IV(e)(i).
(v) Payments. The meaning of this term is set forth in Subsection
IV(e)(i).
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(w) Resulting Corporation. The meaning of this term is set forth in
Subsection I(i)(iii).
(x) Retirement. For purposes of this Agreement, "Retirement" shall mean
Executive's voluntary termination of employment with the Company, other than for
Good Reason, and in accordance with the Company's retirement policy generally
applicable to its employees or in accordance with any prior or contemporaneous
retirement agreement or arrangement between Executive and the Company.
(y) Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean
any corporation of which fifty percent (50%) or more of the voting stock is
owned, directly or indirectly, by the Company.
(z) Tax Consultant. The meaning of this term is set forth in Subsection
IV(e)(ii).
(aa) Terminate(d) or Termination. The meaning of this term is set forth in
Subsection III(a).
(bb) Termination Date. For purposes of this Agreement, "Termination Date"
shall mean:
(i) If Executive's employment is terminated for Disability, thirty
(30) calendar days after Notice of Termination is given (provided that
Executive shall not have returned to the full-time performance of his
duties during such thirty-day period); and
(ii) If Executive's employment is terminated for Cause or Good Reason
or for any reason other than death or Disability, the date specified in the
Notice of Termination (which in the case of a termination for Cause shall
not be less than thirty (30) calendar days and in the case of a
termination for Good Reason shall not be less than thirty (30) calendar
days nor more than sixty (60) calendar days, respectively, from the date
such Notice of Termination is given).
II. Term of Agreement
(a) General. Upon execution by Executive, this Agreement shall commence as
of February 7, 1997. This Agreement shall continue in effect through December
31, 2000; provided, however, that commencing on January 1, 2001, and every third
January 1 thereafter, the term of this Agreement shall automatically be extended
for three (3) additional years unless, not later than ninety (90) calendar days
prior to the January 1 on which this Agreement otherwise automatically would be
extended, the Company shall have given notice to Executive that it does not wish
to extend this Agreement; provided further, however, that if a Change of Control
of the Company shall have occurred during the original or any extended term of
this Agreement, this Agreement shall continue in effect for a period of
thirty-six (36) months beyond the month in which the Change of Control occurred.
The term of this Agreement automatically shall be extended for three (3)
additional years from the date of any public announcement of an event that would
constitute a Change of Control as defined in this Agreement; provided however,
that if any such announced event is not consummated within that three (3) year
period, the original renewal term thereafter shall apply.
(b) Disposition of Employer. In the event Executive is employed by a
Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold
or otherwise disposed of prior to the date on which a Change of Control occurs,
unless Executive continues in employment with the Controlled Group after such
sale or other disposition. If Executive's Employer is sold or disposed of on or
after the date on which a Change of Control occurs, this Agreement shall
continue through its original term or any extended term then in effect.
(c) Deemed Change of Control. If Executive's employment with Employer is
terminated prior to the date on which a Change of Control occurs, and such
termination was at the request of a third party who
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has taken steps to effect a Change of Control, or otherwise was in connection
with the Change of Control, then for all purposes of this Agreement, a Change
of Control shall be deemed to have occurred prior to such termination.
(d) Expiration of Agreement. No termination or expiration of this
Agreement shall affect any rights, obligations or liabilities of either party
that shall have accrued on or prior to the date of such termination or
expiration.
III. Termination Following Change of Control
(a) Entitlement to Benefits. If a Change of Control (other than a Change
of Control within the meaning of Subsection I(i)(v)) shall have occurred,
Executive shall be entitled to the benefits provided in Section IV hereof upon
the subsequent termination of his employment with the Company for any reason
within three (3) years after the date of the Change of Control. If a Change of
Control within the meaning of Subsection I(i)(v) shall have occurred, Executive
shall be entitled to the benefits provided in Section IV hereof upon the
subsequent termination of his employment with the Company within three (3) years
after the date of the Change of Control unless such termination is (i) a result
of Executive's death, Disability or Retirement, (ii) for Cause or (iii) by
Executive other than for Good Reason. A termination of Executive's employment
that entitles Executive to the payment of benefits under Section IV hereof shall
be referred to hereinafter as a "Termination."
(b) Notice of Termination. Any purported termination of Executive's
employment by either the Company or Executive shall be communicated by written
Notice of Termination to the other party hereto in accordance with Section VIII.
For purposes of this Agreement, a "Notice of Termination" shall mean a written
notice that indicates the specific provision(s) of this Agreement relied upon
and sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision(s)
so indicated. If Executive's employment shall be terminated by the Company for
Cause or by Executive for other than Good Reason, the Company shall pay
Executive his full base salary through the Termination Date at the salary level
in effect at the time Notice of Termination is given and shall pay any amounts
to be paid to Executive pursuant to any other compensation or stock or stock
option plan(s), program(s) or employment agreement(s) then in effect, and the
Company shall have no further obligations to Executive under this Agreement.
If, within thirty (30) calendar days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the grounds for termination, then,
notwithstanding the meaning of "Termination Date" set forth in Subsection I(bb),
the Termination Date shall be the date on which the dispute is finally resolved,
whether by mutual written agreement of the parties or by a decision rendered
pursuant to Section XI; provided that the Termination Date shall be extended by
a notice of dispute only if such notice is given in good faith and the party
giving such notice pursues the resolution of such dispute with reasonable
diligence. Notwithstanding the pendency of any such dispute, the Company will
continue to pay Executive his full compensation including, without limitation,
base salary, bonus, incentive pay and equity grants, in effect when the notice
of the dispute was given, and continue Executive's participation in all benefits
plans or other perquisites in which Executive was participating, or which he was
enjoying, when the Notice of Termination giving rise to the dispute was given,
until the dispute is finally resolved. Amounts paid under this Subsection
III(b) are in addition to and not in lieu of all other amounts due to Executive
under this Agreement and shall not be offset against or reduce any other amounts
due to Executive under this Agreement.
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IV. Compensation Upon a Termination
Following a Change of Control, upon Executive's Termination, Executive
shall be entitled to the following benefits, provided that such Termination
occurs during the three (3) year period immediately following the date of the
Change of Control:
(a) Standard Benefits. The Company shall pay to Executive, in cash, no
later than the second business day following the Termination Date:
(i) his full base salary through the Termination Date at the salary level
in effect on either (x) the day on which Notice of Termination is given, or
(y) the day immediately preceding the date of the Change of Control,
whichever is higher;
(ii) the annual bonus payable to Executive under any short-term incentive
plan(s) or program(s) of the Company in which Executive participates
following a termination of employment after a change of control, as defined
in such plan(s) or program(s). If a change of control has not occurred
within the meaning of such plan(s) or program(s), a change of control shall
be deemed to have occurred with respect to Executive for the purpose of
determining the bonus payable to Executive based on a Change of Control
occurring within the meaning of this Agreement; and
(iii) the annual grant value of any long-term incentive award payable to
Executive under any long-term incentive plan(s) or program(s) of the
Company in which Executive participates following a termination of
employment after a change of control, as defined in such plan(s) or
program(s). If a change of control has not occurred within the meaning of
such plan(s) or program(s), a change of control shall be deemed to have
occurred with respect to Executive based on a Change of Control occurring
within the meaning of this Agreement.
In addition, the Company shall cause: (x) all unvested stock options held by
Executive on the Termination Date immediately to vest and be fully exercisable
as of the Termination Date; (y) any restrictions on all restricted stock held by
Executive on the Termination Date immediately to lapse and all shares of such
stock to fully vest as of the Termination Date; and (z) any accrued benefit or
deferred arrangement of the Company that Executive otherwise would become
entitled to if he continued employment with the Company immediately to vest as
of the Termination Date.
(b) Additional Benefits. The Company shall pay to Executive as additional
pay ("Additional Pay"), the product of (i) the lesser of (x) three (3) or (y)
the difference between sixty-five (65) and Executive's age as of the date of the
Notice of Termination (calculated to the nearest twelfth of a year), multiplied
by (ii) the sum of (x) Executive's annual base salary in effect immediately
prior to the Termination Date, (y) Executive's annual bonus amount under any
short-term incentive plan(s) or program(s) in which Executive participates, such
bonus amount to be calculated on the basis of the extent to which the
performance factors targeted by the Human Resources Committee of the Board have
been achieved (for this purpose, the Company's performance through the
Termination Date shall be annualized based upon the actual number of days
elapsed from the beginning of the fiscal year in which the Termination occurs
through the Termination Date over a year of 360 days), which shall be deemed to
be one hundred percent (100%) unless the performance actually achieved is
greater than one hundred percent (100%), in which case the actual performance
level shall be utilized, and (z) the dollar value of the most recent annual
grant to Executive prior to the Termination Date under any long-term incentive
plan(s), program(s) or grant(s) in which Executive participates, whether such
value is in the form of stock, stock options, Dividend Equivalent Units or any
other form of long term incentive compensation, such grant value to be
calculated as if the performance measures set forth in any such plan(s),
program(s) or grant(s) (e.g., Dividend Equivalent Units)
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for the applicable performance period shall be deemed to be one hundred
percent (100%). The Company shall pay the Additional Pay to Executive in a
lump sum, in cash, not later than the fifteenth calendar day following the
Termination Date. The Company also shall provide Executive with office space
and shared administrative support for the three (3) year period immediately
following the Termination Date, in the county of Executive's residence, at a
location to be designated by the Company, which office space and support
shall be similar to that currently provided by the Company to retired senior
officers. The Company shall maintain for Executive for the three (3) year
period immediately following the Termination Date, all perquisites and
benefits enjoyed by Executive immediately prior to the Termination Date.
(c) Retirement Plan Benefits. If not already vested, Executive shall be
deemed fully vested as of the Termination Date in any Company retirement plan(s)
or other written agreement(s) between Executive and the Company relating to pay
or other benefits upon retirement in which Executive was a participant, party or
beneficiary immediately prior to the Change of Control, and any additional
plan(s) or agreement(s) in which such Executive became a participant, party or
beneficiary thereafter. In addition to the foregoing, for purposes of
determining the amounts to be paid to Executive under such plan(s) or
agreement(s), the years of service with the Company and the age of Executive
under all such plans and agreements shall be deemed increased by the lesser of
thirty-six (36) months or such shorter period of time as would render Executive
sixty-five (65) years of age. For purposes of this Subsection IV(c), the term
"plan(s)" includes, without limitation, the Company's qualified pension plan,
non-qualified and mid-career pension plans and any companion, successor or
amended plan(s), and the term "agreement(s)" encompasses, without limitation,
the terms of any offer letter(s) leading to Executive's employment with the
Company where Executive was a signatory thereto, any written amendment(s) to the
foregoing and any subsequent written agreement(s) on such matters. In the event
the terms of the plans referenced in this Subsection IV(c) do not for any reason
coincide with the provisions of this Subsection IV(c) (e.g., if plan amendments
would cause disqualification of qualified plans), Executive shall be entitled to
receive from the Company, under the terms of this Agreement, an amount equal to
all amounts he would have received, at the time he would have received such
amounts, had all such plans continued in existence as in effect on the date of
this Agreement after being amended to coincide with the terms of this Subsection
IV(c).
(d) Health and Other Benefits. Following the Termination Date, the Company
shall provide substantially the same level of health, vision and dental benefits
to Executive and Executive's eligible dependents that the Company would provide
to Executive and Executive's eligible dependents if Executive were first
eligible for retiree health, vision and dental benefits immediately prior to the
Change of Control. The eligibility of Executive's dependents shall be
determined by the terms of any retiree health, vision and dental benefit plan(s)
or program(s) in effect immediately prior to the Change of Control. Following
the Termination Date, (i) ownership of any Basic Executive Life Insurance held
by the Company for the benefit of Executive immediately shall be transferred to
a third party trustee and held in an irrevocable rabbi trust for the benefit of
Executive, and (ii) any collateral assignment by Executive to the Company under
any Supplemental Executive Life Insurance (SELI) owned by Executive shall be
subordinated to Executive's right to the maximum cash value under the SELI
measured against a death benefit equal to fifty percent (50%) of the SELI
coverage in effect immediately prior to the Change of Control, without the SELI
becoming a modified endowment contract.
(e) Gross-Up Payments.
(i) In the event any payment(s) or the value of any benefit(s)
received or to be received by Executive in connection with Executive's
Termination or contingent upon a Change of Control (whether received or to
be received pursuant to the terms of this Agreement (the "Agreement
Payments") or of any other plan, arrangement or agreement of the Company,
its successors, any
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person whose actions result in a Change of Control or
any person affiliated with any of them (or which, as a result of the
completion of the transaction(s) causing a Change of Control, will become
affiliated with any of them) ("Other Payments" and, together with the
Agreement Payments, the "Payments")), in the opinion of the Tax Consultant
(as defined below in Subsection IV(e)(ii)), would be subject to an excise
tax imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") or any other federal, state or local excise tax (any
such excise or other tax, together with any interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), as determined as
provided below, the Company shall pay to Executive an additional amount
such that the net amount retained by Executive, after deduction of the
Excise Tax on Agreement Payments and Other Payments and any federal, state
and local income and employment tax and Excise Tax upon the Payment(s)
provided for by this Subsection IV(e)(i), and any interest, penalties or
additions to tax payable by Executive with respect thereto, shall be equal
to the total present value of the Agreement Payments and Other Payments at
the time such Payments are to be made (the "Gross-Up Payment(s)"). The
intent of the parties is that the Company shall be responsible in full for,
and shall pay, any and all Excise Tax on any Payments and Gross-Up
Payment(s) and any and all income and employment taxes (including, without
limitation, penalties and interest) imposed on any Gross-Up Payment(s) as
well as any loss of deduction caused by or related to the Gross-Up
Payment(s).
(ii) All determinations required to be made under this Subsection
IV(e), including, without limitation, whether and when a Gross-Up Payment
is required, and the amount of such Gross-Up Payment and the assumptions to
be utilized in arriving at such determinations, unless otherwise set forth
in this Agreement, shall be made by tax consultant(s) selected by the
Company and reasonably acceptable to Executive ("Tax Consultant"). For
purposes of determining the amount of any Gross-Up Payment, Executive shall
be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Gross-Up Payment
is to be made, and state and local income taxes at the highest marginal
rate of taxation in the state and locality of Executive's residence on the
Termination Date, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes. The
Company shall cause the Tax Consultant to provide detailed supporting
calculations to the Company and Executive within fifteen (15) business days
after notice is given by Executive to the Company that any or all of the
Payments have occurred, or such earlier time as is requested by the
Company. Within two (2) business days after such notice is given to the
Company, the Company shall instruct the Tax Consultant to timely provide
the data required by this Subsection IV(e) to Executive. All fees and
expenses of the Tax Consultant shall be paid in full by the Company. Any
Excise Tax as determined pursuant to this Subsection IV(e) shall be paid by
the Company to the Internal Revenue Service or any other appropriate taxing
authority on Executive's behalf within five (5) business days after receipt
of the Tax Consultant's determination. If the Tax Consultant determines
that there is substantial authority (within the meaning of Section 6662 of
the Code) that no Excise Tax is payable by Executive, the Tax Consultant
shall furnish Executive with a written opinion that failure to disclose or
report the Excise Tax on Executive's federal income tax return will not
constitute a substantial understatement of tax or be reasonably likely to
result in the imposition of a negligence or any other penalty. Any
determination by the Tax Consultant shall be binding upon the Company and
Executive in the absence of material mathematical or legal error. As a
result of the uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Tax Consultant hereunder, it
is possible that Gross-Up Payments will not have been made by the Company
that should have been made or that Gross-Up Payments have been made that
should not have been made, in each case, consistent with the calculations
required to be made hereunder. In the event the Company exhausts its
remedies pursuant to Subsection IV(e)(iii) below, and Executive is
thereafter required to make a payment of any Excise Tax or any interest,
penalties or
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addition to tax, the Tax Consultant shall determine the amount
of underpayment of Excise Taxes that has occurred and any such underpayment
and any interest, penalties or addition to tax shall promptly be paid by
the Company to the Internal Revenue Service or other appropriate taxing
authority on Executive's behalf or, if such underpayment has been
previously paid by Executive to the appropriate taxing authority, to
Executive. In the event the Tax Consultant determines that an overpayment
of Gross-Up Payment(s) has occurred, any such overpayment shall be treated
for all purposes as a loan to Executive with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code, due and
payable within ninety (90) calendar days after written demand to Executive
by the Company; provided, however, that Executive shall have no duty or
obligation whatsoever to repay such loan if Executive's receipt of the
overpayment, or any portion thereof, is includible in Executive's income
and Executive's repayment of the same is not deductible by Executive for
federal and state income tax purposes.
(iii) Executive shall notify the Company in writing of any claim of
which he is aware by the Internal Revenue Service or state or local taxing
authority, that, if successful, would result in any Excise Tax or an
underpayment of any Gross-Up Payment(s). Such notice shall be given as
soon as practicable but no later than fifteen (15) business days after
Executive is informed in writing of the claim by the taxing authority, and
Executive shall provide written notice to the Company of the nature of the
claim, the administrative or judicial appeal period, and the date on which
any payment of the claim must be paid. Executive shall not pay any portion
of the claim prior to the expiration of the thirty (30) day period
following the date on which Executive gives such notice to the Company (or
such shorter period ending on the date that any amount under the claim is
due). If the Company notifies Executive in writing prior to the expiration
of such thirty (30) day period that it desires to contest the claim,
Executive shall:
(A) give the Company any information reasonably requested by the
Company relating to the claim;
(B) take such action in connection with contesting the claim as
the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation
concerning the claim by an attorney selected by the Company who is
reasonably acceptable to Executive; and
(C) cooperate with the Company in good faith in order to
effectively contest the claim;
provided, however, that the Company shall bear and pay directly all costs
and expenses (including, without limitation, additional interest and
penalties and attorneys' fees) incurred in such contests and shall
indemnify and hold Executive harmless, on an after-tax basis, for any
Excise Tax or income tax (including, without limitation, interest and
penalties thereon) imposed as a result of such representation. Without
limitation upon the foregoing provisions of this Subsection IV(e)(iii),
except as provided below, the Company shall control all proceedings
concerning such contest and, in its sole opinion, may pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with
the taxing authority pertaining to the claim. At the written request of the
Company and upon payment to Executive of an amount at least equal to the
claim plus any additional amount necessary to obtain the jurisdiction of
the appropriate tribunal and/or court, Executive shall pay the same to the
appropriate taxing authority and sue for a refund. Executive agrees to
prosecute in cooperation with the Company any contest of a claim to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the Company requests Executive
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to pay the claim and sue for a refund, the Company shall advance the
full amount of such payment to Executive, on an interest-free basis,
and shall indemnify and hold Executive harmless on an after-tax basis, from
any Excise Tax or income tax (including, without limitation, interest and
penalties thereon) imposed on such advance or for any imputed income on
such advance. Any extension of the statute of limitations relating to
assessment of any Excise Tax for the taxable year of Executive which is the
subject of the claim is to be limited solely to the claim. Furthermore,
the Company's control of the contest shall be limited to issues for which a
Gross-Up Payment would be payable hereunder. Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(iv) If, after the receipt by Executive of an amount advanced by the
Company pursuant to Subsection IV(e)(iii) above, Executive receives from
the taxing authority any refund of a claim or any additional amount that
was necessary to obtain jurisdiction, Executive shall promptly pay to the
Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the receipt by
Executive of an amount advanced by the Company pursuant to Subsection
IV(e)(iii) above, a determination is made that Executive shall not be
entitled to any refund of the claim, and the Company does not notify
Executive in writing of its intent to contest such denial of refund of a
claim prior to the expiration of thirty (30) calendar days after such
determination, then the portion of such advance attributable to a claim
shall be forgiven by the Company and shall not be required to be repaid by
Executive. The amount of such advance attributable to a claim shall
offset, to the extent thereof, the amount of the underpayment required to
be paid by the Company to Executive.
(v) If, after the advance by the Company of an additional amount
necessary to obtain jurisdiction, there is a final determination made by
the taxing authority that Executive is not entitled to any refund of such
amount, or any portion thereof, then such advance shall be repaid to the
Company by Executive within thirty (30) calendar days after Executive
receives notice of such final determination. A final determination shall
occur when the period to contest or otherwise appeal any decision by an
administrative tribunal or court of initial jurisdiction has been waived or
the time for contesting or appealing the same has expired.
(f) Legal Fees and Expenses. The Company shall pay to Executive all legal
fees and expenses as and when incurred by Executive in connection with this
Agreement, including all such fees and expenses, if any, incurred in contesting
or disputing any Termination or in seeking to obtain or enforce any right,
payment or benefit provided by this Agreement, regardless of the outcome,
unless, in the case of a legal action brought by or in the name of Executive, a
decision is rendered pursuant to Section XI, or in any other proper legal
proceeding, that such action was not brought by Executive in good faith.
(g) No Mitigation. Executive shall not be required to mitigate the amount
of any payment or benefit provided for in this Section IV by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Section IV be reduced by any compensation earned by Executive as the
result of employment with another employer or by retirement or other benefits
received from whatever source after the Termination Date or otherwise, except as
specifically provided in this Section IV. The Company's obligation to make
payments to Executive provided for in this Agreement and otherwise to perform
its obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action that the Company or Employer
may have against Executive or other parties.
V. Death and Disability Benefits
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In the event of the death or Disability of Executive after a Change of
Control , Executive, or in the case of death, Executive's Beneficiaries (as
defined below in Subsection VI.(c)), shall receive the benefits to which
Executive or his Beneficiaries are entitled under this Agreement and any and all
retirement plans, pension plans, disability policies and other applicable plans,
programs, policies, agreements or arrangements of the Company.
VI. Successors; Binding Agreement
(a) Obligations of Successors. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Company is required to perform it. Failure of the
Company to obtain such assumption and agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle
Executive to compensation from the Company in the same amount and on the same
terms as Executive would be entitled hereunder if Executive had terminated
employment for Good Reason following a Change of Control, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Termination Date. As used in this
Agreement, the term "Company" shall mean U S WEST, Inc., including any surviving
entity or successor to all or substantially all of its business and/or assets
and the parent of any such surviving entity or successor.
(b) Joint and Several Liability. Upon the occurrence of a Change of
Control as defined in Subsection I(i)(v)(A), (B), (D) or (E), the Company and
the Subsidiary whose stock is distributed (by redemption or dividend) to the
stockholders of the Company as described therein shall be jointly and severally
liable for all of the obligations of the Company under this Agreement, and prior
to the occurrence of such event, the Company shall require such Subsidiary to
expressly agree in writing to perform this Agreement jointly and severally with
the Company.
(c) Enforceable by Beneficiaries. This Agreement shall inure to the
benefit of and be enforceable by Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees (the "Beneficiaries"). In the event of the death of Executive while
any amount would still be payable hereunder if such death had not occurred, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to Executive's Beneficiaries.
(d) Employment. Except in the event of a Change of Control and,
thereafter, only as specifically set forth in this Agreement, nothing in this
Agreement shall be construed to: (i) limit in any way the right of the Company
or a Subsidiary to terminate Executive's employment at any time for any reason,
or for no reason; or (ii) be evidence of any agreement or understanding,
expressed or implied, that the Company or a Subsidiary will employ Executive in
any particular position, on any particular terms or at any particular rate of
remuneration.
VII. Confidential Information.
Executive shall hold in a fiduciary capacity for the benefit of the Company
all secret or confidential information, knowledge or data relating to the
Company, the Subsidiaries and their respective businesses, which shall have been
obtained during Executive's employment with the Employer and which shall not be
public knowledge (other than by acts by Executive or his representatives in
violation of this Agreement). After termination of Executive's employment with
the Company or any Employer within the Controlled Group, Executive shall not,
without prior written consent of the Company or the Employer, communicate or
divulge any such information, knowledge or data to anyone other than the
Company, the Employer or those
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designated by them. In no event shall an asserted violation of this Section
VII constitute a basis for deferring or withholding any amounts otherwise
payable to Executive under this Agreement.
VIII. Notice
All notices and communications, including, without limitation, any Notice
of Termination hereunder, shall be in writing and shall be given either by hand
delivery to the other party, by registered or certified mail, return receipt
requested, postage prepaid, or by overnight delivery service, addressed as
follows:
If to Executive:
Name
Chairman, Chief Executive Officer
and President
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Englewood, Colorado 80111
If to the Company:
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Englewood, Colorado 80111
Attn.: Vice President - Law and Human Resources
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be deemed
given and effective when actually received by the addressee.
IX. Miscellaneous
No provision of this Agreement may be modified, waived or discharged unless
such waiver, modification or discharge is agreed to in writing and signed by
Executive and the Company's Chief Executive Officer or other authorized officer
designated by the Board or an appropriate committee of the Board. No waiver by
either party hereto at any time of any breach by the other party hereto of, or
compliance with, any conditions or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not expressly set
forth in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Delaware. All references to sections of the Code or the Exchange Act shall be
deemed also to refer to any successor provisions of such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law. The obligations of the Company under
Sections IV and V shall survive the expiration of the term of this Agreement.
X. Validity
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.
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XI. Arbitration
Executive may agree in writing with the Company (in which case this Article
XI shall have effect but not otherwise) that any dispute that may arise directly
or indirectly in connection with this Agreement, Executive's employment or the
termination of Executive's employment, whether arising in contract, statute,
tort, fraud, misrepresentation, discrimination or other legal theory, shall be
resolved by arbitration in Denver, Colorado, under the applicable rules and
procedures of the AAA. The only legal claims between Executive and the Company
or any Subsidiary that would not be included in this agreement to arbitration
are claims by Executive for workers' compensation or unemployment compensation
benefits, claims for benefits under a Company or Subsidiary benefit plan if the
plan does not provide for arbitration of such disputes, and claims by Executive
that seek judicial relief in the form of specific performance of the right to be
paid until the Termination Date during the pendency of any applicable dispute or
controversy. If this Article XI is in effect, any claim with respect to this
Agreement, Executive's employment or the termination of Executive's employment
must be established by a preponderance of the evidence submitted to an impartial
arbitrator. A single arbitrator engaged in the practice of law shall conduct
any arbitration under the applicable rules and procedures of the AAA. The
arbitrator shall have the authority to order a pre-hearing exchange of
information by the parties including, without limitation, production of
requested documents, and examination by deposition of parties and their
authorized agents. If this Article XI is in effect, the decision of the
arbitrator: (i) shall be final and binding; (ii) shall be rendered within
ninety (90) days after the impanelment of the arbitrator; and (iii) shall be
kept confidential by the parties to such arbitration. The arbitration award may
be enforced in any court of competent jurisdiction. The Federal Arbitration
Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims.
If this Agreement sets forth the terms of our understanding on the subject
matter hereof, kindly sign both originals of this letter and return to the Vice
President - Law and Human Resources of the Company one of the fully executed
originals of this letter which will then constitute our Agreement on this
subject.
Sincerely,
U S WEST, Inc.
By:___________________________________
Chairman, Human Resources Committee of
the Board of Directors
______________________________________
Name
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EXHIBIT 10aa
Date
Name
Group Officer
U S WEST Group
Address
Dear _________:
U S WEST, Inc., on behalf of itself, its subsidiaries and stockholders,
and any successor or surviving entity, wishes to encourage your continued
service and dedication in the performance of your duties, notwithstanding the
possibility, threat or occurrence of a Change of Control (as defined in
Subsection I(i)) of the Company (as defined in Subsection I(k)). The Board
of Directors of the Company (the "Board") believes that the prospect of a
pending or threatened Change of Control inevitably creates distractions,
personal risks and uncertainties for its executives, and that it is in the
best interests of U S WEST, Inc. and its stockholders to minimize such
distractions to certain executives. The Board further believes that it is in
the best interests of the Company to encourage its executives' full attention
and dedication to their duties, both currently and in the event of any
threatened or pending Change of Control.
Accordingly, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued retention of certain members
of the Company's management, including yourself, and the attention and
dedication of management to their assigned duties without distraction in the
face of potentially disturbing circumstances arising from the possibility of
a Change of Control.
In order to induce you ("Executive") to remain in the employ of the
Company, and in consideration of your continued service to the Company, the
Company agrees that you shall receive the benefits set forth in this letter
agreement (the "Agreement") in the event that your employment with the
Company is terminated subsequent to a Change of Control in the circumstances
described herein. For purposes of this Agreement, references to employment
with the Company shall include employment with a Subsidiary of the Company
(as defined in Subsection I(y)).
I. Definitions
The meaning of each defined term that is used in this Agreement is set
forth below.
(a) AAA. The American Arbitration Association.
(b) Additional Pay. The meaning of this term is set forth in Subsection
IV(b).
(c) Agreement. The meaning of this term is set forth in the third
paragraph of this Agreement.
<PAGE>
(d) Agreement Payments. The meaning of this term is set forth in
Subsection IV(e)(i).
(e) Beneficiaries. The meaning of this term is set forth in Subsection
VI(c).
(f) Board. The meaning of this term is set forth in the first
paragraph of this Agreement.
(g) Business Combination. The meaning of this term is set
forth in Subsection I(i)(iii).
(h) Cause. For purposes of this Agreement, "Cause" shall mean
Executive's willful breach or failure to perform his employment duties. For
purposes of this Subsection I(h), no act, or failure to act, on the part of
Executive shall be deemed "willful" unless done, or omitted to be done, by
Executive not in good faith and without reasonable belief that such action or
omission was in the best interest of the Company. Notwithstanding the
foregoing, Executive's employment shall not be deemed to have been terminated
for Cause unless and until the Company delivers to Executive a certificate of
a resolution duly adopted by the affirmative vote of not less than
seventy-five percent (75%) of the entire membership of the Board, at a
meeting of the Board called and held for such purpose (after reasonable
notice to Executive and an opportunity for Executive, together with
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive has engaged in such willful conduct and
specifying the details of such willful conduct.
(i) Change of Control. For purposes of this Agreement, a
"Change of Control" shall be deemed to have occurred if there is a change of
control of a nature that would be required to be reported in response to Item
6(e) of Schedule 14A of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the
Company is then subject to such reporting requirement; provided that, without
limitation, such a Change of Control shall be deemed to have occurred if:
(i) any "person" (as such term is used in Sections 13(d)
and 14(d)(2), as currently in effect, of the Exchange Act) is
or becomes a "beneficial owner" (as determined for purposes of
Regulation 13D-G, as currently in effect, under the Exchange
Act), directly or indirectly, of securities representing
twenty percent (20%) or more of the total voting power of all
of the Company's then outstanding voting securities. For
purposes of this Agreement, the term "person" shall not
include: (i) the Company or any of its Subsidiaries; (ii) a
trustee or other fiduciary holding securities under an employee
benefit plan of the Company or any of its Subsidiaries; or (iii)
an underwriter temporarily holding securities pursuant to an
offering of such securities;
(ii) during any period of two (2) consecutive calendar
years, individuals who at the beginning of such period
constitute the Board and any new director(s) whose election by
the Board or nomination for election by the Company's
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 such period or whose election or nomination
for election was previously so approved, cease for any reason
to constitute a majority of the Board, but excluding for this
purpose, any such individual whose initial assumption of office
occurs as a result of an actual or threatened election contest
(as such terms are used in Rule 14a-11 of Regulation 14A, as
currently in effect, of the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf
of a person other than the Board;
(iii) the stockholders of the Company approve a merger,
consolidation or sale or other disposition of all or
substantially all of the assets of the Company (a "Business
Combination"), in each case, unless following such Business
Combination: (i) all or substantially all of the individuals
and entities who were the "beneficial owners" (as determined
for purposes of
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Regulation 13D-G, as currently in effect, of the Exchange Act)
of the outstanding voting securities of the Company immediately
prior to such Business Combination beneficially own, directly
or indirectly, securities representing more than seventy
percent (70%) of the total voting power of the then outstanding
voting securities of the corporation resulting from such
Business Combination or the parent of such corporation (the
"Resulting Corporation"); (ii) no "person" (as such term is
used in Sections 13(d) and 14(d)(2), as currently in effect, of
the Exchange Act), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the
Company or the Resulting Corporation, is the "beneficial owner"
(as determined for purposes of Regulation 13D-G, as currently in
effect, of the Exchange Act), directly or indirectly, of voting
securities representing twenty percent (20%) or more of the
total voting power of the then outstanding voting securities of
the Resulting Corporation; and (iii) at least a majority of the
members of the board of directors of the Resulting Corporation
were members of the Board at the time of the execution of the
initial agreement, or at the time of the action of the Board,
providing for such Business Combination;
(iv) the stockholders of the Company approve a plan of
complete liquidation or dissolution of the Company;
(v) the Company: (A) redeems substantially all of the
outstanding shares of U S WEST Communications Group Common
Stock or U S WEST Media Group Common Stock in exchange for
shares of one or more wholly-owned subsidiaries of the Company
that hold all or substantially all of the assets that are
attributed to that Group; (B) distributes to the stockholders of
U S WEST Communications Group or U S WEST Media Group the shares
of one or more wholly-owned subsidiaries that hold all or
substantially all of the assets attributed to that Group; (C)
converts all of the outstanding shares of U S WEST
Communications Group Common Stock into the shares of U S WEST
Media Group Common Stock, or vice versa; (D) distributes the
stock of one or more wholly-owned subsidiaries holding all or
substantially all of the assets of the Company, under
applicable law, at a time when there are no classes of Common
Stock that separately track the performance of certain Company
businesses; or (E) sells or otherwise disposes of all or
substantially all of the assets of the U S WEST Communications
Group or the U S WEST Media Group and distributes the net
proceeds of such sale or disposition to the holders of the
common stock related to such Group by dividend or redemption; or
(vi) any other event that a simple majority of the Board,
in its sole discretion, shall determine constitutes a Change of
Control;
(vii) Notwithstanding any terms to the contrary
contained in this Subsection I(i), the following shall not
constitute a Change of Control for purposes of this Agreement:
if (i) the stockholders of the Company approve a merger of the
Company and (ii) in connection with such merger or immediately
prior to such merger (A) substantially all of the assets of the
Company are contributed to Newco (as defined below) and (B) the
stockholders of the U S WEST Communications Group receive shares
of Newco Communications Group Common Stock (as defined below)
for each share of U S WEST Communications Group Common Stock
held and the stockholders of the U S WEST Media Group receive
shares of Newco Media Group Common Stock (as defined below) for
each share of U S WEST Media Group Common Stock held. As used
herein, "Newco" shall mean a newly formed subsidiary of the
Company that has two classes of Common Stock, one of which
reflects the performance of businesses that comprise the
businesses of the U S WEST Communications Group ("Newco
Communications Group Common Stock") and one of which reflects
the performance of businesses that comprise the businesses of
the U S WEST Media Group ("Newco Media Group Common Stock").
This limited exception to the definition of "Change of Control"
set forth in this Subsection I(i)(vii)
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shall not apply, and a Change of Control shall be deemed to have
occurred, if one or more transaction(s), whether structured as
set forth in this Subsection I(i)(vii) or otherwise, alone or
in the aggregate, result(s) in the sale, transfer, exchange or
disposition of all or substantially all of the assets of the
Communications Group, the Media Group or the Company as a
whole, as each of those entities is constituted as of the date
of this Agreement.
(j) Code. The meaning of this term is set forth in Subsection
IV(e)(i).
(k) Company. The meaning of this term is set forth in
Subsection VI(a).
(l) Controlled Group. For purposes of this Agreement,
"Controlled Group" shall mean the Company and all of the Company's
Subsidiaries.
(m) Disability. For purposes of this Agreement, "Disability"
shall mean an illness, injury or similar incapacity which, 52 weeks after its
commencement, continues to render Executive unable to perform the material
and substantial duties of Executive's position or any occupation or
employment for which Executive is qualified or may reasonably become
qualified by training, education or experience. Any dispute as to the
existence of a Disability upon which Executive and the Company cannot agree
shall be resolved by a qualified independent physician selected by Executive
(or, if Executive is unable to make such selection, by any adult member of
Executive's immediate family or Executive's legal representative), and
approved by the Company, such approval not to be unreasonably withheld. The
decision of such physician made in writing to both the Company and Executive
shall be final and conclusive for all purposes of this Agreement.
(n) Employer. For purposes of this Agreement, "Employer"
shall mean the Company or the Subsidiary, as the case may be, with which
Executive has an employment relationship.
(o) Exchange Act. This term shall have the meaning set forth
in Subsection I(i).
(p) Executive. This term shall have the meaning set forth in
the third paragraph of this Agreement.
(q) Excise Tax. This term shall have the meaning set forth in
Subsection IV(e)(i).
(r) Good Reason. For purposes of this Agreement, "Good
Reason" shall mean the occurrence, without Executive's prior express written
consent, of any of the following circumstances:
(i) The assignment to Executive of any duties inconsistent
with Executive's status or responsibilities as in effect
immediately prior to a Change of Control, including imposition
of travel obligations which differ materially from required
business travel immediately prior to the Change of Control;
(ii) Any diminution in the status or responsibilities of
Executive's position from that which existed immediately prior
to the Change of Control, whether by reason of the Company
ceasing to be a public company under the Exchange Act, becoming
a subsidiary of a successor public company, or otherwise;
(iii) (A) A reduction in Executive's annual base salary as
in effect immediately before the Change of Control; or (B) the
failure to pay a bonus award to which Executive otherwise is
entitled under any short-term incentive plan(s) or
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program(s) or any long-term incentive plan(s) or program(s) in
which Executive participates, or any companion, amended,
successor or other incentive compensation plan(s) or
program(s), at the time such awards are usually paid;
(iv) A change in the principal place of Executive's
employment, as in effect immediately prior to the Change of
Control, to a location more than thirty-five (35) miles distant
from the location of such principal place at such time;
(v) The failure by the Company to continue in effect any
incentive compensation or stock or stock option plan in which
Executive participates immediately prior to the Change of
Control, unless participation in an equivalent alternative
compensation or stock or stock option arrangement (embodied in
an ongoing substitute or alternative plan) has been provided to
Executive, or the failure by the Company to continue Executive's
participation in any such compensation or stock or stock option
plan on a substantially equivalent or more beneficial basis,
both in terms of the nature and amount of benefits provided and
the level of Executive's participation relative to other
participants, as existed immediately prior to the time of the
Change of Control;
(vi) (A) Except as required by law, the failure by the
Company to continue to provide to Executive benefits
substantially equivalent or more beneficial, in the aggregate,
to those enjoyed by Executive under the qualified and
non-qualified employee benefit and welfare plans of the Company,
including, without limitation, any pension, deferred
compensation, life insurance, medical, dental, health and
accident, disability, retirement or savings plan(s) or
program(s) in which Executive was eligible to participate
immediately prior to the Change of Control; (B) the taking of
any action by the Company that would, directly or indirectly,
materially reduce or deprive Executive of any other perquisite
or benefit enjoyed by Executive immediately prior to the Change
of Control (including, without limitation, Company-paid and/or
reimbursed club memberships, financial counseling fees and the
like); or (C) the failure by the Company to treat Executive
under the Company's vacation policy, past practice or special
agreement in the same manner and to the same extent as was in
effect immediately prior to the Change of Control;
(vii) The failure of the Company to obtain a satisfactory
written agreement from any successor prior to consummation of
the Change of Control to assume and agree to perform this
Agreement, as contemplated in Subsection VI(a); or
(viii) Any purported termination by the Company of
Executive's employment that is not effected pursuant to a
Notice of Termination satisfying the requirements of Subsection
III(b) or, if applicable, Subsection I(h). For purposes of
this Agreement, no such purported termination shall be
effective except as constituting Good Reason.
Executive's continued employment with the Company or any Subsidiary shall not
constitute a consent to, or a waiver of rights with respect to, any
circumstances constituting Good Reason hereunder.
(s) Gross-Up Payment. The meaning of this term is set forth
in Subsection IV(e)(i).
(t) Notice of Termination. The meaning of this term is set
forth in Subsection III(b).
(u) Other Payments. The meaning of this term is set forth in
Subsection IV(e)(i).
(v) Payments. The meaning of this term is set forth in
Subsection IV(e)(i).
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(w) Resulting Corporation. The meaning of this term is set
forth in Subsection I(i)(iii).
(x) Retirement. For purposes of this Agreement, "Retirement"
shall mean Executive's voluntary termination of employment with the Company,
other than for Good Reason, and in accordance with the Company's retirement
policy generally applicable to its employees or in accordance with any prior
or contemporaneous retirement agreement or arrangement between Executive and
the Company.
(y) Subsidiary. For purposes of this Agreement, "Subsidiary"
shall mean any corporation of which fifty percent (50%) or more of the voting
stock is owned, directly or indirectly, by the Company.
(z) Tax Consultant. The meaning of this term is set forth in
Subsection IV(e)(ii).
(aa) Terminate(d) or Termination. The meaning of this term is
set forth in Subsection III(a).
(bb) Termination Date. For purposes of this Agreement,
"Termination Date" shall mean:
(i) If Executive's employment is terminated for Disability,
thirty (30) calendar days after Notice of Termination is given
(provided that Executive shall not have returned to the
full-time performance of his duties during such thirty-day
period); and
(ii) If Executive's employment is terminated for Cause or
Good Reason or for any reason other than death or Disability,
the date specified in the Notice of Termination (which in the
case of a termination for Cause shall not be less than thirty
(30) calendar days and in the case of a termination for Good
Reason shall not be less than thirty (30) calendar days nor
more than sixty (60) calendar days, respectively, from the date
such Notice of Termination is given).
II. Term of Agreement
(a) General. Upon execution by Executive, this Agreement
shall commence as of February 7, 1997. This Agreement shall continue in
effect through December 31, 2000; provided, however, that commencing on
January 1, 2001, and every third January 1 thereafter, the term of this
Agreement shall automatically be extended for three (3) additional years
unless, not later than ninety (90) calendar days prior to the January 1 on
which this Agreement otherwise automatically would be extended, the Company
shall have given notice to Executive that it does not wish to extend this
Agreement; provided further, however, that if a Change of Control of the
Company shall have occurred during the original or any extended term of this
Agreement, this Agreement shall continue in effect for a period of thirty-six
(36) months beyond the month in which the Change of Control occurred. The
term of this Agreement automatically shall be extended for three (3)
additional years from the date of any public announcement of an event that
would constitute a Change of Control as defined in this Agreement; provided
however, that if any such announced event is not consummated within that
three (3) year period, the original renewal term thereafter shall apply.
(b) Disposition of Employer. In the event Executive is
employed by a Subsidiary, the terms of this Agreement shall expire if such
Subsidiary is sold or otherwise disposed of prior to the date on which a
Change of Control occurs, unless Executive continues in employment with the
Controlled Group after such sale or other disposition. If Executive's
Employer is sold or disposed of on or after the date on which a Change of
Control occurs, this Agreement shall continue through its original term or
any extended term then in effect.
(c) Deemed Change of Control. If Executive's employment with
Employer is terminated prior to the date on which a Change of Control occurs,
and such termination was at the request of a third party who has taken steps
to effect a Change of Control, or otherwise was in connection with the Change
of Control,
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then for all purposes of this Agreement, a Change of Control shall be deemed
to have occurred prior to such termination.
(d) Expiration of Agreement. No termination or expiration of
this Agreement shall affect any rights, obligations or liabilities of either
party that shall have accrued on or prior to the date of such termination or
expiration.
III. Termination Following Change of Control
(a) Entitlement to Benefits. If a Change of Control shall
have occurred, Executive shall be entitled to the benefits provided in
Section IV hereof upon the subsequent Termination (as defined below) of his
employment with the Company, except as otherwise set forth in this Subsection
III(a), within three (3) years after the date of the Change of Control. For
purposes of this Agreement, "Termination" shall mean a termination of
Executive's employment that is not as a result of Executive's death,
Retirement or Disability and (x) if by the Company, is not for Cause, or (y)
if by Executive, is for Good Reason. Executive shall not be entitled to the
benefits provided in Section IV hereof in the event of a Change of Control as
defined in Subsection I(i)(v)(A), (B) or (D), unless that Change of Control
also results in the termination of Executive's employment with the
corporation that is created as a result of the events leading to that Change
of Control. For purposes of the foregoing sentence only, "termination" shall
have the same definition as Termination, defined above, except that the
reference to the "Company" in subclause (x) shall mean the corporation
created by the events leading to the Change of Control. If, in the event of a
Change of Control under Subsection I(i)(v)(A), (B) or (D), Executive's
employment continues with the Company, his entitlement to benefits shall be
determined in accordance with the first sentence of this Subsection III(a).
(b) Notice of Termination. Any purported termination of
Executive's employment by either the Company or Executive shall be
communicated by written Notice of Termination to the other party hereto in
accordance with Section VIII. For purposes of this Agreement, a "Notice of
Termination" shall mean a written notice that indicates the specific
provision(s) of this Agreement relied upon and sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for termination
of Executive's employment under the provision(s) so indicated. If
Executive's employment shall be terminated by the Company for Cause or by
Executive for other than Good Reason, the Company shall pay Executive his
full base salary through the Termination Date at the salary level in effect
at the time Notice of Termination is given and shall pay any amounts to be
paid to Executive pursuant to any other compensation or stock or stock option
plan(s), program(s) or employment agreement(s) then in effect, and the
Company shall have no further obligations to Executive under this Agreement.
If, within thirty (30) calendar days after any Notice of
Termination is given, the party receiving such Notice of Termination notifies
the other party that a dispute exists concerning the grounds for termination,
then, notwithstanding the meaning of "Termination Date" set forth in
Subsection I(bb), the Termination Date shall be the date on which the dispute
is finally resolved, whether by mutual written agreement of the parties or by
a decision rendered pursuant to Section XI; provided that the Termination
Date shall be extended by a notice of dispute only if such notice is given in
good faith and the party giving such notice pursues the resolution of such
dispute with reasonable diligence. Notwithstanding the pendency of any such
dispute, the Company will continue to pay Executive his full compensation
including, without limitation, base salary, bonus, incentive pay and equity
grants, in effect when the notice of the dispute was given, and continue
Executive's participation in all benefits plans or other perquisites in which
Executive was participating, or which he was enjoying, when the Notice of
Termination giving rise to the dispute was given, until the dispute is
finally resolved. Amounts paid under this Subsection III(b) are in addition
to and not in lieu of all other amounts due to Executive under this Agreement
and shall not be offset against or reduce any other amounts due to Executive
under this Agreement.
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IV. Compensation Upon a Termination
Following a Change of Control, upon Executive's Termination,
Executive shall be entitled to the following benefits, provided that such
Termination occurs during the three (3) year period immediately following the
date of the Change of Control:
(a) Standard Benefits. The Company shall pay to Executive, in
cash, no later than the second business day following the Termination Date:
(i) his full base salary through the Termination Date at the
salary level in effect on either (x) the day on which Notice of
Termination is given, or (y) the day immediately preceding the
date of the Change of Control, whichever is higher;
(ii) the annual bonus payable to Executive under any short-term
incentive plan(s) or program(s) of the Company in which
Executive participates following a termination of employment
after a change of control, as defined in such plan(s) or
program(s). If a change of control has not occurred within the
meaning of such plan(s) or program(s), a change of control shall
be deemed to have occurred with respect to Executive for the
purpose of determining the bonus payable to Executive based on
a Change of Control occurring within the meaning of this
Agreement; and
(iii) the annual grant value of any long-term incentive award
payable to Executive under any long-term incentive plan(s) or
program(s) of the Company in which Executive participates
following a termination of employment after a change of
control, as defined in such plan(s) or program(s). If a change
of control has not occurred within the meaning of such plan(s)
or program(s), a change of control shall be deemed to have
occurred with respect to Executive based on a Change of Control
occurring within the meaning of this Agreement.
In addition, the Company shall cause: (x) all unvested stock options held by
Executive on the Termination Date immediately to vest and be fully
exercisable as of the Termination Date; (y) any restrictions on all
restricted stock held by Executive on the Termination Date immediately to
lapse and all shares of such stock to fully vest as of the Termination Date;
and (z) any accrued benefit or deferred arrangement of the Company that
Executive otherwise would become entitled to if he continued employment with
the Company immediately to vest as of the Termination Date.
(b) Additional Benefits. The Company shall pay to Executive
as additional pay ("Additional Pay"), the product of (i) the lesser of (x)
three (3) or (y) the difference between sixty-five (65) and Executive's age
as of the date of the Notice of Termination (calculated to the nearest
twelfth of a year), multiplied by (ii) the sum of (x) Executive's annual base
salary in effect immediately prior to the Termination Date, (y) Executive's
annual bonus amount under any short-term incentive plan(s) or program(s) in
which Executive participates, such bonus amount to be calculated on the basis
of the extent to which the performance factors targeted by the Human
Resources Committee of the Board have been achieved (for this purpose, the
Company's performance through the Termination Date shall be annualized based
upon the actual number of days elapsed from the beginning of the fiscal year
in which the Termination occurs through the Termination Date over a year of
360 days), which shall be deemed to be one hundred percent (100%) unless the
performance actually achieved is greater than one hundred percent (100%), in
which case the actual performance level shall be utilized, and (z) the dollar
value of the most recent annual grant to Executive prior to the Termination
Date under any long-term incentive plan(s), program(s) or grant(s) in which
Executive participates, whether such value is in the form of stock, stock
options, Dividend Equivalent Units or any other form of long term incentive
compensation, such grant value to be calculated as if the
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performance measures set forth in any such plan(s), program(s) or grant(s)
(e.g., Dividend Equivalent Units) for the applicable performance period shall
be deemed to be one hundred percent (100%). The Company shall pay the
Additional Pay to Executive in a lump sum, in cash, not later than the
fifteenth calendar day following the Termination Date. The Company also
shall provide Executive with office space and shared administrative support
for the three (3) year period immediately following the Termination Date, in
the county of Executive's residence, at a location to be designated by the
Company, which office space and support shall be similar to that currently
provided by the Company to retired senior officers. The Company shall
maintain for Executive for the three (3) year period immediately following
the Termination Date, all perquisites and benefits enjoyed by Executive
immediately prior to the Termination Date.
(c) Retirement Plan Benefits. If not already vested,
Executive shall be deemed fully vested as of the Termination Date in any
Company retirement plan(s) or other written agreement(s) between Executive
and the Company relating to pay or other benefits upon retirement in which
Executive was a participant, party or beneficiary immediately prior to the
Change of Control, and any additional plan(s) or agreement(s) in which such
Executive became a participant, party or beneficiary thereafter. In addition
to the foregoing, for purposes of determining the amounts to be paid to
Executive under such plan(s) or agreement(s), the years of service with the
Company and the age of Executive under all such plans and agreements shall be
deemed increased by the lesser of thirty-six (36) months or such shorter
period of time as would render Executive sixty-five (65) years of age. For
purposes of this Subsection IV(c), the term "plan(s)" includes, without
limitation, the Company's qualified pension plan, non-qualified and
mid-career pension plans and any companion, successor or amended plan(s), and
the term "agreement(s)" encompasses, without limitation, the terms of any
offer letter(s) leading to Executive's employment with the Company where
Executive was a signatory thereto, any written amendment(s) to the foregoing
and any subsequent written agreement(s) on such matters. In the event the
terms of the plans referenced in this Subsection IV(c) do not for any reason
coincide with the provisions of this Subsection IV(c) (e.g., if plan
amendments would cause disqualification of qualified plans), Executive shall
be entitled to receive from the Company, under the terms of this Agreement,
an amount equal to all amounts he would have received, at the time he would
have received such amounts, had all such plans continued in existence as in
effect on the date of this Agreement after being amended to coincide with the
terms of this Subsection IV(c).
(d) Health and Other Benefits. Following the Termination
Date, the Company shall provide substantially the same level of health,
vision and dental benefits to Executive and Executive's eligible dependents
that the Company would provide to Executive and Executive's eligible
dependents if Executive were first eligible for retiree health, vision and
dental benefits immediately prior to the Change of Control. The eligibility
of Executive's dependents shall be determined by the terms of any retiree
health, vision and dental benefit plan(s) or program(s) in effect immediately
prior to the Change of Control. Following the Termination Date, (i) ownership
of any Basic Executive Life Insurance held by the Company for the benefit of
Executive immediately shall be transferred to a third party trustee and held
in an irrevocable rabbi trust for the benefit of Executive, and (ii) any
collateral assignment by Executive to the Company under any Supplemental
Executive Life Insurance (SELI) owned by Executive shall be subordinated to
Executive's right to the maximum cash value under the SELI measured against a
death benefit equal to fifty percent (50%) of the SELI coverage in effect
immediately prior to the Change of Control, without the SELI becoming a
modified endowment contract.
(e) Gross-Up Payments.
(i) In the event any payment(s) or the value of any
benefit(s) received or to be received by Executive in
connection with Executive's Termination or contingent upon a
Change of Control (whether received or to be received pursuant
to the terms of this Agreement (the "Agreement
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Payments") or of any other plan, arrangement or agreement of
the Company, its successors, any person whose actions result in
a Change of Control or any person affiliated with any of them
(or which, as a result of the completion of the transaction(s)
causing a Change of Control, will become affiliated with any of
them) ("Other Payments" and, together with the Agreement
Payments, the "Payments")), in the opinion of the Tax Consultant
(as defined below in Subsection IV(e)(ii)), would be subject to
an excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended (the "Code") or any other federal,
state or local excise tax (any such excise or other tax,
together with any interest and penalties, are hereinafter
collectively referred to as the "Excise Tax"), as determined as
provided below, the Company shall pay to Executive an additional
amount such that the net amount retained by Executive, after
deduction of the Excise Tax on Agreement Payments and Other
Payments and any federal, state and local income and employment
tax and Excise Tax upon the Payment(s) provided for by this
Subsection IV(e)(i), and any interest, penalties or additions
to tax payable by Executive with respect thereto, shall be
equal to the total present value of the Agreement Payments and
Other Payments at the time such Payments are to be made (the
"Gross-Up Payment(s)"). The intent of the parties is that the
Company shall be responsible in full for, and shall pay, any
and all Excise Tax on any Payments and Gross-Up Payment(s) and
any and all income and employment taxes (including, without
limitation, penalties and interest) imposed on any Gross-Up
Payment(s) as well as any loss of deduction caused by or
related to the Gross-Up Payment(s).
(ii) All determinations required to be made under this
Subsection IV(e), including, without limitation, whether and
when a Gross-Up Payment is required, and the amount of such
Gross-Up Payment and the assumptions to be utilized in arriving
at such determinations, unless otherwise set forth in this
Agreement, shall be made by tax consultant(s) selected by the
Company and reasonably acceptable to Executive ("Tax
Consultant"). For purposes of determining the amount of any
Gross-Up Payment, Executive shall be deemed to pay federal
income taxes at the highest marginal rate of federal income
taxation in the calendar year in which the Gross-Up Payment is
to be made, and state and local income taxes at the highest
marginal rate of taxation in the state and locality of
Executive's residence on the Termination Date, net of the
maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes. The
Company shall cause the Tax Consultant to provide detailed
supporting calculations to the Company and Executive within
fifteen (15) business days after notice is given by Executive
to the Company that any or all of the Payments have occurred,
or such earlier time as is requested by the Company. Within two
(2) business days after such notice is given to the Company,
the Company shall instruct the Tax Consultant to timely
provide the data required by this Subsection IV(e) to
Executive. All fees and expenses of the Tax Consultant shall
be paid in full by the Company. Any Excise Tax as determined
pursuant to this Subsection IV(e) shall be paid by the Company
to the Internal Revenue Service or any other appropriate taxing
authority on Executive's behalf within five (5) business days
after receipt of the Tax Consultant's determination. If the
Tax Consultant determines that there is substantial authority
(within the meaning of Section 6662 of the Code) that no Excise
Tax is payable by Executive, the Tax Consultant shall furnish
Executive with a written opinion that failure to disclose or
report the Excise Tax on Executive's federal income tax return
will not constitute a substantial understatement of tax or be
reasonably likely to result in the imposition of a negligence
or any other penalty. Any determination by the Tax Consultant
shall be binding upon the Company and Executive in the absence
of material mathematical or legal error. As a result of the
uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Tax Consultant
hereunder, it is possible that Gross-Up Payments will not have
been made by the Company that should have been made or that
Gross-Up Payments have been made that should not have been
made, in each case, consistent with the calculations required
to be made hereunder. In the event the Company exhausts its
remedies pursuant to Subsection IV(e)(iii) below, and
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Executive is thereafter required to make a payment of any
Excise Tax or any interest, penalties or addition to tax, the
Tax Consultant shall determine the amount of underpayment of
Excise Taxes that has occurred and any such underpayment and
any interest, penalties or addition to tax shall promptly be
paid by the Company to the Internal Revenue Service or other
appropriate taxing authority on Executive's behalf or, if such
underpayment has been previously paid by Executive to the
appropriate taxing authority, to Executive. In the event the
Tax Consultant determines that an overpayment of Gross-Up
Payment(s) has occurred, any such overpayment shall be treated
for all purposes as a loan to Executive with interest at the
applicable federal rate provided for in Section 7872(f)(2) of
the Code, due and payable within ninety (90) calendar days
after written demand to Executive by the Company; provided,
however, that Executive shall have no duty or obligation
whatsoever to repay such loan if Executive's receipt of the
overpayment, or any portion thereof, is includible in
Executive's income and Executive's repayment of the same is
not deductible by Executive for federal and state income tax
purposes.
(iii) Executive shall notify the Company in writing of any
claim of which he is aware by the Internal Revenue Service or
state or local taxing authority, that, if successful, would
result in any Excise Tax or an underpayment of any Gross-Up
Payment(s). Such notice shall be given as soon as practicable
but no later than fifteen (15) business days after Executive is
informed in writing of the claim by the taxing authority, and
Executive shall provide written notice to the Company of the
nature of the claim, the administrative or judicial appeal
period, and the date on which any payment of the claim must be
paid. Executive shall not pay any portion of the claim prior to
the expiration of the thirty (30) day period following the date
on which Executive gives such notice to the Company (or such
shorter period ending on the date that any amount under the
claim is due). If the Company notifies Executive in writing
prior to the expiration of such thirty (30) day period that it
desires to contest the claim, Executive shall:
(A) give the Company any information reasonably
requested by the Company relating to the claim;
(B) take such action in connection with contesting
the claim as the Company shall reasonably request in writing
from time to time, including, without limitation, accepting
legal representation concerning the claim by an attorney
selected by the Company who is reasonably acceptable to
Executive; and
(C) cooperate with the Company in good faith in order
to effectively contest the claim;
provided, however, that the Company shall bear and pay directly
all costs and expenses (including, without limitation,
additional interest and penalties and attorneys' fees) incurred
in such contests and shall indemnify and hold Executive
harmless, on an after-tax basis, for any Excise Tax or income
tax (including, without limitation, interest and penalties
thereon) imposed as a result of such representation. Without
limitation upon the foregoing provisions of this Subsection
IV(e)(iii), except as provided below, the Company shall control
all proceedings concerning such contest and, in its sole
opinion, may pursue or forego any and all administrative
appeals, proceedings, hearings and conferences with the taxing
authority pertaining to the claim. At the written request of
the Company and upon payment to Executive of an amount at least
equal to the claim plus any additional amount necessary to
obtain the jurisdiction of the appropriate tribunal and/or
court, Executive shall pay the same to the appropriate taxing
authority and sue for a refund. Executive agrees to prosecute
in cooperation with the Company any contest of a claim to a
determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate
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courts, as the Company shall determine; provided, however,
that if the Company requests Executive to pay the claim and
sue for a refund, the Company shall advance the full amount of
such payment to Executive, on an interest-free basis, and shall
indemnify and hold Executive harmless on an after-tax basis,
from any Excise Tax or income tax (including, without
limitation, interest and penalties thereon) imposed on such
advance or for any imputed income on such advance. Any
extension of the statute of limitations relating to assessment
of any Excise Tax for the taxable year of Executive which is the
subject of the claim is to be limited solely to the claim.
Furthermore, the Company's control of the contest shall be
limited to issues for which a Gross-Up Payment would be payable
hereunder. Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
(iv) If, after the receipt by Executive of an amount
advanced by the Company pursuant to Subsection IV(e)(iii)
above, Executive receives from the taxing authority any refund
of a claim or any additional amount that was necessary to
obtain jurisdiction, Executive shall promptly pay to the Company
the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the
receipt by Executive of an amount advanced by the Company
pursuant to Subsection IV(e)(iii) above, a determination is made
that Executive shall not be entitled to any refund of the claim,
and the Company does not notify Executive in writing of its
intent to contest such denial of refund of a claim prior to the
expiration of thirty (30) calendar days after such
determination, then the portion of such advance attributable to
a claim shall be forgiven by the Company and shall not be
required to be repaid by Executive. The amount of such advance
attributable to a claim shall offset, to the extent thereof,
the amount of the underpayment required to be paid by the
Company to Executive.
(v) If, after the advance by the Company of an additional
amount necessary to obtain jurisdiction, there is a final
determination made by the taxing authority that Executive is
not entitled to any refund of such amount, or any portion
thereof, then such advance shall be repaid to the Company by
Executive within thirty (30) calendar days after Executive
receives notice of such final determination. A final
determination shall occur when the period to contest or
otherwise appeal any decision by an administrative tribunal or
court of initial jurisdiction has been waived or the time for
contesting or appealing the same has expired.
(f) Legal Fees and Expenses. The Company shall pay to
Executive all legal fees and expenses as and when incurred by Executive in
connection with this Agreement, including all such fees and expenses, if any,
incurred in contesting or disputing any Termination or in seeking to obtain
or enforce any right, payment or benefit provided by this Agreement,
regardless of the outcome, unless, in the case of a legal action brought by
or in the name of Executive, a decision is rendered pursuant to Section XI,
or in any other proper legal proceeding, that such action was not brought by
Executive in good faith.
(g) No Mitigation. Executive shall not be required to mitigate
the amount of any payment or benefit provided for in this Section IV by
seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Section IV be reduced by any compensation earned
by Executive as the result of employment with another employer or by
retirement or other benefits received from whatever source after the
Termination Date or otherwise, except as specifically provided in this
Section IV. The Company's obligation to make payments to Executive provided
for in this Agreement and otherwise to perform its obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment, defense or
other claim, right or action that the Company or Employer may have against
Executive or other parties.
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V. Death and Disability Benefits
In the event of the death or Disability of Executive after a
Change of Control , Executive, or in the case of death, Executive's
Beneficiaries (as defined below in Subsection VI.(c)), shall receive the
benefits to which Executive or his Beneficiaries are entitled under this
Agreement and any and all retirement plans, pension plans, disability
policies and other applicable plans, programs, policies, agreements or
arrangements of the Company.
VI. Successors; Binding Agreement
(a) Obligations of Successors. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company is required to perform it.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle Executive to compensation from the Company in the same amount
and on the same terms as Executive would be entitled hereunder if Executive
had terminated employment for Good Reason following a Change of Control,
except that for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Termination Date. As
used in this Agreement, the term "Company" shall mean U S WEST, Inc.,
including any surviving entity or successor to all or substantially all of
its business and/or assets and the parent of any such surviving entity or
successor.
(b) Joint and Several Liability. Upon the occurrence of a
Change of Control as defined in Subsection I(i)(v)(A), (B), (D) or (E), the
Company and the Subsidiary whose stock is distributed (by redemption or
dividend) to the stockholders of the Company as described therein shall be
jointly and severally liable for all of the obligations of the Company under
this Agreement, and prior to the occurrence of such event, the Company shall
require such Subsidiary to expressly agree in writing to perform this
Agreement jointly and severally with the Company.
(c) Enforceable by Beneficiaries. This Agreement shall inure
to the benefit of and be enforceable by Executive's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees (the "Beneficiaries"). In the event of the death of
Executive while any amount would still be payable hereunder if such death had
not occurred, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to Executive's
Beneficiaries.
(d) Employment. Except in the event of a Change of Control
and, thereafter, only as specifically set forth in this Agreement, nothing in
this Agreement shall be construed to: (i) limit in any way the right of the
Company or a Subsidiary to terminate Executive's employment at any time for
any reason, or for no reason; or (ii) be evidence of any agreement or
understanding, expressed or implied, that the Company or a Subsidiary will
employ Executive in any particular position, on any particular terms or at
any particular rate of remuneration.
VII. Confidential Information.
Executive shall hold in a fiduciary capacity for the benefit
of the Company all secret or confidential information, knowledge or data
relating to the Company, the Subsidiaries and their respective businesses,
which shall have been obtained during Executive's employment with the
Employer and which shall not be public knowledge (other than by acts by
Executive or his representatives in violation of this Agreement). After
termination of Executive's employment with the Company or any Employer within
the Controlled Group, Executive shall not, without prior written consent of
the Company or the Employer, communicate or
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divulge any such information, knowledge or data to anyone other than the
Company, the Employer or those designated by them. In no event shall an
asserted violation of this Section VII constitute a basis for deferring or
withholding any amounts otherwise payable to Executive under this Agreement.
VIII. Notice
All notices and communications, including, without limitation,
any Notice of Termination hereunder, shall be in writing and shall be given
either by hand delivery to the other party, by registered or certified mail,
return receipt requested, postage prepaid, or by overnight delivery service,
addressed as follows:
If to Executive:
Name
Group Officer
U S WEST Group
Address
If to the Company:
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Attn.: Vice President - Law and Human Resources
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notices and communications shall be deemed
given and effective when actually received by the addressee.
IX. Miscellaneous
No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing and signed by Executive and the Company's Chief Executive Officer or
other authorized officer designated by the Board or an appropriate committee
of the Board. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any conditions or provision of
this Agreement to be performed by such other party shall be deemed a waiver
of similar or dissimilar provisions or conditions at the same or at any prior
or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made
by either party which are not expressly set forth in this Agreement. The
validity, interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Delaware. All references to
sections of the Code or the Exchange Act shall be deemed also to refer to any
successor provisions of such sections. Any payments provided for hereunder
shall be paid net of any applicable withholding required under federal, state
or local law. The obligations of the Company under Sections IV and V shall
survive the expiration of the term of this Agreement.
X. Validity
The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
XI. Arbitration
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Executive may agree in writing with the Company (in which case
this Article XI shall have effect but not otherwise) that any dispute that
may arise directly or indirectly in connection with this Agreement,
Executive's employment or the termination of Executive's employment, whether
arising in contract, statute, tort, fraud, misrepresentation, discrimination
or other legal theory, shall be resolved by arbitration in Denver, Colorado,
under the applicable rules and procedures of the AAA. The only legal claims
between Executive and the Company or any Subsidiary that would not be
included in this agreement to arbitration are claims by Executive for
workers' compensation or unemployment compensation benefits, claims for
benefits under a Company or Subsidiary benefit plan if the plan does not
provide for arbitration of such disputes, and claims by Executive that seek
judicial relief in the form of specific performance of the right to be paid
until the Termination Date during the pendency of any applicable dispute or
controversy. If this Article XI is in effect, any claim with respect to this
Agreement, Executive's employment or the termination of Executive's
employment must be established by a preponderance of the evidence submitted
to an impartial arbitrator. A single arbitrator engaged in the practice of
law shall conduct any arbitration under the applicable rules and procedures
of the AAA. The arbitrator shall have the authority to order a pre-hearing
exchange of information by the parties including, without limitation,
production of requested documents, and examination by deposition of parties
and their authorized agents. If this Article XI is in effect, the decision
of the arbitrator: (i) shall be final and binding; (ii) shall be rendered
within ninety (90) days after the impanelment of the arbitrator; and (iii)
shall be kept confidential by the parties to such arbitration. The
arbitration award may be enforced in any court of competent jurisdiction.
The Federal Arbitration Act, 9 U.S.C. 1-15, not state law, shall govern the
arbitrability of all claims.
If this Agreement sets forth the terms of our understanding on
the subject matter hereof, kindly sign both originals of this letter and
return to the Vice President - Law and Human Resources of the Company one of
the fully executed originals of this letter which will then constitute our
Agreement on this subject.
Sincerely,
U S WEST, Inc.
By:___________________________________
Chairman, President and Chief Executive Officer
______________________________________
Name
15
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EXHIBIT 10ae
AMENDED U S WEST COMMUNICATIONS GROUP
LONG-TERM INCENTIVE PLAN
Section I
PURPOSE
The purpose of the Amended 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 U S WEST Communications Group Long Term
Incentive Plan was effective on January 1, 1996. This Amended U S WEST
Communications Group Long Term Incentive Plan is effective January 1, 1997,
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.
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2.4 "Committee" shall mean the Human Resources Committee of the Company's
Board of Directors, or its delegate. It is intended that the Committee members
all qualify as "outside directors" within the meaning of Code section 162(m).
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 Amended 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 terminated employment with the Company or the Communications
Group other than "for cause" (as determined by the Committee) and (i) such
person is eligible to receive an immediate service pension benefit under the
U S WEST Pension Plan, (ii) such person would be eligible to receive an
immediate service pension under the U S WEST Pension Plan, as amended and
restated effective January 1, 1993, had that plan not been amended and restated
effective January 1, 1997, (iii) such person specifically is treated as
"retired" for purposes of the U S WEST 1994 Stock Plan ( the "Stock Plan") under
any individually negotiated, custom, written agreement or arrangement between
the Company or any Related Entity (as defined in the Stock Plan) and the
Participant, or (iv) the Committee deems such Participant to be "Retired" for
purposes of this Plan in its sole discretion.
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.
Section IV
PERFORMANCE PERIODS
The Plan, as amended, shall be effective for two (2) Performance Periods,
each having a duration of three calendar years. The first Performance Period
shall commence on January 1, 1997, and shall terminate on December 31, 1999, and
the second Performance Period shall commence on January 1, 1998, and shall
terminate on December 31, 2000.
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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.
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, and may be reduced for any
Participant by the Committee in its sole and absolute discretion, provided that
such reduction does not result in an increased percentage for any other
Participant.
6.2 Form and Manner of Payout. The DEU award payment to each Participant shall
be made in any combination of shares of Communications Stock, Restricted Stock
or cash, as determined by the Committee in its sole discretion. Any portion of
the award paid in Communications Stock shall be determined by dividing such
portion of 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.
Awards shall be payable to a Participant as soon as practicable following the
Performance Period. 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 cash or unrestricted shares of Communications Stock paid
pursuant to this Plan are taxable at the time they are paid. Restricted Stock
paid pursuant to this Plan 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,
less the number of shares of Communications Stock, if any, awarded under the U S
WEST Communications Group Long Term Incentive Plan for the 1996-1997 and
1996-1998 Performance Periods.
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 of 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.
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(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.
(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 at the 100% level;
(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, the benefit payable under the Plan for any outstanding DEUs
held by the Participant at the time of death or disability, if any, 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, and (ii) the Participant shall continue
to hold any DEUs then held by the Participant and any award payable on such DEUs
shall be calculated at the end of the Performance Period and paid to the
Participant pursuant to the provisions of Section VI as if the Participant were
employed and participated in the Plan during the entire Performance Period;
provided, however, that the continuation of vesting of Restricted Stock 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, (i) 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
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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 interpreted solely by the Company's Senior Management
Compliance Committee; or (ii) the Participant, either on his or her own
account or in conjunction with or on behalf of any other person or entity
whatsoever, directly or indirectly induces, solicit, or entice away any
person who, at any time during the three (3) months immediately preceding the
Participant's Retirement, is a managerial level employee of the Company
(including, but not limited to, any Officer, Executive Director or
director-level employee, or any equivalent or successor term for any such
employees), the Participant immediately shall forfeit all DEUs and Restricted
Stock granted under the Plan, and no payments on any DEUs held by the
Participant 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. 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. The
Federal Arbitration Act, 9 U.S.C. Sections 1-16 ("FAA") shall govern the
arbitrability of all claims, provided that they are enforceable under the FAA,
as it may be amended from time to time. In the event the FAA does not govern,
the Colorado Uniform Arbitration Act shall apply. Additionally, the substantive
law of Colorado, to the extent it is consistent with the terms stated in this
Plan for arbitration, shall apply to any common law claims. This arbitration
provision supersedes any other arbitration agreement between the Participant and
the Company to the extent they are inconsistent.
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
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Participant's employment with the Company or the Communications Group or to the
termination of the Participant's employment shall be conducted under the AAA
National Rules for the Resolution of Employment Disputes, effective June 1,
1996. 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 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.
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
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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.
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EXHIBIT 10af-1
April 2, 1996
Mike Glinsky
Coopers & Lybrand
370 17th Street, Suite 3300
Denver, CO 80202
Dear Mike:
U S WEST is pleased to formally offer you employment at U S WEST, Inc. (also
referred to as "U S WEST") in the capacity of Executive Vice President and Chief
Financial Officer in Englewood, Colorado, reporting directly to the Chairman,
Chief Executive Officer and President, U S WEST, Inc. As such, you will become
a member of the Company's Senior Management Team. Your formal election will
occur at the next meeting of the U S WEST Board of Directors. The purpose of
this letter is to cover the essential elements of our relationship. Assuming
your acceptance, please sign and return a copy of this letter and Attachments in
the enclosed envelope or by fax by April 3, 1996. The other copy is for your
records. We look forward to your joining us. We understand from you that you
are prepared to commence your employment with U S WEST, Inc. on April 15, 1996.
Special Hiring Incentives
Upon signed receipt of the offer letter and signed acceptance of the terms
stated in the Attachments, you will receive a $130,000 Sign-On-Bonus. This
Bonus will be grossed-up in such a manner that the $130,000 amount will be net
of all applicable taxes. This one-time bonus will be paid to you within 1 to 2
pay periods following the effective date of your hire. In the event you
voluntarily terminate your employment within one year after your employment
date, you are obligated to repay this Bonus in full to U S WEST.
Salary
As compensation for the services you will be performing, you will receive an
annual salary of $400,000 currently paid at two week intervals.
Annual Incentive
You will participate in the U S WEST Short-Term Incentive Plan ("STIP") and be
eligible for a target annual award of 60% of your base salary, according to plan
provisions, and contingent upon Company and individual results. If you commence
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Mike Glinsky
Page 2
April 3, 1996
employment by April 15, 1996, this award opportunity will be paid as if you
began work on January 1, 1996, and will not be pro-rated. However, U S WEST
will guarantee a pro-rated target STIP payment of at least $180,000 for the 1996
performance year.
Long Term Incentive
You will be granted 45,000 performance shares as a participant in the current
U S WEST Long-Term Incentive Plan ("LTIP"). The current plan operates through
1996. As a plan participant, you will be credited with a portion of the 45,000
share grant based upon Total Shareowner Return ("TSR") results pursuant to the
plan provisions. The award is currently delivered in common stock with a two
year restriction period. You will commence participation in the plan upon your
employment. This award opportunity will be on a pro-rata basis for 1996
beginning with your date of hire. The target award, if achieved under the Plan
would, on this basis, provide you with approximately 4,556 shares of Media Group
and Communications Group common stock respectively.
You will also be granted 36,000 Dividend Equivalent Units (DEU's) in the new
U S WEST Communications Group Long Term Incentive Plan paying out over a two and
three year periods, in early 1998 and 1999, respectively. This Plan is in part
a replacement LTIP for the current U S WEST LTIP which will expire December 31,
1996.
In addition, under the Company's new LTIP program, you will be granted 35,000
U S WEST Media Group stock options and 28,000 U S WEST Communications Group
stock options. The grant price of these options will be determined based upon
the closing price of the respective stocks on the day that the Human Resources
Committee of the Board of Directors approves the grant. These are non-qualified
options that vest in one-third increments each year for the next three years.
The annual Black-Scholes value of the new LTIP to you has been calculated by us
as being worth $550,000.
Change of Control and Executive Severance
You will be a participant in the U S WEST, Inc. Change of Control Plan and will
have an individual agreement to that effect.
You will also be entitled to a standard U S WEST Executive Severance Agreement
setting forth the terms and conditions under which you would be entitled to
receive severance benefits in the unlikely event your employment were to be
terminated without cause. It is a condition of your employment that you sign
the Severance Agreement and a copy is enclosed.
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Mike Glinsky
Page 3
April 3, 1996
The arbitration provisions of the Executive Severance Agreement will govern any
dispute that may arise between you and U S WEST, with the sole exception that
the arbitration provisions contained in your Change of Control Agreement will
govern if a "change of control" (as defined in the Change of Control Agreement)
occurs.
Pension
We understand that you are entitled to a vested pension when you terminate
employment with your current employer. It is the intention of U S WEST that you
be eligible to receive from U S WEST, if you retire from U S WEST at age 60, a
supplemental pension amount which, when added to that amount you will receive
from your current employer, will be at least as valuable as you would have
received if you had remained with such employer until age 60, based upon
reasonable assumptions. Attached hereto is a schedule setting forth what this
pension amount would be under a set of reasonable illustrative, but not
guaranteed, assumptions.
To this end, you will participate in the U S WEST Mid-Career Pension Plan, and
Non-Qualified and Qualified Pension Plans upon beginning employment with
U S WEST.
The Mid-Career Pension Plan as it applies to you will be modified so as to
provide you with an additional 3/4 year of service for every year of service
with U S WEST. Thus, you will received one and 3/4 years of service for each
year of service at U S WEST. In the event you voluntarily leave employment with
U S WEST prior to five years from the commencement of your employment with
U S WEST, your U S WEST Pensions shall not vest. In all other circumstances,
your U S WEST Pensions shall be treated as vested upon your termination of
employment with U S WEST.
In addition, if you work until age 57, you will be considered "Service Pension
eligible" and will receive the benefits given to Service Pension eligible
employees under all U S WEST plans and programs. Currently included would be
payment of your pension on an immediate unreduced basis, medical and dental
benefits, and stock option vesting.
All benefits granted under this section will be provided to you under this
letter to the extent you do not qualify for them under the terms of the regular
Plans.
Executive Benefits
You will be eligible to participate in the U S WEST Deferred Compensation Plan,
subject to plan provisions in place by enrolling by year-end 1996. An
enrollment package will be sent to you, describing the plan in detail. However,
within 30 days of your hire date, you may also elect to defer receipt of your
1996 (paid 1997) Short Term Incentive Award.
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Mike Glinsky
Page 4
April 3, 1996
You may elect to participate in the U S WEST Executive Life Insurance Plan in
lieu of the Group Plan. The basic policy provides coverage equal to your annual
eligible compensation (which includes base salary and short-term incentive
award) with U S WEST paid premiums. In addition, upon proof of insurability,
you may elect to participate in the Supplemental Life Insurance Plan which
provides coverage of up to four (4) times your eligible annual pay. This plan
is a split dollar plan with potential cash value to you. You will pay the same
group term rates as you would in the Group Plan.
In the event that you are disabled and unable to work at U S WEST due to an
illness or injury, you will be eligible to receive Short Term Disability
benefits of up to 52 weeks of full base pay. After the 52 weeks, you may be
eligible for Long Term Disability benefits equal to 60% of base pay (offset by
pension, social security and workers compensation benefits). The specific
benefits and conditions are defined in the U S WEST Executive Disability Plan.
You will be provided an annual financial counseling reimbursement, subject to
plan provisions, in an amount up to $10,000. Such amount must be used prior to
the end of each calendar year, and does not carry over into the following year.
You will be eligible to receive an annual physical, according to current plan
provisions (currently up to $500), paid for by U S WEST.
U S WEST will also reimburse you for monthly dues for a country club equivalent
to the one to which you now belong, and associated business expenses.
U S WEST agrees to pay for a luncheon club (approximately $100 in monthly dues)
and will provide, for business purposes, first class air travel and use of
corporate aircraft, when available, (spousal use for business purposes grossed
up for tax purposes).
U S WEST agrees to pay for the installation, maintenance and monthly service
fees for a home security system while you are employed at U S WEST similar to
those utilized by other U S WEST Executive Officers.
Employee Benefits
Finally, you will be eligible to participate in all of the established benefit
programs regularly maintained by U S WEST. At the present time, these include:
- - Medical, dental and vision coverage which provides, according to the
provisions in effect at the time of coverage, various options of coverage.
<PAGE>
Mike Glinsky
Page 5
April 3, 1996
- - The option to elect to participate in the Group Life Insurance Plan which
provides basic coverage equal to your salary. This coverage is provided at
company expense. In addition you may elect to purchase supplemental coverage
of from 1 to 5 times annual pay. You will pay group term rates for this
coverage.
- - Paid vacation, including personal days and designated holidays (currently
there is no prescribed number of such days allotted, vacation time being a
matter of judgment for our officer group).
- - 401(k) savings plan with matching company contributions of 83.33% up to 6%
pre-tax of base salary after one year of service with U S WEST and based on
plan provisions.
- - U S WEST Stock Option reload provision of the 1994 Stock Plan
In all cases, you will be entitled to receive all benefits of employment
generally applicable to all employees of U S WEST at your same level of
responsibility. These benefits will be pursuant to the specific provisions of
such plans and programs.
Mike, this offer and compensation opportunities recognize the scope and
significance of the job we are offering you. They also represent our confidence
in the contributions you will make to the success of U S WEST. Dick McCormick
and I look forward to your acceptance of this offer and anticipate your
value-added contributions to the success of U S WEST.
Sincerely,
Charles P. Russ, III
Attachments
I acknowledge receipt of this offer and accept the offer as stated, which is
conditioned upon my successful completion of a pre-employment drug test,
successful completion of a medical inquiry, satisfactory resolution of a
background check and acceptance of the terms stated in the Attachments and the
Agreement regarding Severance.
____________________________________ _____________________________
Mike Glinsky Date
<PAGE>
Mike Glinsky
April 2, 1996
Attachment A
Page 1
ATTACHMENT A
In consideration of the offer of employment extended to you by U S WEST
Communications, you must satisfy or agree to each of the conditions described
below. Should you decide to accept the offer of employment, please sign and
return this Attachment in the enclosed envelope by April 3, 1996. As used in
this Attachment, "U S WEST" includes U S WEST, Inc., any successor, subsidiary
or affiliate of U S WEST, Inc., and the employees, officers, directors, and
agents of each of them. This Attachment supersedes any written or verbal
representations regarding matters addressed in this Attachment to the extent
they are inconsistent. PLEASE READ THIS DOCUMENT CAREFULLY, AS IT AFFECTS THE
LEGAL RIGHTS OF YOU AND U S WEST.
PRE-EMPLOYMENT INQUIRIES
There are five primary pre-employment conditions you must satisfy as a condition
of this offer. These conditions include signing and returning this Attachment
to U S WEST; successful completion of a pre-employment drug test; successful
completion of a medical inquiry; satisfactory resolution of a background check;
and signed acceptance of the terms stated in the Agreement regarding Severance.
The determination as to whether each of these conditions has been satisfactorily
completed will be made by U S WEST in its reasonable discretion. The background
check may include one or more of the following actions depending on the
relevance to the position you have been offered: verification of your work
experience, training, licenses, certificates and other educational experience,
examination of your driving record, and examination of public records including
basic identity verification, social security number and criminal history.
EMPLOYMENT AT WILL
Nothing in the offer of employment or in this Attachment contain any promises
about the terms, conditions, or duration of the employment relationship between
you and U S WEST or the circumstances under or the procedures by which the
employment relationship may be terminated. Just as you may terminate your
employment at any time, with or without cause, U S WEST reserves the same
rights, that is, it may also terminate you or change the terms and conditions of
your employment at any time with or without cause. Change in the economy,
markets and technology is inevitable. For this reason and others, U S WEST
cannot contract or even imply that your employment will continue for any
particular period of time. This at-will employment relationship
<PAGE>
Mike Glinsky
April 2, 1996
Attachment A
Page 2
may not be modified, unless in a written agreement properly signed by you and
anauthorized officer of U S WEST. Nothing contained in the offer of employment,
this Attachment, or other communications, creates or implies an employment
contract or term of employment or any promise of specific treatment upon which
you can rely.
TRADE SECRETS AND CONFIDENTIAL INFORMATION
During the course of your employment with U S WEST you may have access to or
create intellectual property of U S WEST. Therefore:
Executive agrees that any inventions, discoveries, creations (including without
limitation software, writings, drawings and other works), improvements,
confidential information or other intellectual property that he or she may
develop or create, or assist in developing or any creating, during his or her
employment with U S WEST, whether or not patentable or eligible for copyright,
which relate to the actual, planned, or foreseeable business or other activities
of U S WEST, or which result from his or her work for U S WEST, are the
exclusive property of U S WEST and at no time later than his or her termination
of employment with U S WEST. Executive agrees to disclose promptly such
intellectual property to U S WEST and will, both during and after his or her
employment, and without additional compensation, execute all assignments and
other documents and do all things reasonably necessary to secure and enforce
U.S. and foreign intellectual property rights for U S WEST, including patents
and copyrights.
Executive agrees to hold in a fiduciary capacity for the benefit of U S WEST
all confidential, legal, financial, marketing, business, technical, or other
information, including specifically but not exclusively, information that
Executive prepared, caused to be prepared, or received in connection with
Executive's employment with U S WEST, such as, management and business plans,
business strategies, software, software evaluations, trade secrets, personnel
information, marketing methods and techniques, and any of the above-recited
information as it relates to U S WEST which shall have been obtained and/or
learned during his or her employment and which shall not be public knowledge.
After termination of Executive's employment with U S WEST, Executive will not,
without prior written consent of U S WEST, communicate or divulge any such
information, knowledge or data to anyone other than U S WEST or its designated
representatives. This provision does not apply to (a) information or knowledge
that already is or subsequently may come into the public domain after the
termination of employment other than by way of unauthorized disclosure by
Executive, or (b)
<PAGE>
Mike Glinsky
March 19, 1996
Attachment A
Page 3
information or knowledge that Executive is required to disclose by order of a
court or governmental agency after timely notice is provided to U S WEST to
allow U S WEST to take legal action with respect to the matter.
You are not obligated to assign any intellectual property to U S WEST that you
created prior to your employment with U S WEST. To avoid any confusion, you
must identify in writing on the attached page any such intellectual property
that has not been patented or published and forward it along with this
Attachment.
SEVERABILITY AND SURVIVAL OF TERMS
In case any one or more of the provisions of this Attachment shall be found to
be invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained in this Attachment will not
be affected. Further, any provision or portion of this Attachment found to be
invalid, illegal or unenforceable shall be deemed, without further action on the
part of you or U S WEST, to be modified, amended and/or limited to the minimum
extent necessary to render such provisions or portions thereof valid and
enforceable. The provisions of this Attachment regarding trade secrets and
confidential information and arbitration shall survive the termination of your
employment by U S WEST.
If these arrangements meet with your approval, please sign below and return one
of the signed Attachments to Charles P. Russ III, Executive Vice President, Law
& Human Resources, General Counsel and Secretary, U S WEST, Inc., 7800 E.
Orchard Road, Suite 200, Englewood, CO 80112. The other copy is for your
records.
I accept the offer of employment with U S WEST, Inc. I have read this
Attachment, including the provisions concerning employment at will, trade
secrets and confidential information. My signature below indicates that I
understand and agree to the terms of this Attachment.
____________________________________ _____________________________
Mike Glinsky Date
<PAGE>
Mike Glinsky
April 2, 1996
Attachment B
ATTACHMENT B
INTELLECTUAL PROPERTY THAT HAS BEEN PATENTED OR PUBLISHED
1.
2.
3.
<PAGE>
EXHIBIT 10af-2
U S WEST, Inc.
7800 East Orchard Road, Suite 200
Post Office Box 6508
Englewood, Colorado 80155-6508
303 793-6500
Richard D. McCormick
Chairman and Chief Executive Officer
January 31, 1997
Michael P. Glinsky
Executive Vice President &
Chief Financial Officer
U S WEST, Inc.
7800 East Orchard Road
Suite 200
Englewood, CO 80155
Dear Mike:
It is my pleasure to inform you of your 1997 Executive Total Direct Compensation
opportunities, effective January 1, 1997. Please retain one copy of the
Agreement for your files and return the signed original in the enclosed envelope
to the Executive Compensation organization by March 15, 1997.
Your 1997 Total Direct Compensation opportunities reflect U S WEST's
compensation philosophy objectives to:
- Offer a total compensation opportunity competitive with peer companies
- Recognize your contribution and value to our success
- Tailor to our unique business needs
- Align Executives with our shareholders as owners of the Company, and
- Enable Executive movement across the organization
Enclosed is your personalized one page summary outlining your opportunities this
year and your Long Term Incentive grant, including your Stock Option Agreement
and Dividend Equivalent Unit Schedule.
This letter also serves to clarify your pension arrangement with the Company to
reflect recent changes to the Company's benefit programs. This letter
supplements the terms of the supplemental pension set forth in your offer letter
dated April 3, 1996.
Under the new disability benefit feature to the qualified U S WEST Pension Plan
recently approved by the Board of Directors for all management employees, any
disability benefit paid to a participant does not affect the level of such
participant's pension benefit. Consistent with this Board approval, any
disability benefit you may receive from U S WEST, including without
limitation, any incidental disability benefit from a pension plan (whether
received prior to, after
<PAGE>
Michael P. Glinsky
January 31, 1997
Page 2
or concurrent with any pension benefit), shall not be considered to be a pension
payment and shall not offset any pension payment from U S WEST.
Upon your retirement on or after your fifty-seventh birthday, you will be
eligible for benefits as if "service pension eligible," and will receive the
equivalent benefits provided to service pension eligible employees under all U S
WEST plans and programs, including without limitation, treatment as if "retired"
under the U S WEST Stock Plan. The terms and conditions of this letter
are binding on the Company's successors and assigns, whether by law or
otherwise, including without limitation, in the event of a change of control of
the Company.
The Human Resources Committee's approval of the compensation opportunities and
modified pension benefit described above reflects the Company's desire to
maintain appropriate incentives to retain your highly valued services in the
future.
Mike, I look forward to your acceptance of these employment terms and anticipate
your continued strong performance and the contribution you will make to the
success of U S WEST.
Please indicate your acceptance by signing below and returning to me at your
earliest convenience.
Sincerely,
Richard D. McCormick
I acknowledge receipt of this letter and agree to its terms, which are
conditioned upon my signature below.
____________________________________ _____________________________
Michael P. Glinsky Date
cc: Sharon Naylor
<PAGE>
CONFORMED COPY
$3,000,000,000
364-DAY
CREDIT AGREEMENT
dated as of
November 1, 1996
among
U S WEST Capital Funding, Inc.
U S WEST, Inc.
The Banks Listed Herein
Citibank, N.A.,
as Syndication Agent
The Bank of New York,
as Documentation Agent
and
Morgan Guaranty Trust Company of New York,
as Administrative Agent
<PAGE>
TABLE OF CONTENTS*
Page
ARTICLE 1
Definitions
Section 1.01. Definitions...................................................1
Section 1.02. Accounting Terms and Determinations..........................12
Section 1.03. Types of Borrowings..........................................12
ARTICLE 2
The Credit
Section 2.01. Commitments to Lend..........................................13
Section 2.02. Notice of Committed Borrowing................................15
Section 2.03. Money Market Borrowings......................................15
Section 2.04. Notice to Banks; Funding of Loans............................19
Section 2.05. Notes........................................................20
Section 2.06. Maturity of Loans............................................21
Section 2.07. Interest Rates...............................................21
Section 2.08. Facility Fees................................................24
Section 2.09. Optional Termination or Reduction of Commitments.............24
Section 2.10. Method of Electing Interest Rates............................24
Section 2.11. Optional Prepayments.........................................25
Section 2.12. General Provisions as to Payments............................26
Section 2.13. Funding Losses...............................................27
Section 2.14. Computation of Interest and Fees.............................27
Section 2.15. Change of Control............................................27
ARTICLE 3
Conditions
Section 3.01. Closing......................................................28
Section 3.02. Borrowings...................................................29
ARTICLE 4
Representations and Warranties
Section 4.01. Corporate Existence and Power................................30
Section 4.02. Corporate and Governmental Authorization;
__________
* The Table of Contents is not part of this Agreement.
i
<PAGE>
No Contravention.............................................30
Section 4.03. Binding Effect...............................................30
Section 4.04. Financial Information........................................30
Section 4.05. Litigation...................................................31
Section 4.06. Compliance with ERISA........................................31
Section 4.07. Environmental Matters........................................32
Section 4.08. Taxes........................................................32
Section 4.09. Subsidiaries.................................................32
Section 4.10. Not an Investment Company....................................33
Section 4.11. Full Disclosure..............................................33
ARTICLE 5
Covenants
Section 5.01. Information..................................................33
Section 5.02. Maintenance of Property; Insurance...........................35
Section 5.03. Maintenance of Existence.....................................36
Section 5.04. Compliance with Laws.........................................36
Section 5.05. Inspection of Property, Books and Records....................36
Section 5.06. Subsidiary Debt..............................................36
Section 5.07. Debt Coverage................................................36
Section 5.08. Negative Pledge..............................................37
Section 5.09. Consolidations, Mergers and Sales of Assets..................38
Section 5.10. Use of Proceeds..............................................38
ARTICLE 6
Defaults
Section 6.01. Events of Default............................................38
Section 6.02. Notice of Default............................................41
ARTICLE 7
The Agent
Section 7.01. Appointment and Authorization................................41
Section 7.02. Agent and Affiliates.........................................41
Section 7.03. Action by Agent..............................................42
Section 7.04. Consultation with Experts....................................42
Section 7.05. Liability of Agent...........................................42
Section 7.06. Indemnification..............................................42
Section 7.07. Credit Decision..............................................42
Section 7.08. Successor Agent..............................................43
Section 7.09. Agent's Fee..................................................43
ii
<PAGE>
Section 7.10. Other Agents.................................................43
ARTICLE 8
Changes in Circumstances
Section 8.01. Basis for Determining Interest Rate Inadequate
or Unfair....................................................43
Section 8.02. Illegality...................................................44
Section 8.03. Increased Cost and Reduced Return............................45
Section 8.04. Taxes........................................................46
Section 8.05. Domestic Loans Substituted for Affected
Euro-Dollar Loans............................................48
Section 8.06. Substitution of Bank.........................................48
ARTICLE 9
Guaranty
Section 9.01. The Guaranty.................................................49
Section 9.02. Guaranty Unconditional.......................................49
Section 9.03. Discharge Only upon Payment in Full;
Reinstatement In Certain Circumstances.......................50
Section 9.04. Waiver by the Company........................................50
Section 9.05. Subrogation..................................................50
Section 9.06. Stay of Acceleration.........................................50
ARTICLE 10
Miscellaneous
Section 10.01. Notices.....................................................51
Section 10.02. No Waivers..................................................51
Section 10.03. Expenses; Indemnification...................................51
Section 10.04. Sharing of Set-offs.........................................52
Section 10.05. Amendments and Waivers......................................53
Section 10.06. Successors and Assigns.....................................53
Section 10.07. Termination of Existing Credit Agreements...................55
Section 10.08. Governing Law; Submission to Jurisdiction...................55
Section 10.09. Counterparts; Integration; Effectiveness....................55
Section 10.10. WAIVER OF JURY TRIAL........................................56
Section 10.11. Confidentiality.............................................56
iii
<PAGE>
Pricing Schedule
Schedule 4.07 - Environmental Matters
Exhibit A - Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E - Opinion of Counsel for the Company and the Borrower
Exhibit F - Opinion of Special Counsel for the Administrative Agent
Exhibit G - Assignment and Assumption Agreement
Exhibit H - Extension Agreement
iv
<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of November 1, 1996 among U S WEST Capital Funding,
Inc., U S WEST, Inc., the BANKS listed on the signature pages hereof,
CITIBANK, N.A., as Syndication Agent, THE BANK OF NEW YORK, as Documentation
Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative
Agent.
The parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.01. Definitions.
The following terms, as used herein, have the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes setting
forth Money Market Absolute Rates pursuant to Section 2.03.
"Acquisition" means the merger of Continental Cablevision, Inc.
("Continental"), with and into the Company or a Wholly-Owned Consolidated
Subsidiary, provided that the cash consideration payable to shareholders of
Continental in connection with such merger shall not exceed the "Cash
Consideration Amount" (as defined in the Agreement and Plan of Merger among the
Company, Continental Merger Corporation and Continental dated as of February 27,
1996 and amended and restated as of June 27, 1996 and further amended as of
October 7, 1996) without the consent of the Required Banks, which consent shall
not be unreasonably withheld or delayed.
"Adjusted London Interbank Offered Rate" has the meaning set forth in
Section 2.07(b).
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted to
the Agent (with a copy to the Company) duly completed by such Bank.
"Agent" means Morgan Guaranty Trust Company of New York in its capacity
as administrative agent for the Banks hereunder, and its successors in such
capacity.
"Applicable Lending Office" means, with respect to any Bank, (i) in the case
of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its
Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of
its Money Market Loans, its Money Market Lending Office.
"Assignee" has the meaning set forth in Section 10.06(c).
"Bank" means each bank listed on the signature pages hereof, each Assignee
which becomes a Bank pursuant to Section 10.06(c), and their respective
successors.
"Base Rate" means, for any day, a rate per annum equal to the higher of (i)
the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal
Funds Rate for such day.
"Benefit Arrangement" means at any time an employee benefit plan within the
meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan
and which is maintained or otherwise contributed to by any member of the
ERISA Group.
"Borrower" means U S WEST Capital Funding, Inc., a Colorado corporation, and
its successors.
"Borrowing" has the meaning set forth in Section 1.03.
"Closing Date" means the date on or after the Effective Date on which the
Agent shall have received the documents specified in or pursuant to Section
3.01.
"Commitment" means, with respect to each Bank, the amount set forth opposite
the name of such Bank on the signature pages hereof, as such amount may be
reduced from time to time pursuant to Sections 2.09 and 2.11.
"Committed Loan" means a loan to be made by a Bank pursuant to Section
2.01(a); provided that if any such loan or loans are combined or subdivided
pursuant to a Notice of Interest Rate Election, the term "Committed Loan"
shall refer to the combined principal amount resulting from such combination
or to each of the separate principal amounts resulting from such subdivision,
as the case may be.
"Company" means U S WEST, Inc., a Delaware corporation, and its successors.
2
<PAGE>
"Company's 1995 Form 10-K" means the Company's annual report on Form 10-K for
1995, as filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934.
"Consolidated Net Worth" means at any date the consolidated shareowners'
equity of the Company and its Consolidated Subsidiaries determined as of such
date.
"Consolidated Subsidiary" means at any date any Subsidiary or other entity
the accounts of which would be consolidated with those of the Company in its
consolidated financial statements if such statements were prepared as of such
date.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v)
all Debt secured by a Lien on any asset of such Person, whether or not such
Debt is otherwise an obligation of such Person, and (vi) all Debt of others
Guaranteed by such Person. Notwithstanding the foregoing, for purposes of
Sections 5.06 and 5.07 Debt shall in no event include the following:
(x) Debt of Persons which are not Consolidated Subsidiaries ("Joint
Ventures") (i) which is secured by a Lien on the assets or capital stock of a
Minor Subsidiary or the equity interests in such Joint Ventures or is
Guaranteed by a Minor Subsidiary, which Lien or Guarantee is incurred in
connection with the international operations of the Company and its
Subsidiaries, and (ii) for the payment of which no other recourse may be had
to the Company or any of its Subsidiaries; and
(y) Debt of the Company or the Borrower issued in connection with the
issuance of Trust Originated Preferred Securities or substantially similar
securities, so long as such Debt is subordinated and junior in right of
payment to substantially all liabilities of the Company or the Borrower, as
the case may be, including, without limitation, the Loans.
"Default" means any condition or event which constitutes an Event of Default
or which with the giving of notice or lapse of time or both would, unless
cured or waived, become an Event of Default.
3
<PAGE>
"Domestic Business Day" means any day except a Saturday, Sunday or other day
on which commercial banks in New York City are authorized by law to close.
"Domestic Lending Office" means, as to each Bank, its office located at its
address set forth in its Administrative Questionnaire (or identified in its
Administrative Questionnaire as its Domestic Lending Office) or such other
office as such Bank may hereafter designate as its Domestic Lending Office by
notice to the Company and the Agent.
"Domestic Loan" means (i) a Committed Loan which bears interest at the Base
Rate pursuant to the applicable Notice of Committed Borrowing or Notice of
Interest Rate Election or the provisions of Article 8 or (ii) an overdue
amount which was a Domestic Loan immediately before it became overdue.
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 10.09.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating
to the environment, the effect of the environment on human health or to
emissions, discharges or releases of pollutants, contaminants, Hazardous
Substances or wastes into the environment including, without limitation,
ambient air, surface water, ground water, or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Company, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Company or any
Subsidiary, are treated as a single employer under Section 414 of the
Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
4
<PAGE>
"Euro-Dollar Lending Office" means, as to each Bank, its office, branch or
affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by
notice to the Company and the Agent.
"Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election or (ii) an overdue amount which was a
Euro-Dollar Loan before it became overdue.
"Euro-Dollar Margin" has the meaning set forth in Section 2.07(b).
"Euro-Dollar Rate" means a rate of interest determined pursuant to Section
2.07(b) on the basis of an Adjusted London Interbank Offered Rate.
"Euro-Dollar Reference Banks" means the principal London offices of Citibank,
N.A., The Bank of New York and Morgan Guaranty Trust Company of New York, and
"Euro-Dollar Reference Bank" means any one of the foregoing.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section 2.07(b).
"Event of Default" has the meaning set forth in Section 6.01.
"Existing Credit Agreements" means the Credit Agreements dated as of August
8, 1994, as amended, among the Borrower, the Company, the banks listed on
the signature pages thereof and Morgan Guaranty Trust Company of New York, as
Agent.
"Federal Funds Rate" means, for any day, the rate per annum (rounded upward,
if necessary, to the nearest 1/100th of 1%) equal to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Domestic Business Day next
succeeding such day, provided that (i) if such day is not a Domestic Business
Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on
the next succeeding Domestic Business Day, and (ii) if no such rate is so
published on such next succeeding Domestic Business Day, the Federal Funds
Rate for such day shall be the average rate quoted to Morgan Guaranty Trust
Company of New York on such day on such transactions as determined by the
Agent.
5
<PAGE>
"Fixed Rate Loans" means Euro-Dollar Loans or Money Market Loans (excluding
Money Market LIBOR Loans bearing interest at the Base Rate pursuant to
Section 8.01(a)) or any combination of the foregoing.
"Group of Loans" means at any time a group of Loans consisting of (i) all
Committed Loans which are Domestic Loans at such time or (ii) all Committed
Loans which are Euro-Dollar Loans having the same Interest Period at such
time; provided that, if a Committed Loan of any particular Bank is converted
to or made as a Domestic Loan pursuant to Section 8.02 or 8.05, such Loan
shall be included in the same Group or Groups of Loans from time to time as
it would have been in if it had not been so converted or made.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Debt or other obligation
of any other Person and, without limiting the generality of the foregoing,
any obligation, direct or indirect, contingent or otherwise, of such Person
(i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Debt or other obligation (whether arising by virtue of
partnership arrangements, by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Debt or other obligation of
the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part), provided that the term Guarantee shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Hazardous Substances" means any toxic, radioactive, caustic or otherwise
hazardous substance, including petroleum, its derivatives, by-products and
other hydrocarbons, or any substance having any constituent elements
displaying any of the foregoing characteristics.
"Indemnitee" has the meaning set forth in Section 10.03(b).
"Indentures" means the agreements or instruments evidencing the following
Debt of Continental Cablevision, Inc., and its successors: (i) the 10 5/8%
Senior Subordinated Notes Due June 15, 2002; (ii) the 11% Senior Subordinated
Debentures Due June 1, 2007; (iii) the 8 5/8% Senior Notes Due August 15,
2003; (iv) the 9% Senior Debentures Due September 1, 2008; (v) the 8 7/8%
Senior Debentures Due September 15, 2002; (vi) the 9 1/2% Senior Debentures
Due August 1, 2013; (vii) the 8 1/2% Senior Notes Due September 15, 2001; and
(viii) any other Debt containing terms and conditions as or more
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favorable to the holders thereof than the terms and conditions of any of the
foregoing Debt.
"Interest Period" means: (1) with respect to each Euro-Dollar Loan, a period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing or the date specified in the applicable Notice of Interest Rate
Election and ending one, two, three or six months thereafter, as the Borrower
may elect in the applicable notice; provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of
a calendar month; and
(c) any Interest Period beginning prior to a Termination Date which would
otherwise end after a Termination Date shall end on such Termination Date, and
any Interest Period beginning on or after a Termination Date which would
otherwise end after the first anniversary of such Termination Date shall end on
the first anniversary of such Termination Date.
(2) with respect to each Money Market LIBOR Loan, the period commencing on
the date of borrowing specified in the applicable Notice of Borrowing and
ending such whole number of months thereafter as the Borrower may elect in
accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such
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Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period beginning prior to a Termination Date which
would otherwise end after a Termination Date shall end on such Termination
Date.
(3) with respect to each Money Market Absolute Rate Loan,
the period commencing on the date of borrowing specified in the applicable
Notice of Borrowing and ending such number of days thereafter (but not less
than 7 days) as the Borrower may elect in accordance with Section 2.03;
provided that:
(a) any Interest Period which would otherwise end on a day which is
not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) any Interest Period beginning prior to a Termination Date which
would otherwise end after a Termination Date shall end on such Termination
Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended,
or any successor statute.
"LIBOR Auction" means a solicitation of Money Market Quotes setting forth
Money Market Margins based on the London Interbank Offered Rate pursuant to
Section 2.03.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Company or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and
"Loans" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or
any combination of the foregoing.
"London Interbank Offered Rate" has the meaning set forth in Section 2.07(b).
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"Margin Stock" means "margin stock" as such term is defined in Regulation U
of the Board of Governors of the Federal Reserve System, as in effect from
time to time.
"Material Debt" means Debt (other than the Notes) of the Company and/or one
or more of its Subsidiaries, arising in one or more related or unrelated
transactions, in an aggregate principal amount exceeding $100,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate Unfunded
Liabilities in excess of $100,000,000.
"Minor Subsidiary" means, for purposes of the last sentence of the definition
of Debt and of Section 5.08(f) (the "Relevant Provisions"), (i) USW PCN Inc.,
and (ii) any other Subsidiary which, at the time of the issuance of a
Guarantee or grant of a Lien referred to in the Relevant Provisions, had
assets which, when taken together with all assets of Subsidiaries at any
earlier time when such Subsidiaries were deemed to be Minor Subsidiaries
pursuant to this clause (ii), did not exceed $250,000,000.
"Money Market Absolute Rate" has the meaning set forth in Section 2.03(d).
"Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant
to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its Domestic Lending
Office or such other office, branch or affiliate of such Bank as it may
hereafter designate as its Money Market Lending Office by notice to the
Company and the Agent; provided that any Bank may from time to time by notice
to the Company and the Agent designate separate Money Market Lending Offices
for its Money Market LIBOR Loans, on the one hand, and its Money Market
Absolute Rate Loans, on the other hand, in which case all references herein
to the Money Market Lending Office of such Bank shall be deemed to refer to
either or both of such offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a
LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 8.01(a)).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
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"Money Market Margin" has the meaning set forth in Section 2.03(d).
"Money Market Quote" means an offer by a Bank to make a Money Market Loan in
accordance with Section 2.03.
"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for
these purposes any Person which ceased to be a member of the ERISA Group
during such five year period.
"Notes" means promissory notes of the Borrower, substantially in the form of
Exhibit A hereto, evidencing the obligation of the Borrower to repay the
Loans made to it, and "Note" means any one of such promissory notes issued
hereunder.
"Notice of Borrowing" means a Notice of Committed Borrowing (as defined in
Section 2.02) or a Notice of Money Market Borrowing (as defined in Section
2.03(f)).
"Parent" means, with respect to any Bank, any Person controlling such Bank.
"Participant" has the meaning set forth in Section 10.06(b).
"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership, an association,
a trust or any other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person
which was at such time a member of the ERISA Group for employees of any
Person which was at such time a member of the ERISA Group.
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"Pricing Schedule" means the Schedule attached hereto and identified as such.
"Prime Rate" means the rate of interest publicly announced by Morgan Guaranty
Trust Company of New York in New York City from time to time as its Prime
Rate.
"Required Banks" means at any time Banks having more than 50% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing more than 50% of the aggregate unpaid
principal amount of the Loans.
"Revolving Credit Period" means the period from and including the Effective
Date to but excluding the Termination Date.
"Significant Subsidiary" means any Subsidiary which would meet the definition
of "significant subsidiary" contained as of the date hereof in Regulation S-X
of the Securities and Exchange Commission.
"Subsidiary" means any corporation or other entity of which securities or
other ownership interests having ordinary voting power to elect a majority of
the board of directors or other persons performing similar functions are at
the time directly or indirectly owned by the Company.
"Super-Majority Banks" means at any time Banks having at least 85% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing at least 85% of the aggregate unpaid
principal amount of the Loans.
"Termination Date" means with respect to each Bank October 31, 1997, or such
later date to which the Termination Date for such Bank shall have been
extended pursuant to Section 2.01(b), or, if such day is not a Euro-Dollar
Business Day, the next preceding Euro-Dollar Business Day.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed
by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair
market value of all Plan assets allocable to such liabilities under Title IV
of ERISA (excluding any accrued but unpaid contributions), all determined as
of the then most recent valuation date for such Plan, but only to the extent
that such excess represents a
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potential liability of a member of the ERISA Group to the PBGC or any other
Person under Title IV of ERISA.
"United States" means the United States of America, including the States and
the District of Columbia, but excluding its territories and possessions.
"Wholly-Owned Consolidated Subsidiary" means any Consolidated Subsidiary all
of the shares of capital stock or other ownership interests of which (except
directors' qualifying shares) are at the time directly or indirectly owned by
the Company.
Section 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial
statements required to be delivered hereunder shall be prepared in accordance
with generally accepted accounting principles as in effect from time to time
in the United States, applied on a basis consistent (except for changes
concurred in by the Company's independent public accountants) with the most
recent audited consolidated financial statements of the Company and its
Consolidated Subsidiaries delivered to the Banks; provided that, if the
Company notifies the Agent that the Company wishes to amend any covenant in
Article 5 to eliminate the effect of any change in such generally accepted
accounting principles on the operation of such covenant (or if the Agent
notifies the Company that the Required Banks wish to amend Article 5 for such
purpose), then compliance with such covenant shall be determined on the basis
of generally accepted accounting principles in effect in the United States
immediately before the relevant change in generally accepted accounting
principles became effective, until either such notice is withdrawn or such
covenant is amended in a manner satisfactory to the Company and the Required
Banks.
Section 1.03. Types of Borrowings. The term "Borrowing" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant
to Article 2 on a single date, all of which Loans are of the same type
(subject to Article 8) and, except in the case of Domestic Loans, have the
same Interest Period or initial Interest Period. Borrowings are classified
for purposes of this Agreement either by reference to the pricing of Loans
comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
comprised of Euro-Dollar Loans) or by reference to the provisions of Article
2 under which participation therein is determined (i.e., a "Committed
Borrowing" is a Borrowing under Section 2.01(a) in which all Banks
participate in proportion to their Commitments, while a "Money Market
Borrowing" is a Borrowing under Section
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2.03 in which the Bank participants are determined on the basis of their bids
in accordance therewith).
ARTICLE 2
The Credit
Section 2.01. Commitments to Lend.
(a) The Commitments. During the Revolving Credit Period each Bank severally
agrees, on the terms and conditions set forth in this Agreement, to make
loans to the Borrower pursuant to this subsection (a) from time to time in
amounts such that the aggregate principal amount of Committed Loans by such
Bank at any one time outstanding to the Borrower shall not exceed the amount
of its Commitment. Each Borrowing under this Section shall be in an
aggregate principal amount of $25,000,000 or any larger multiple of
$5,000,000 (except that any such Borrowing may be in the aggregate amount
available in accordance with Section 3.02(c)) and shall be made from the
several Banks ratably in proportion to their respective Commitments. Within
the foregoing limits, the Borrower may borrow under this subsection (a),
repay, or to the extent permitted by Section 2.11, prepay Loans and reborrow
at any time during the Revolving Credit Period under this subsection (a).
The Commitments shall terminate at the close of business on the Termination
Date.
(b) Extension of Commitments. The Commitments may be extended in the manner
and amount set forth in this subsection (b), for a period of 364 days
measured from the Termination Date then in effect. If the Company wishes to
request an extension of each Bank's Commitment, it shall give notice to that
effect to the Agent not less than 45 days and not more than 60 days prior to
the Termination Date then in effect, whereupon the Agent shall promptly
notify each of the Banks of such request. Each Bank will use its best
efforts to respond to such request, whether affirmatively or negatively, as
it may elect in its discretion, within 30 days of such notice to the Agent.
If any Bank shall not have responded affirmatively within such 30-day period,
such Bank shall be deemed to have rejected the Company's proposal to extend
its Commitment, and only the Commitments of those Banks which have responded
affirmatively shall be extended, subject to receipt by the Agent of
counterparts of an Extension Agreement in substantially the form of Exhibit H
hereto duly completed and signed by the Borrower, the Company, the Agent and
all of the Banks which have responded affirmatively. The Agent shall provide
to the Company, no later than 10 days prior to the Termination Date then in
effect, a list of the Banks which
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have responded affirmatively. The Extension Agreement shall be executed and
delivered no later than five days prior to the Termination Date then in
effect, and no extension of the Commitments pursuant to this subsection (b)
shall be legally binding on any party hereto unless and until such Extension
Agreement is so executed and delivered. The Company and the Borrower may
decline to execute and deliver such Extension Agreement if any Bank has
rejected the Company's proposal to extend its Commitment or has failed to
execute and deliver such Extension Agreement, and will promptly notify the
Agent and the Banks if it so declines.
(c) Additional Commitments. At any time during the Revolving Credit
Period, if no Default shall have occurred and be continuing at such time, the
Company may, if it so elects, increase the aggregate amount of the
Commitments, either by designating a Person not theretofore a Bank and
acceptable to the Agent to become a Bank or by agreeing with an existing Bank
that such Bank's Commitment shall be increased. Upon execution and delivery
by the Company, the Borrower and such Bank or other Person of an instrument
of assumption in form and amount satisfactory to the Administrative Agent,
such existing Bank shall have a Commitment as therein set forth or such other
Person shall become a Bank with a Commitment as therein set forth and all the
rights and obligations of a Bank with such a Commitment hereunder; provided
that (i) the Company shall provide prompt notice of such increase to the
Agent, which shall promptly notify the other Banks, (ii) the aggregate amount
of each such increase which is effective on any day shall be at least
$50,000,000 and (iii) the aggregate amount of the Commitments shall at no
time exceed $4,200,000,000. Upon any increase in the aggregate amount of the
Commitments pursuant to this subsection (c), within five Domestic Business
Days in the case of each Group of Domestic Loans outstanding, and at the end
of the then current Interest Period with respect thereto in the case of each
Group of Euro-Dollar Loans then outstanding, the Borrower shall prepay such
Group in its entirety, and, to the extent the Borrower elects to do so and
subject to the conditions specified in Article 3, the Borrower shall reborrow
Committed Loans from the Banks in proportion to their respective Commitments
after giving effect to such increase, until such time as all outstanding
Committed Loans are held by the Banks in such proportion.
(d) Term Loans. Each Bank severally agrees, on the terms and
conditions set forth in this Agreement, to make a loan to the Borrower on the
Termination Date in amounts such that the aggregate principal amount of such
Bank's outstanding Loans to the Borrower at the close of business on the
Termination Date shall not exceed its Commitment. Each Borrowing under this
subsection (d) shall be made from the several Banks ratably in proportion to
their respective Commitments. Amounts prepaid pursuant to Section 2.11 shall
not be
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reborrowed. If less than all the Banks shall have agreed to extend the
Termination Date pursuant to subsection (b) above, but the Termination Date
for those Banks which have not so agreed has not yet occurred (the "Earlier
Date"), and the Borrower has requested a Borrowing pursuant to this
subsection (d), then such Borrowing shall be made on the Earlier Date.
Section 2.02. Notice of Committed Borrowing. The Borrower shall give the
Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M.
(New York City time) on (x) the date of each Domestic Borrowing, and (y) the
third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic Business Day
in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case
of a Euro-Dollar Borrowing,
(ii) the aggregate amount of such Borrowing,
(iii) whether the Loans comprising such Borrowing bear interest
initially at the Base Rate or at a Euro-Dollar Rate, and
(iv) in the case of a Euro-Dollar Borrowing, the duration of the
initial Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period.
Section 2.03. Money Market Borrowings. (a) The Money Market Option. In
addition to Committed Borrowings pursuant to Section 2.01(a), the Borrower
may, as set forth in this Section, request the Banks during the Revolving
Credit Period to make offers to make Money Market Loans to the Borrower. The
Banks may, but shall have no obligation to, make such offers and the Borrower
may, but shall have no obligation to, accept any such offers in the manner
set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request
offers to make Money Market Loans under this Section, it shall transmit to
the Agent by telex or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit B hereto so as to be received no later
than 9:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business
Day prior to the date of Borrowing proposed therein, in the case of a LIBOR
Auction or (y) the Domestic Business Day prior to the date of Borrowing
proposed therein, in the case of an Absolute Rate Auction (or, in either
case, such other time or date as the Company and the Agent shall have
mutually agreed and shall have notified to the Banks not later than the date
of the Money Market Quote Request for the
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first LIBOR Auction or Absolute Rate Auction for which such change is to be
effective) specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day in the
case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be $25,000,000
or a larger multiple of $5,000,000,
(iii) the duration of the Interest Period applicable thereto, subject
to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set forth a Money
Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than one
Interest Period in a single Money Market Quote Request. No Money Market
Quote Request shall be given within five Euro-Dollar Business Days (or such
other number of days as the Company and the Agent may agree) of any other
Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the
Money Market Loans to which such Money Market Quote Request relates in
accordance with this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank may
submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each
Money Market Quote must comply with the requirements of this subsection (d)
and must be submitted to the Agent by telex or facsimile transmission at its
offices specified in or pursuant to Section 10.01 not later than (x) 10:30
A.M. (New York City time) on the third Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:15 A.M.
(New York City time) on the proposed date of Borrowing, in the case of an
Absolute Rate Auction (or, in either case, such other time or date as the
Company and the Agent shall have mutually agreed and shall have notified to
the Banks not later than the date of the Money Market Quote Request for the
first LIBOR
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Auction or Absolute Rate Auction for which such change is to be effective);
provided that Money Market Quotes submitted by the Agent (or any affiliate of
the Agent) in the capacity of a Bank may be submitted, and may only be
submitted, if the Agent or such affiliate notifies the Borrower of the terms
of the offer or offers contained therein not later than (x) one hour prior to
the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15
minutes prior to the deadline for the other Banks, in the case of an Absolute
Rate Auction. Subject to Articles 3 and 6, any Money Market Quote so made
shall be irrevocable except with the written consent of the Agent given on
the instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which each such
offer is being made, which principal amount (w) may be greater than or less
than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger
multiple of $1,000,000, (y) may not exceed the principal amount of Money
Market Loans for which offers were requested, and (z) may be subject to an
aggregate limitation as to the principal amount of Money Market Loans for
which offers being made by such quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above or below the
applicable London Interbank Offered Rate (the "Money Market Margin") offered
for each such Money Market Loan, expressed as a percentage (specified to the
nearest 1/10,000th of 1%) to be added to or subtracted from such base rate,
(D) in the case of an Absolute Rate Auction, the rate of interest per
annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute
Rate") offered for each such Money Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
(iii) Any Money Market Quote shall be disregarded if it:
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(A) is not substantially in conformity with Exhibit D hereto or does
not specify all of the information required by subsection (d)(ii);
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set forth in the
applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly (and in any event no
later than 11:00 A.M. (New York time) on (i) the third Euro-Dollar Business
Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction
or (ii) the proposed date of Borrowing, in the case of an Absolute Rate
Auction) notify the Borrower of the terms (x) of any Money Market Quote
submitted by a Bank that is in accordance with subsection (d) and (y) of any
Money Market Quote that amends, modifies or is otherwise inconsistent with a
previous Money Market Quote submitted by such Bank with respect to the same
Money Market Quote Request. Any such subsequent Money Market Quote shall be
disregarded by the Agent unless such subsequent Money Market Quote is
submitted solely to correct a manifest error in such former Money Market
Quote. The Agent's notice to the Borrower shall specify (A) the aggregate
principal amount of Money Market Loans for which offers have been received
for each Interest Period specified in the related Money Market Quote Request,
(B) the respective principal amounts and Money Market Margins or Money Market
Absolute Rates, as the case may be, so offered and (C) if applicable,
limitations on the aggregate principal amount of Money Market Loans for which
offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 11:15 A.M. (New
York City time) on (x) the third Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) the
proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in
either case, such other time or date as the Company and the Agent shall have
mutually agreed and shall have notified to the Banks not later than the date
of the Money Market Quote Request for the first LIBOR Auction or Absolute
Rate Auction for which such change is to be effective), the Borrower shall
notify the Agent of its acceptance or non-acceptance of the offers so
notified to it pursuant to subsection (e). In the case of acceptance, such
notice (a "Notice of Money Market
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Borrowing") shall specify the aggregate principal amount of offers for each
Interest Period that are accepted. The Borrower may accept any Money Market
Quote in whole or in part; provided that:
(i) the aggregate principal amount of each Money Market Borrowing may
not exceed the applicable amount set forth in the related Money Market Quote
Request,
(ii) the principal amount of each Money Market Borrowing must be
$25,000,000 or a larger multiple of $5,000,000,
(iii) acceptance of offers may only be made on the basis of ascending
Money Market Margins or Money Market Absolute Rates, as the case may be, and
(iv) the Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the requirements
of this Agreement.
(g) Allocation by Agent. If offers are made by two or more Banks with
the same Money Market Margins or Money Market Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of
which such offers are accepted for the related Interest Period, the principal
amount of Money Market Loans in respect of which such offers are accepted
shall be allocated by the Agent among such Banks as nearly as possible (in
multiples of $1,000,000, as the Agent may deem appropriate) in proportion to
the aggregate principal amounts of such offers. Determinations by the Agent
of the amounts of Money Market Loans shall be conclusive in the absence of
manifest error.
Section 2.04. Notice to Banks; Funding of Loans. (a) Upon receipt of a
Notice of Borrowing, the Agent shall promptly notify each Bank of the
contents thereof and of such Bank's share (if any) of such Borrowing and such
Notice of Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 1:00 P.M. (New York City time) on the date of each
Borrowing, each Bank participating therein shall (except as provided in
subsection (c) of this Section) make available its share of such Borrowing,
in Federal or other funds immediately available in New York City, to the
Agent at its address referred to in Section 10.01. Unless any applicable
condition specified in Article 3 has not been satisfied, as
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determined by the Agent in accordance with Article 3, the Agent will make the
funds so received from the Banks immediately available to the Borrower at the
Agent's aforesaid address.
(c) If any Bank makes a new Loan hereunder to the Borrower on a day on
which the Borrower is to repay all or any part of an outstanding Loan from
such Bank, such Bank shall apply the proceeds of its new Loan to make such
repayment and only an amount equal to the difference (if any) between the
amount being borrowed by the Borrower and the amount being repaid shall be
made available by such Bank to the Agent as provided in subsection (b) of
this Section, or remitted by the Borrower to the Agent as provided in Section
2.12, as the case may be.
(d) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing (or, in the case of a Base Rate Borrowing, prior to
Noon (New York City time) on the date of such Borrowing) that such Bank will
not make available to the Agent such Bank's share of such Borrowing, the
Agent may assume that such Bank has made such share available to the Agent on
the date of such Borrowing in accordance with subsections (b) and (c) of this
Section 2.04 and the Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If and to the
extent that such Bank shall not have so made such share available to the
Agent, such Bank and the Borrower severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower
until the date such amount is repaid to the Agent, at (i) in the case of the
Borrower, a rate per annum equal to the higher of the Federal Funds Rate and
the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the
case of such Bank, the Federal Funds Rate. If such Bank shall repay to the
Agent such corresponding amount, such amount so repaid shall constitute such
Bank's Loan included in such Borrowing for purposes of this Agreement. If
the Borrower shall have repaid such corresponding amount of such Bank, such
Bank shall reimburse the Borrower for any loss on account thereof incurred by
the Borrower.
Section 2.05. Notes. (a) The Loans of each Bank to the Borrower shall
be evidenced by a single Note of the Borrower payable to the order of such
Bank for the account of its Applicable Lending Office, unless such Bank
requests otherwise, in an amount equal to the aggregate unpaid principal
amount of such Bank's Loans to the Borrower.
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(b) Each Bank may, by notice to the Borrower and the Agent, request
that its Loans of a particular type to the Borrower be evidenced by a
separate Note of the Borrower in an amount equal to the aggregate unpaid
principal amount of such Loans. Each such Note shall be in substantially the
form of Exhibit A hereto with appropriate modifications to reflect the fact
that it evidences solely Loans of the relevant type. Each reference in this
Agreement to a "Note" or the "Notes" of such Bank shall be deemed to refer to
and include any or all of such Notes, as the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.01, the
Agent shall forward such Note to such Bank. Each Bank shall record the date,
amount and type of each Loan made by it to the Borrower and the date and
amount of each payment of principal made with respect thereto, and may, if
such Bank so elects in connection with any transfer or enforcement of its
Note of the Borrower, endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to
each such Loan to the Borrower then outstanding; provided that the failure of
any Bank to make any such recordation or endorsement shall not affect the
obligations of the Borrower hereunder or under the Notes. Each Bank is
hereby irrevocably authorized by the Borrower so to endorse its Notes and to
attach to and make a part of any Note a continuation of any such schedule as
and when required.
Section 2.06. Maturity of Loans. Each Loan by a Bank included in any
Borrowing made pursuant to Section 2.01(a) shall mature, and the principal
amount thereof shall be due and payable, together with accrued interest
thereon, on the Termination Date for such Bank. Each Loan included in any
Borrowing made pursuant to Section 2.01(d) shall mature, and the principal
amount thereof shall be due and payable, together with accrued interest
thereon, on the first anniversary of the Termination Date on which such
Borrowing is made. Each Loan included in any Borrowing made pursuant to
Section 2.03 shall mature, and the principal amount thereof shall be due and
payable, together with accrued interest thereon, on the last day of the
Interest Period applicable thereto.
Section 2.07. Interest Rates. (a) Each Domestic Loan shall bear
interest on the outstanding principal amount thereof, for each day from the
date such Loan is made until it becomes due, at a rate per annum equal to the
Base Rate for such day. Such interest shall be payable quarterly in arrears
on the last day of each calendar quarter and, with respect to the principal
amount of any Domestic Loan converted to a Euro-Dollar Loan,
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on each date a Domestic Loan is so converted. Any overdue principal of or
interest on any Domestic Loan shall bear interest, payable on demand, for
each day until paid at a rate per annum equal to the sum of 2% plus the rate
otherwise applicable to Domestic Loans for such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for the Interest Period applicable thereto, at a
rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable
Adjusted London Interbank Offered Rate. Such interest shall be payable for
each Interest Period on the last day thereof and, if such Interest Period is
longer than three months, at intervals of three months after the first day
thereof.
The "Adjusted London Interbank Offered Rate" applicable to any Interest
Period means a rate per annum equal to the quotient obtained (rounded upward,
if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable
London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve
Percentage.
"Euro-Dollar Margin" means a rate per annum determined in accordance
with the Pricing Schedule.
The "London Interbank Offered Rate" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of
1%) of the respective rates per annum at which deposits in dollars are
offered to each of the Euro-Dollar Reference Banks in the London interbank
market at approximately 11:00 A.M. (London time) two Euro-Dollar Business
Days before the first day of such Interest Period in an amount approximately
equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar
Reference Bank to which such Interest Period is to apply and for a period of
time comparable to such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars
in respect of "Eurocurrency liabilities" (or in respect of any other category
of liabilities which includes deposits by reference to which the interest
rate on Euro-Dollar Loans is determined or any category of extensions of
credit or other assets which includes loans by a non-United States office of
any Bank to United States
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residents). The Adjusted London Interbank Offered Rate shall be adjusted
automatically on and as of the effective date of any change in the
Euro-Dollar Reserve Percentage.
(c) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day from and including the date
payment thereof was due to but excluding the date of actual payment, at a
rate per annum equal to the sum of 2% plus the higher of (i) the Euro-Dollar
Margin plus the quotient obtained (rounded upward, if necessary, to the next
higher 1/100 of 1%) by dividing (x) the average (rounded upward, if
necessary, to the next higher 1/16 of 1%) of the respective rates per annum
at which one day (or, if such amount due remains unpaid more than three
Euro-Dollar Business Days, then for such other period of time not longer than
six months as the Agent may select) deposits in dollars in an amount
approximately equal to such overdue payment due to each of the Euro-Dollar
Reference Banks are offered to such Euro-Dollar Reference Bank in the London
interbank market for the applicable period determined as provided above by
(y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances
described in clause (a) or (b) of Section 8.01 shall exist, at a rate per
annum equal to the sum of 2% plus the rate applicable to Domestic Loans for
such day) and (ii) the sum of the Euro-Dollar Margin plus the Adjusted London
Interbank Offered Rate applicable to such Loan at the date such payment was
due.
(d) Subject to Section 8.01, each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the sum of the London
Interbank Offered Rate for such Interest Period (determined in accordance
with Section 2.07(b) as if the related Money Market LIBOR Borrowing were a
Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin
quoted by the Bank making such Loan in accordance with Section 2.03. Each
Money Market Absolute Rate Loan shall bear interest on the outstanding
principal amount thereof, for the Interest Period applicable thereto, at a
rate per annum equal to the Money Market Absolute Rate quoted by the Bank
making such Loan in accordance with Section 2.03. Such interest shall be
payable for each Interest Period on the last day thereof and, if such
Interest Period is longer than three months, at intervals of three months
after the first day thereof. Any overdue principal of or interest on any
Money Market Loan shall bear interest, payable on demand, for each day until
paid at a rate per annum equal to the sum of 2% plus the Base Rate for such
day.
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(e) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(f) Each Euro-Dollar Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated hereby. If any Euro-Dollar
Reference Bank does not furnish a timely quotation, the Agent shall determine
the relevant interest rate on the basis of the quotation or quotations
furnished by the remaining Euro-Dollar Reference Bank or Banks or, if none of
such quotations is available on a timely basis, the provisions of Section
8.01 shall apply.
Section 2.08. Facility Fees. The Company shall pay to the Agent for the
account of the Banks ratably a facility fee at the Facility Fee Rate
(determined daily in accordance with the Pricing Schedule). Such facility
fee shall accrue (i) from and including the earlier of the Closing Date and
December 31, 1996 to but excluding the Termination Date (or earlier date of
termination of the Commitments in their entirety), on the daily average
aggregate amount of the Commitments (whether used or unused) and (ii) from
and including the Termination Date (or earlier date of termination of the
Commitments in their entirety) to but excluding the date the Loans shall be
repaid in their entirety, on the daily average aggregate outstanding
principal amount of the Loans. Accrued facility fees shall be payable
quarterly in arrears on the last day of each calendar quarter and upon the
date of termination of the Commitments in their entirety (and, if later, the
date the Loans shall be repaid in their entirety).
"Facility Fee Rate" means a rate per annum determined in accordance with
the Pricing Schedule.
Section 2.09. Optional Termination or Reduction of Commitments. During
the Revolving Credit Period, the Company may, upon at least three Domestic
Business Days' notice to the Agent, (i) terminate the Commitments at any
time, if no Loans are outstanding at such time or (ii) ratably reduce from
time to time by an aggregate amount of $25,000,000 or any larger multiple of
$5,000,000, the aggregate amount of the Commitments in excess of the
aggregate outstanding principal amount of the Loans.
Section 2.10. Method of Electing Interest Rates. (a) The Loans included
in each Committed Borrowing shall bear interest initially at the
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type of rate specified by the Borrower in the applicable Notice of Committed
Borrowing. Thereafter, the Borrower may from time to time elect to change or
continue the type of interest rate borne by each Group of Loans (subject in
each case to the provisions of Article 8), as follows:
(i) if such Loans are Domestic Loans, the Borrower may elect to convert such
Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect to convert
such Loans to Domestic Loans or elect to continue such Loans as Euro-Dollar
Loans for an additional Interest Period, in each case effective on the last
day of the then current Interest Period applicable to such Loans.
Each such election shall be made by delivering a notice (a "Notice of
Interest Rate Election") to the Agent at least three Euro-Dollar Business
Days before the conversion or continuation selected in such notice is to be
effective. A Notice of Interest Rate Election may, if it so specifies, apply
to only a portion of the aggregate principal amount of the relevant Group of
Loans; provided that (i) such portion is allocated ratably among the Loans
comprising such Group and (ii) the portion to which such Notice applies, and
the remaining portion to which it does not apply, are each $25,000,000 or any
larger multiple of $5,000,000.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such notice applies;
(ii) the date on which the conversion or continuation selected in such
notice is to be effective, which shall comply with the applicable clause of
subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the new type
of Loans and, if such new Loans are Euro-Dollar Loans, the duration of the
initial Interest Period applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans for an additional
Interest Period, the duration of such additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
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(c) Upon receipt of a Notice of Interest Rate Election from the Borrower
pursuant to subsection (a) above, the Agent shall promptly notify each Bank
of the contents thereof and such notice shall not thereafter be revocable by
such Borrower. If the Borrower fails to deliver a timely Notice of Interest
Rate Election to the Agent for any Group of Euro-Dollar Loans, such Loans
shall be converted into Domestic Loans on the last day of the then current
Interest Period applicable thereto.
Section 2.11 Optional Prepayments
(a) The Borrower may, upon at least one Domestic Business Day's notice to
the Agent, prepay the Group of Domestic Loans (or any Money Market Borrowing
bearing interest at the Base Rate pursuant to Section 8.01(a)) in whole at
any time, or from time to time in part in amounts aggregating $25,000,000 or
any larger multiple of $5,000,000, by paying the principal amount to be
prepaid together with accrued interest thereon to the date of prepayment.
(b) The Borrower may, upon at least three Euro-Dollar Business Days' notice
to the Agent, in the case of a Group of Euro-Dollar Loans, prepay the Loans
comprising such a Group on the last day of any Interest Period applicable to
such Group, in whole at any time, or from time to time in part in amounts
aggregating $25,000,000 or any larger multiple of $5,000,000, by paying the
principal amount to be prepaid together with accrued interest thereon to the
date of prepayment.
(c) Except as provided in subsection (a) above, the Borrower may not prepay
all or any portion of the principal amount of any Money Market Loan prior to
the maturity thereof.
(d) Upon receipt of a notice of prepayment pursuant to this Section, the
Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment and such notice shall not
thereafter be revocable by the Borrower. Each such prepayment shall be
applied to prepay ratably the Loans of the several Banks included in the
relevant Group or Borrowing.
Section 2.12. General Provisions as to Payments. (a) The Borrower shall make
each payment of principal of, and interest on, the Loans and of fees and
other amounts payable hereunder, not later than 12:00 Noon (New York City
time) on the date when due, in Federal or other funds immediately available
in New York City, without off set or counterclaim, to the Agent at its
address referred to in Section 10.01. The Agent will promptly distribute to
each Bank its ratable
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share of each such payment received by the Agent for the account of the
Banks. Whenever any payment of principal of, or interest on, the Domestic
Loans or of fees or other amounts payable hereunder shall be due on a day
which is not a Domestic Business Day, the date for payment thereof shall be
extended to the next succeeding Domestic Business Day. Whenever any payment
of principal of, or interest on, the Euro-Dollar Loans shall be due on a day
which is not a Euro-Dollar Business Day, the date for payment thereof shall
be extended to the next succeeding Euro-Dollar Business Day unless such
Euro-Dollar Business Day falls in another calendar month, in which case the
date for payment thereof shall be the next preceding Euro-Dollar Business
Day. Whenever any payment of principal of, or interest on, the Money Market
Loans shall be due on a day which is not a Euro-Dollar Business Day, the date
for payment thereof shall be extended to the next succeeding Euro-Dollar
Business Day. If the date for any payment of principal is extended by
operation of law or otherwise, interest thereon shall be payable for such
extended time.
(b) Unless the Agent shall have received notice from the Borrower prior to
the date on which any payment is due from the Borrower to the Banks hereunder
that the Borrower will not make such payment in full, the Agent may assume
that the Borrower has made such payment in full to the Agent on such date and
the Agent may, in reliance upon such assumption, cause to be distributed to
each Bank on such due date an amount equal to the amount then due such Bank.
If and to the extent that the Borrower shall not have so made such payment,
each Bank shall repay to the Agent forthwith on demand such amount
distributed to such Bank together with interest thereon, for each day from
the date such amount is distributed to such Bank until the date such Bank
repays such amount to the Agent, at the Federal Funds Rate.
Section 2.13. Funding Losses. If the Borrower makes any payment of principal
with respect to any Fixed Rate Loan or any Fixed Rate Loan is converted to a
Domestic Loan (pursuant to Article 6 or 8 or otherwise) on any day other than
the last day of an Interest Period applicable thereto, or the last day of an
applicable period fixed pursuant to Section 2.07(c), or if the Borrower fails
to borrow or prepay any Fixed Rate Loans after notice has been given to any
Bank in accordance with Section 2.04(a) or 2.11(d), the Company shall
reimburse each Bank within 15 days after demand for any resulting loss or
expense incurred by it (or by an existing or prospective Participant in the
related Loan), including (without limitation) any loss incurred in obtaining,
liquidating or employing deposits from third parties, but excluding loss of
margin for the period after any such payment or conversion or failure to
borrow or prepay, provided that such Bank shall have delivered to the Company
a certificate as to the amount of such
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loss or expense, which certificate shall be conclusive in the absence of
manifest error.
Section 2.14. Computation of Interest and Fees. Interest based on the Prime
Rate hereunder shall be computed on the basis of a year of 365 days (or 366
days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees hereunder shall be computed on the basis of a year of 360 days and paid
for the actual number of days elapsed (including the first day but excluding
the last day).
Section 2.15. Change of Control. If a Change of Control shall occur, the
Company will, within ten days after the occurrence thereof, give each Bank
notice thereof, which notice shall describe in reasonable details the facts
and circumstances giving rise thereto and shall specify an Optional
Termination Date for purposes of this Section (the "Optional Termination
Date") which date shall not be less than 30 nor more than 60 days after the
date of such notice. Each Bank may, by notice to the Company and the Agent
given not less than three Domestic Business Days prior to the Optional
Termination Date, terminate its Commitment (if any), which shall thereupon be
terminated, and declare the Note held by it (together with accrued interest
thereon) and any other amounts payable hereunder for its account to be, and
such Note and such other amounts shall thereupon become, due and payable
without presentment, demand, protest or other notice of any kind, all of
which are hereby waived by the Company and the Borrower, in each case
effective on the Optional Termination Date.
A "Change of Control" shall occur if any person or group of persons (within
the meaning of Section 13 or 14 of the Securities Exchange Act of 1934, as
amended) shall have acquired beneficial ownership (within the meaning of Rule
13d-3 promulgated by the Securities and Exchange Commission under said Act)
of 30% or more of the outstanding shares of common stock of the Company; or,
during any period of twelve consecutive calendar months, individuals who were
directors of the Company on the first day of such period shall cease to
constitute a majority of the board of directors of the Company.
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ARTICLE 3
Conditions
Section 3.01. Closing. The closing hereunder shall occur upon receipt by the
Agent of the following documents, each dated the Closing Date unless
otherwise indicated:
(a) a duly executed Note of the Borrower for the account of each Bank dated
on or before the Closing Date complying with the provisions of Section 2.05;
(b) an opinion of Stephen E. Brilz, Esq., counsel for the Company and the
Borrower, substantially in the form of Exhibit E hereto and covering such
additional matters relating to the transactions contemplated hereby as the
Required Banks may reasonably request;
(c) an opinion of Davis Polk & Wardwell, special counsel for the Agent,
substantially in the form of Exhibit F hereto and covering such additional
matters relating to the transactions contemplated hereby as the Required
Banks may reasonably request;
(d) evidence satisfactory to the Agent that the commitments under the
Existing Credit Agreements have been terminated and that the principal and
interest on all loans and accrued fees outstanding thereunder have been paid
in full;
(e) evidence satisfactory to the Agent that all conditions to the
consummation of the Acquisition have been satisfied; and
(f) all documents the Agent may reasonably request relating to the existence
of the Company, the corporate authority for and the validity of this
Agreement and the Notes, and any other matters relevant hereto, all in form
and substance satisfactory to the Agent.
The Agent shall promptly notify the Company and the Banks of the Closing
Date, and such notice shall be conclusive and binding on all parties hereto.
Section 3.02. Borrowings. The obligation of any Bank to make a Loan on the
occasion of any Borrowing is subject to the satisfaction of the following
conditions:
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(a) the fact that the Closing Date shall have occurred on or prior to
February 15, 1997;
(b) receipt by the Agent of a Notice of Borrowing as required by Section
2.02 or 2.03, as the case may be;
(c) the fact that, immediately before and after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed the
aggregate amount of the Commitments;
(d) the fact that, immediately before and after such Borrowing, no Default
shall have occurred and be continuing; and
(e) the fact that the representations and warranties contained in this
Agreement shall be true on and as of the date of such Borrowing (except, in
the case of the representations and warranties contained in Section 4.04(c),
as disclosed by the Borrower to the Banks in writing in the Notice of
Borrowing relating to such Borrowing).
Each Borrowing hereunder shall be deemed to be a representation and warranty
by the Borrower on the date of such Borrowing as to the facts specified in
clauses (c), (d) and (e) of this Section.
ARTICLE 4
Representations and Warranties
Each of the Company and the Borrower represents and warrants that:
Section 4.01. Corporate Existence and Power. Each of the Company and the
Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation, and has all
corporate powers and all material governmental licenses, authorizations,
qualifications, consents and approvals required to carry on its business as
now conducted.
Section 4.02. Corporate and Governmental Authorization; No Contravention. The
execution, delivery and performance by the Company and the Borrower of this
Agreement and by the Borrower of the Notes are within such Person's corporate
powers, have been duly authorized by all necessary corporate action, require
no action by or in respect of, or filing with, any governmental body, agency
or official and do not contravene, or constitute a default under, any
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provision of applicable law or regulation or of the certificate of
incorporation or by-laws of such Person or of any agreement, judgment,
injunction, order, decree or other instrument binding upon such Person or any
Significant Subsidiary or result in the creation or imposition of any Lien on
any material asset of such Person or any Significant Subsidiary.
Section 4.03. Binding Effect. This Agreement constitutes a valid and binding
agreement of the Company and the Borrower, and the Notes, when executed and
delivered in accordance with this Agreement, will constitute valid and
binding obligations of the Borrower.
Section 4.04. Financial Information.
(a) The consolidated balance sheet of the Company and its Consolidated
Subsidiaries as of December 31, 1995 and the related consolidated statements
of income and cash flows for the fiscal year then ended, reported on by
Coopers & Lybrand and set forth in the Company's 1995 Form 10-K, a copy of
which has been delivered to each of the Banks, fairly present, in conformity
with generally accepted accounting principles, the consolidated financial
position of the Company and its Consolidated Subsidiaries as of such date and
their consolidated results of operations and cash flows for such fiscal year.
(b) The unaudited consolidated balance sheet of the Company and its
Consolidated Subsidiaries as of June 30, 1996 and the related unaudited
consolidated statements of income and cash flows for the six months then
ended, set forth in the Company's quarterly report for the fiscal quarter
ended June 30, 1996 as filed with the Securities and Exchange Commission on
Form 10-Q, a copy of which has been delivered to each of the Banks, fairly
present, in conformity with generally accepted accounting principles applied
on a basis consistent with the financial statements referred to in subsection
(a) of this Section, the consolidated financial position of the Company and
its Consolidated Subsidiaries as of such date and their consolidated results
of operations and cash flows for such six month period (subject to normal
year-end adjustments).
(c) Since June 30, 1996 there has been no material adverse change in the
financial position or results of operations of the Company and its
Consolidated Subsidiaries, considered as a whole (it being understood that
the consummation of the Acquisition shall not be considered such a change).
Section 4.05. Litigation. Except as disclosed in the Company's 1995 Form 10-K
and quarterly report for the fiscal quarter ended June 30, 1996 as filed with
the Securities and Exchange Commission on Form 10-Q, there is no action,
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suit or proceeding pending against, or to the knowledge of the Company
threatened against or affecting, the Company or any of its Subsidiaries
before any court or arbitrator or any governmental body, agency or official
in which there is a reasonable possibility of an adverse decision which would
materially adversely affect the consolidated financial position or
consolidated results of operations of the Company and its Consolidated
Subsidiaries, considered as a whole, or which in any manner draws into
question the validity of this Agreement or the Notes.
Section 4.06. Compliance with ERISA. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and
the Internal Revenue Code with respect to each Plan and is in compliance in
all respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan, except where failure to
comply would not have a material adverse effect on the consolidated financial
position or consolidated results of operations of the Company and its
Consolidated Subsidiaries, considered as a whole. No member of the ERISA
Group has (i) sought a waiver of the minimum funding standard under Section
412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make
any contribution or payment to any Plan or Multiemployer Plan or in respect
of any Benefit Arrangement, or made any amendment to any Plan or Benefit
Arrangement, which has resulted or could result in the imposition of a Lien
or the posting of a bond or other security under ERISA or the Internal
Revenue Code or (iii) incurred any liability under Title IV of ERISA other
than a liability to the PBGC for premiums under Section 4007 of ERISA.
Section 4.07. Environmental Matters. (a) The operations of the Company and
each of its Subsidiaries comply in all respects with all Environmental Laws
except such non-compliance which would not (if enforced in accordance with
applicable law) reasonably be expected to result, individually or in the
aggregate, in a material adverse effect on the financial position or results
of operations of the Company and its Consolidated Subsidiaries, considered as
a whole.
(b) Except as specifically identified in Schedule 4.07, the Company and each
of its Subsidiaries have obtained all material licenses, permits,
authorizations and registrations required under any Environmental Laws
("Environmental Permits") necessary for their respective operations, and all
such Environmental Permits are in good standing, and the Company and each of
its Subsidiaries is in compliance with all material terms and conditions of
such Environmental Permits.
(c) Except as specifically identified in Schedule 4.07, (i) none of the
Company, any of its Subsidiaries or any of their present property or
operations are
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subject to any outstanding written order from or settlement or consent
agreement with any governmental authority or other Person, nor is any of the
foregoing subject to any judicial or docketed administrative proceedings,
respecting any Environmental Laws or Hazardous Substances with a potential
liability in excess of $1,000,000 and (ii) there are no other conditions or
circumstances known to the Company which may give rise to any claims
respecting any Environmental Laws arising from the operations of the Company
or its Subsidiaries (including, without limitation, off-site liabilities), or
any additional costs of compliance with Environmental Laws, that would
reasonably be expected to have a material adverse effect on the financial
position or results of operations of the Company and its Subsidiaries,
considered as a whole.
Section 4.08. Taxes. United States Federal income tax returns of the Company
and its Subsidiaries have been examined and closed through the fiscal year
ended December 31, 1987. The Company and its Subsidiaries have filed all
United States Federal income tax returns and all other material tax returns
which are required to be filed by them and have paid all taxes due pursuant
to such returns or pursuant to any assessment received by the Company or any
Subsidiary, except for taxes the amount, applicability or validity of which
is being contested in good faith by appropriate proceedings. The charges,
accruals and reserves on the books of the Company and its Subsidiaries in
respect of taxes or other governmental charges are, in the opinion of the
Company, adequate.
Section 4.09. Subsidiaries. Each of the Company's corporate Significant
Subsidiaries (including, but not limited to, the Borrower) is a corporation
duly incorporated, validly existing and in good standing under the laws of
its jurisdiction of incorporation, and has all corporate powers and all
material governmental licenses, authorizations, qualifications, consents and
approvals required to carry on its business as now conducted.
Section 4.10. Not an Investment Company. Neither the Company nor the Borrower
is an "investment company" within the meaning of the Investment Company Act
of 1940, as amended.
Section 4.11. Full Disclosure. All written information heretofore furnished
by the Company or the Borrower to the Agent or any Bank for purposes of or in
connection with this Agreement or any transaction contemplated hereby is, and
all such information hereafter furnished by the Company or the Borrower to
the Agent or any Bank will be, true and accurate in all material respects on
the date as of which such information is stated or certified.
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ARTICLE 5
Covenants
The Company agrees that, so long as any Bank has any Commitment hereunder or
any amount payable under any Note remains unpaid:
Section 5.01. Information. The Company will deliver to each of the Banks:
(a) as soon as available and in any event within 95 days after the end of
each fiscal year of the Company, a consolidated balance sheet of the Company
and its Consolidated Subsidiaries as of the end of such fiscal year and the
related consolidated statements of income and cash flows for such fiscal
year, setting forth in each case in comparative form the figures for the
previous fiscal year, all reported on in a manner acceptable to the
Securities and Exchange Commission by Arthur Andersen L.L.P. or other
independent public accountants of nationally recognized standing;
(b) as soon as available and in any event within 50 days after the end of
each of the first three quarters of each fiscal year of the Company, a
consolidated balance sheet of the Company and its Consolidated Subsidiaries
as of the end of such quarter and the related consolidated statements of
income and cash flows for such quarter and for the portion of the Company's
fiscal year ended at the end of such quarter, setting forth in the case of
such statements of income and cash flows in comparative form the figures for
the corresponding quarter and the corresponding portion of the Company's
previous fiscal year, all certified (subject to normal year-end adjustments)
as to fairness of presentation, generally accepted accounting principles and
consistency by the chief financial officer or the chief accounting officer of
the Company;
(c) simultaneously with the delivery of each set of financial statements
referred to in clauses (a) and (b) above, a certificate of the chief
financial officer (or such officer's designee, designated in writing by such
officer) or the chief accounting officer of the Company (i) setting forth in
reasonable detail the calculations required to establish whether the Company
was in compliance with the requirements of Sections 5.06 to 5.08, inclusive,
on the date of such financial statements and (ii) stating whether any Default
exists on the date of such certificate and, if any
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Default then exists, setting forth the details thereof and the action which
the Company is taking or proposes to take with respect thereto;
(d) within five Domestic Business Days after any officer of the Company or
the Borrower obtains knowledge of any Default, if such Default is then
continuing, a certificate of the chief financial officer or the chief
accounting officer of the Company or the Borrower setting forth the details
thereof and the action which the Company or the Borrower is taking or
proposes to take with respect thereto;
(e) promptly upon the mailing thereof to the shareholders of the Company
generally, copies of all financial statements, reports and proxy statements
so mailed;
(f) promptly upon the filing thereof, copies of all registration statements
(other than the exhibits thereto and any registration statements on Form S-8
or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their
equivalents) (other than any amendment on Form 8-K the sole purpose of which
is to file exhibits relating to existing Debt meeting the requirements of
clause (ii) of the definition of Debt) which the Company shall have filed
with the Securities and Exchange Commission;
(g) if and when any member of the ERISA Group (i) gives or is required to
give notice to the PBGC of any "reportable event" (as defined in Section 4043
of ERISA) with respect to any Plan which might constitute grounds for a
termination of such Plan under Title IV of ERISA, or knows that the plan
administrator of any Plan has given or is required to give notice of any such
reportable event, a copy of the notice of such reportable event given or
required to be given to the PBGC; (ii) receives notice of complete or partial
withdrawal liability under Title IV of ERISA or notice that any Multiemployer
Plan is in reorganization, is insolvent or has been terminated, a copy of
such notice; (iii) receives notice from the PBGC under Title IV of ERISA of
an intent to terminate, impose liability (other than for premiums under
Section 4007 of ERISA) in respect of, or appoint a trustee to administer any
Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding
standard under Section 412 of the Internal Revenue Code, a copy of such
application; (v) gives notice of intent to terminate any Plan under Section
4041(c) of ERISA, a copy of such notice and other information filed with the
PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063
of ERISA, a copy of such notice; or (vii) fails to make any payment or
contribution to any Plan or Multiemployer Plan or in respect of any Benefit
Arrangement or
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makes any amendment to any Plan or Benefit Arrangement which has resulted or
could result in the imposition of a Lien or the posting of a bond or other
security, a certificate of the chief financial officer or the chief
accounting officer of the Company setting forth details as to such occurrence
and action, if any, which the Company or applicable member of the ERISA Group
is required or proposes to take; and
(h) from time to time such additional information regarding the financial
position or business of the Company and its Subsidiaries and the Borrower and
its Subsidiaries as the Agent, at the request of any Bank, may reasonably
request.
Section 5.02. Maintenance of Property; Insurance. (a) The Company will keep,
and will cause each Significant Subsidiary to keep, all property useful and
necessary in its business in good working order and condition, ordinary wear
and tear excepted.
(b) The Company will maintain, and will cause each Significant Subsidiary to
maintain (either in the name of the Borrower or in such Significant
Subsidiary's own name), with financially sound and responsible insurance
companies, insurance on all their respective properties in at least such
amounts and against at least such risks (and with such risk retention) as are
usually insured against in the same general area by companies of established
repute engaged in the same or a similar business; and will furnish to the
Banks, upon request from the Agent, information presented in reasonable
detail as to the insurance so carried; provided that, in lieu of any such
insurance, the Company and any Significant Subsidiary may maintain a system
or systems of self-insurance and reinsurance which will accord with sound
practices of similarly situated corporations maintaining such systems and
with respect to which the Company or such Significant Subsidiary will
maintain adequate insurance reserves, all in accordance with generally
accepted accounting principles and in accordance with sound insurance
principles and practice.
Section 5.03. Maintenance of Existence. The Company will, and will cause each
Significant Subsidiary to, preserve, renew and keep in full force and effect
their respective corporate existence and their respective rights, privileges
and franchises necessary or desirable in the normal conduct of business;
provided that nothing in this Section 5.03 shall prohibit or interfere with
the Company's publicly announced strategy to discontinue or dispose of in one
or more transactions the financial services businesses of it or of any of its
Subsidiaries.
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Section 5.04. Compliance with Laws. The Company will comply, and will cause
each Significant Subsidiary to comply, in all material respects with all
applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities (including, without limitation, Environmental Laws
and ERISA and the rules and regulations thereunder), except where the
necessity of compliance therewith is contested in good faith by appropriate
proceedings and for which adequate reserves in conformity with generally
accepted accounting principles have been established.
Section 5.05. Inspection of Property, Books and Records. The Company will
keep, and will cause each Significant Subsidiary to keep, proper books of
record and account in which full, true and correct entries shall be made of
all dealings and transactions in relation to its business and activities; and
will permit, and will cause each Significant Subsidiary to permit,
representatives of any Bank at such Bank's expense to visit and inspect any
of their respective properties, to examine and make abstracts from any of
their respective books and records and to discuss their respective affairs,
finances and accounts with their respective officers, employees and
independent public accountants, all at such reasonable times and as often as
may reasonably be desired.
Section 5.06. Subsidiary Debt. Total Debt of all Consolidated Subsidiaries
(excluding Debt of a Consolidated Subsidiary to the Company or to a
Wholly-Owned Consolidated Subsidiary) will at no time exceed 250% of
Consolidated Net Worth. For purposes of this Section, any preferred stock of
a Consolidated Subsidiary other than the Borrower which is held by a Person
other than the Company or a Wholly-Owned Consolidated Subsidiary shall be
included, at the higher of its voluntary or involuntary liquidation value, in
the Debt of such Consolidated Subsidiary.
Section 5.07. Debt Coverage. Consolidated Debt of the Company and its
Consolidated Subsidiaries will at all times be less than 70% of the sum of
consolidated Debt of the Company and its Consolidated Subsidiaries and
consolidated shareowners' equity of the Company and its Consolidated
Subsidiaries.
Section 5.08. Negative Pledge. Neither the Company nor the Borrower will, and
the Company will not permit any Subsidiary to, create, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired by it, except:
(a) Liens existing on the date of this Agreement securing Debt outstanding
on the date of this Agreement in an aggregate principal amount not exceeding
$123,700,000;
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(b) any Lien existing on any asset of any corporation at the time such
corporation becomes a Subsidiary and not created in contemplation of such
event;
(c) any Lien on any asset securing Debt incurred or assumed for the purpose
of financing all or any part of the cost of acquiring such asset, provided
that such Lien attaches to such asset concurrently with or within 180 days
after the acquisition thereof;
(d) any Lien on any asset of any corporation existing at the time such
corporation is merged or consolidated with or into the Company or a
Subsidiary and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the acquisition thereof by the
Company or a Subsidiary and not created in contemplation of such acquisition;
(f) any Lien on assets or capital stock of Minor Subsidiaries which secures
Debt of Persons which are not Consolidated Subsidiaries in which the Company
or any of its Subsidiaries has made investments ("Joint Ventures"), but for
the payment of which Debt no other recourse may be had to the Company or any
Subsidiaries ("Limited Recourse Debt"), or any Lien on equity interests in a
Joint Venture securing Limited Recourse Debt of such Joint Venture;
(g) any Lien arising out of the refinancing, replacement, extension, renewal
or refunding of any Debt secured by any Lien permitted by any of the
foregoing clauses of this Section, provided that such Debt is not increased
and is not secured by any additional assets;
(h) Liens arising in the ordinary course of business which (i) do not secure
Debt, (ii) do not secure any obligation in an amount exceeding $50,000,000
and (iii) do not in the aggregate materially detract from the value of its
assets or materially impair the use thereof in the operation of its business;
(i) Liens not otherwise permitted by and in addition to the foregoing
clauses of this Section securing Debt in an aggregate principal amount at any
time outstanding not to exceed 10% of Consolidated Net Worth; and
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(j) any Lien on Margin Stock, if and to the extent the value of all Margin
Stock of the Company and its Subsidiaries exceeds 25% of the value of the
total assets subject to this Section.
Section 5.09. Consolidations, Mergers and Sales of Assets. The Company will
not (i) consolidate with or merge into any other Person or (ii) sell, lease
or otherwise transfer, directly or indirectly, all or substantially all of
the assets of the Company and its Subsidiaries, taken as a whole, to any
other Person. The Company will retain ownership, directly or indirectly, of
at least 80% of the capital stock, and at least 80% of the voting power, of U
S WEST Communications, Inc. ("Communications"), and will cause Communications
to continue to own substantially all of the telecommunications assets it owns
on the date of this Agreement. Nothing in this Section shall be construed to
restrict any sales of Margin Stock for fair value as determined in good faith
by the board of directors of the Company.
Section 5.10. Use of Proceeds. The proceeds of the Loans made under this
Agreement will be used by the Borrower for financing the Acquisition and for
general corporate purposes. None of such proceeds will be used, directly or
indirectly, in violation of any applicable law or regulation, and no use of
such proceeds for general corporate purposes will include any use for the
purpose, whether immediate, incidental or ultimate, of buying or carrying any
Margin Stock.
ARTICLE 6
Defaults
Section 6.01. Events of Default. If one or more of the following events shall
have occurred and be continuing:
(a) any principal of any Loan shall not be paid when due, or any interest,
any fees or any other amount payable hereunder shall not be paid within five
days of the due date thereof;
(b) the Company or the Borrower shall fail to observe or perform any
covenant contained in Sections 5.06 to 5.10, inclusive;
(c) the Company or the Borrower shall fail to observe or perform any
covenant or agreement contained in this Agreement (other than those
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covered by clause (a) or (b) above) for 10 days after written notice thereof
has been given to the Company by the Agent at the request of any Bank;
(d) any representation, warranty, certification or statement made by the
Company or the Borrower in this Agreement or in any certificate, financial
statement or other document delivered pursuant to this Agreement shall prove
to have been incorrect in any material respect when made (or deemed made);
(e) the Company or any Subsidiary shall fail to make any payment or
payments, in the aggregate in excess of $100,000,000, in respect of any
Material Debt when due or within any applicable grace period;
(f) any event or condition shall occur which results in the acceleration of
the maturity of any Material Debt;
(g) the Company or any Significant Subsidiary shall commence a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, or shall consent to any such relief or
to the appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, or shall make a
general assignment for the benefit of creditors, or shall fail generally to
pay its debts as they become due, or shall take any corporate action to
authorize or otherwise acquiesce in any of the foregoing;
(h) an involuntary case or other proceeding shall be commenced against the
Company or any Significant Subsidiary seeking liquidation, reorganization or
other relief with respect to it or its debts under any bankruptcy, insolvency
or other similar law now or hereafter in effect or seeking the appointment of
a trustee, receiver, liquidator, custodian or other similar official of it or
any substantial part of its property, and such involuntary case or other
proceeding shall remain undismissed and unstayed for a period of 60 days; or
an order for relief shall be entered against the Company or any Significant
Subsidiary under the federal bankruptcy laws as now or hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due an amount or
amounts aggregating in excess of $100,000,000 which it shall have become
liable to pay under Title IV of ERISA; or notice of intent to
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terminate a Material Plan shall be filed under Title IV of ERISA by any
member of the ERISA Group, any plan administrator or any combination of the
foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to
terminate, to impose liability (other than for premiums under Section 4007 of
ERISA) in respect of, or to cause a trustee to be appointed to administer any
Material Plan; or a condition shall exist by reason of which the PBGC would
be entitled to obtain a decree adjudicating that any Material Plan must be
terminated; or there shall occur a complete or partial withdrawal from, or a
default, within the meaning of Section 4219(c)(5) of ERISA, with respect to,
one or more Multiemployer Plans which could cause one or more members of the
ERISA Group to incur a current payment obligation in excess of $100,000,000;
(j) a judgment or order for the payment of money in excess of $100,000,000
shall be rendered against the Company or any Subsidiary and such judgment or
order shall continue unsatisfied and unstayed for a period of 10 days;
(k) the Company shall repudiate in writing any of its obligations under
Article 9 or any such obligation shall be unenforceable against the Company
in accordance with its terms, or the Company shall so assert in writing; or
(l) (i) Continental Cablevision, Inc. shall have merged with and into the
Company and Debt is outstanding under the Indentures, and (ii) one or more
events or conditions shall occur which result in a default under any
agreement or agreements in respect of any Material Debt that is subject to
the Indentures and as a consequence of such default or defaults the Company
or any of its Subsidiaries shall make any payment or give or agree to give
any consideration or benefit of any kind (including, without limitation, any
increased compensation, prepayment, shortening of maturities, security or
other credit support) to the holders of such Debt and such payment,
consideration or benefit is determined by the Required Banks, after taking
into account any payment, consideration or benefit made, given or agreed to
be given by such holders to the Company or any of its Subsidiaries (other
than a waiver of such default), to be a material benefit to the holders of
such Debt;
then, and in every such event, the Agent shall (i) if requested by Banks
having more than 50% in aggregate amount of the Commitments, by notice to the
Company terminate the Commitments and they shall thereupon terminate, and/or
(ii) if requested by Banks holding Notes evidencing more than 50% in
aggregate
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principal amount of the Loans, by notice to the Company declare the Notes
(together with accrued interest thereon) to be, and the Notes shall thereupon
become, immediately due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Company and
the Borrower; provided that in the case of any of the Events of Default
specified in clause (g) or (h) above with respect to the Company or the
Borrower, without any notice to the Company or the Borrower or any other act
by the Agent or the Banks, the Commitments shall thereupon automatically
terminate and the Notes (together with accrued interest thereon) shall become
immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Company and the
Borrower.
Section 6.02. Notice of Default. The Agent shall give notice to the Company
under Section 6.01(c) promptly upon being requested to do so by any Bank and
shall thereupon notify all the Banks thereof.
ARTICLE 7
The Agent
Section 7.01. Appointment and Authorization. Each Bank irrevocably appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement and the Notes as are delegated to
the Agent by the terms hereof or thereof, together with all such powers as
are reasonably incidental thereto.
Section 7.02. Agent and Affiliates. Morgan Guaranty Trust Company of New York
shall have the same rights and powers under this Agreement as any other Bank
and may exercise or refrain from exercising the same as though it were not
the Agent, and Morgan Guaranty Trust Company of New York and its affiliates
may accept deposits from, lend money to, and generally engage in any kind of
business with the Company, the Borrower or any Subsidiary or affiliate of the
Company or the Borrower as if it were not the Agent hereunder.
Section 7.03. Action by Agent. The obligations of the Agent hereunder are
only those expressly set forth herein. Without limiting the generality of
the foregoing, the Agent shall not be required to take any action with
respect to any Default, except as expressly provided in Article 6.
Section 7.04. Consultation with Experts. The Agent may consult with legal
counsel (who may be counsel for the Company or the Borrower),
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independent public accountants and other experts selected by it and shall not
be liable for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts.
Section 7.05. Liability of Agent. Neither the Agent nor any of its affiliates
nor any of their respective directors, officers, agents or employees shall be
liable for any action taken or not taken by it in connection herewith (i)
with the consent or at the request of the Required Banks or (ii) in the
absence of its own gross negligence or willful misconduct. Neither the Agent
nor any of its affiliates nor any of their respective directors, officers,
agents or employees shall be responsible for or have any duty to ascertain,
inquire into or verify (i) any statement, warranty or representation made in
connection with this Agreement or any borrowing hereunder; (ii) the
performance or observance of any of the covenants or agreements of the
Company or the Borrower; (iii) the satisfaction of any condition specified in
Article 3, except receipt of items required to be delivered to the Agent; or
(iv) the validity, effectiveness or genuineness of this Agreement, the Notes
or any other instrument or writing furnished in connection herewith. The
Agent shall not incur any liability by acting in reliance upon any notice,
consent, certificate, statement, or other writing (which may be a bank wire,
telex or similar writing) believed by it to be genuine or to be signed by the
proper party or parties.
Section 7.06. Indemnification. Each Bank shall, ratably in accordance with
its Commitment, indemnify the Agent, its affiliates and their respective
directors, officers, agents and employees (to the extent not reimbursed by
the Company or the Borrower) against any cost, expense (including counsel
fees and disbursements), claim, demand, action, loss or liability (except
such as result from such indemnitees' gross negligence or willful misconduct)
that such indemnitees may suffer or incur in connection with this Agreement
or any action taken or omitted by such indemnitees hereunder.
Section 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made
its own credit analysis and decision to enter into this Agreement. Each Bank
also acknowledges that it will, independently and without reliance upon the
Agent or any other Bank, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking any action under this Agreement.
Section 7.08. Successor Agent. The Agent may resign at any time by giving
notice thereof to the Banks and the Company. Upon any such resignation,
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the Required Banks shall have the right to appoint a successor Agent. If no
successor Agent shall have been so appointed by the Required Banks, and shall
have accepted such appointment, within 30 days after the retiring Agent gives
notice of resignation, then the retiring Agent may, on behalf of the Banks,
appoint a successor Agent (with the consent of the Company, such consent not
to be unreasonably withheld), which shall be a commercial bank organized or
licensed under the laws of the United States of America or of any State
thereof and having a combined capital and surplus of at least $400,000,000.
Upon the acceptance of its appointment as Agent hereunder by a successor
Agent, such successor Agent shall thereupon succeed to and become vested with
all the rights and duties of the retiring Agent, and the retiring Agent shall
be discharged from its duties and obligations hereunder. After any retiring
Agent's resignation hereunder as Agent, the provisions of this Article shall
inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent.
Section 7.09. Agent's Fee. The Company shall pay to the Agent for its own
account fees in the amounts and at the times previously agreed upon between
the Company and the Agent.
Section 7.10. Other Agents. Neither Citibank, N.A. nor The Bank of New York
shall have any responsibility, obligation or liability under this Agreement
in its capacity as Syndication Agent or Documentation Agent, respectively.
ARTICLE 8
Changes in Circumstances
Section 8.01. Basis for Determining Interest Rate Inadequate or UnfairIf on
or prior to the first day of any Interest Period for any Euro-Dollar Loan or
Money Market LIBOR Loan:
(a) the Agent is advised by the Euro-Dollar Reference Banks that deposits in
dollars (in the applicable amounts) are not being offered to the Euro-Dollar
Reference Banks in the market for such Interest Period, or
(b) in the case of Euro-Dollar Loans, Banks having 50% or more of the
aggregate amount of the Euro-Dollar Loans advise the Agent that the Adjusted
London Interbank Offered Rate as determined by the Agent will not adequately
and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans
for such Interest Period,
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the Agent shall forthwith give notice thereof to the Company and the Banks,
whereupon until the Agent notifies the Company that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make Euro-Dollar Loans or to convert outstanding Loans into Euro-Dollar Loans
shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be
converted into a Domestic Loan on the last day of the then current Interest
Period applicable thereto. Unless the Borrower notifies the Agent at least
two Domestic Business Days before the date of any Fixed Rate Borrowing for
which a Notice of Borrowing has previously been given that it elects not to
borrow on such date, (i) if such Fixed Rate Borrowing is a Committed
Borrowing, such Borrowing shall instead be made as a Domestic Borrowing and
(ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the
Money Market LIBOR Loans comprising such Borrowing shall bear interest for
each day from and including the first day to but excluding the last day of
the Interest Period applicable thereto at the Base Rate for such day.
Section 8.02. Illegality. If, on or after the date of this Agreement, the
adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by any Bank (or its Euro-Dollar Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency shall make it unlawful or
impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain
or fund its Euro-Dollar Loans to the Borrower and such Bank shall so notify
the Agent, the Agent shall forthwith give notice thereof to the other Banks
and the Company, whereupon until such Bank notifies the Company and the Agent
that the circumstances giving rise to such suspension no longer exist, the
obligation of such Bank to make Euro-Dollar Loans to the Borrower, or to
convert outstanding Loans into Euro-Dollar Loans, shall be suspended. Before
giving any notice to the Agent pursuant to this Section, such Bank shall
designate a different Euro-Dollar Lending Office if such designation will
avoid the need for giving such notice and will not, in the judgment of such
Bank, be otherwise disadvantageous to such Bank. If such notice is given,
each Euro-Dollar Loan of such Bank then outstanding shall be converted to a
Domestic Loan either (a) on the last day of the then current Interest Period
applicable to such Euro-Dollar Loan if such Bank may lawfully continue to
maintain and fund such Loan to such day or (b) immediately if such Bank shall
determine that it may not lawfully continue to maintain and fund such Loan to
such day.
Section 8.03. Increased Cost and Reduced Return. (a) If on or after (x) the
date hereof, in the case of any Committed Loan or any obligation to make
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Committed Loans or (y) the date of the related Money Market Quote, in the
case of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation
or administration thereof, or compliance by any Bank (or its Applicable
Lending Office) with any request or directive (whether or not having the
force of law) of any such authority, central bank or comparable agency shall
impose, modify or deem applicable any reserve (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal Reserve
System with respect to any Euro-Dollar Loan any such requirement included in
an applicable Euro-Dollar Reserve Percentage), special deposit, insurance
assessment or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Bank (or its Applicable Lending
Office) or shall impose on any Bank (or its Applicable Lending Office) or on
the United States market for certificates of deposit or the London interbank
market any other condition affecting its Fixed Rate Loans, its Note or its
obligation to make Fixed Rate Loans and the result of any of the foregoing is
to increase the cost to such Bank (or its Applicable Lending Office) of
making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum
received or receivable by such Bank (or its Applicable Lending Office) under
this Agreement or under its Note with respect thereto, by an amount deemed by
such Bank to be material, then, within 15 days after demand by such Bank
(with a copy to the Agent), the Company shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.
(b) If any Bank shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing
the rate of return on capital of such Bank (or its Parent) as a consequence
of such Bank's obligations hereunder to a level below that which such Bank
(or its Parent) could have achieved but for such adoption, change, request or
directive (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by such Bank to be material, then from time to
time, within 15 days after demand by such Bank (with a copy to the Agent),
the Company shall pay to such Bank such additional amount or amounts as will
compensate such Bank (or its Parent) for such reduction.
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(c) Each Bank will promptly notify the Company and the Agent of any event of
which it has knowledge, occurring after the date hereof, which will entitle
such Bank to compensation pursuant to this Section and will designate a
different Applicable Lending Office if such designation will avoid the need
for, or reduce the amount of, such compensation and will not, in the judgment
of such Bank, be otherwise disadvantageous to such Bank. A certificate of
any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive
in the absence of manifest error. In determining such amount, such Bank may
use any reasonable averaging and attribution methods.
Section 8.04. Taxes. (a) Any and all payments by the Company or the Borrower
to or for the account of any Bank or the Agent hereunder or under any Note
shall be made free and clear of and without deduction for any and all present
or future taxes, duties, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the
case of each Bank and the Agent, taxes imposed on its income, and franchise
taxes imposed on it, by the jurisdiction under the laws of which such Bank or
the Agent (as the case may be) is organized or any political subdivision
thereof and, in the case of each Bank, taxes imposed on its income, and
franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof (all such
non-excluded taxes, duties, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "Taxes"). If
the Company or the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder or under any Note to any Bank or
the Agent, (i) the sum payable shall be increased as necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section 8.04) such Bank or the Agent (as the case may
be) receives an amount equal to the sum it would have received had no such
deductions been made, (ii) such Person shall make such deductions, (iii) such
Person shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law and (iv) such Person
shall furnish to the Agent, at its address referred to in Section 10.01, the
original or a certified copy of a receipt evidencing payment thereof.
(b) In addition, the Company agrees to pay any present or future stamp or
documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any Note
or from the execution or delivery of, or otherwise with respect to, this
Agreement or any Note (hereinafter referred to as "Other Taxes").
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(c) The Company agrees to indemnify each Bank and the Agent for the full
amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.04) paid by such Bank or the Agent (as the case may be) and
any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto. This indemnification shall be made within 15 days
from the date such Bank or the Agent (as the case may be) makes demand
therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the United
States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and
on or prior to the date on which it becomes a Bank in the case of each other
Bank, and from time to time thereafter if requested in writing by the Company
(but only so long as such Bank remains lawfully able to do so), shall provide
the Company with Internal Revenue Service form 1001 or 4224, as appropriate,
or any successor form prescribed by the Internal Revenue Service, certifying
that such Bank is entitled to benefits under an income tax treaty to which
the United States is a party which reduces the rate of withholding tax on
payments of interest or certifying that the income receivable pursuant to
this Agreement is effectively connected with the conduct of a trade or
business in the United States. If the form provided by a Bank at the time
such Bank first becomes a party to this Agreement indicates a United States
interest withholding tax rate in excess of zero, withholding tax at such rate
shall be considered excluded from "Taxes" as defined in Section 8.04(a)
imposed by the United States.
(e) For any period with respect to which a Bank has failed to provide the
Company with the appropriate form pursuant to Section 8.04(d) (unless such
failure is due to a change in treaty, law or regulation occurring subsequent
to the date on which a form originally was required to be provided), such
Bank shall not be entitled to indemnification under Section 8.04(a) with
respect to Taxes imposed by the United States; provided, however, that should
a Bank, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Taxes because of its failure to deliver a
form required hereunder, the Company shall take such steps as such Bank shall
reasonably request to assist such Bank to recover such Taxes.
(f) If the Company or the Borrower is required to pay additional amounts to
or for the account of any Bank pursuant to this Section 8.04, then such Bank
will change the jurisdiction of its Applicable Lending Office so as to
eliminate or reduce any such additional payment which may thereafter accrue
if such change, in the judgment of such Bank, is not otherwise
disadvantageous to such Bank.
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<PAGE>
Section 8.05. Domestic Loans Substituted for Affected Euro-Dollar Loans. If
(i) the obligation of any Bank to make Euro-Dollar Loans to the Borrower has
been suspended pursuant to Section 8.02 or (ii) any Bank has demanded
compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans
and the Borrower shall, by at least five Euro-Dollar Business Days' prior
notice to such Bank through the Agent, have elected that the provisions of
this Section shall apply to such Bank, then, unless and until such Bank
notifies the Company that the circumstances giving rise to such suspension or
demand for compensation no longer exist:
(a) all Loans to the Borrower which would otherwise be made by such Bank as
(or continued as or converted into) Euro-Dollar Loans shall instead be
Domestic Loans (on which interest and principal shall be payable
contemporaneously with the related Euro-Dollar Loans of the other Banks), and
(b) after each of its Euro-Dollar Loans to the Borrower has been repaid (or
converted to a Domestic Loan), all payments of principal which would
otherwise be applied to repay such Euro-Dollar Loans shall be applied to
repay its Domestic Loans instead.
If such Bank notifies the Borrower that the circumstances giving rise to such
notice no longer apply, the principal amount of each such Domestic Loan shall
be converted into a Euro-Dollar Loan on the first day of the next succeeding
Interest Period applicable to the related Euro-Dollar Loans of the other
Banks.
Section 8.06. Substitution of Bank. If (i) the obligation of any Bank to make
Euro-Dollar Loans has been suspended pursuant to Section 8.02, (ii) any Bank
has demanded compensation under Section 8.03 or (iii) any Bank has not signed
an amendment or waiver which must be signed by all the Banks to become
effective, and such amendment or waiver has been signed by the Super-Majority
Banks, the Company shall have the right, with the assistance of the Agent, to
seek a mutually satisfactory substitute bank or banks (which may be one or
more of the Banks) to purchase the Notes and assume the Commitment of such
Bank.
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<PAGE>
ARTICLE 9
Guaranty
Section 9.01. The Guaranty. The Company hereby unconditionally guarantees the
full and punctual payment (whether at stated maturity, upon acceleration or
otherwise) of the principal of and interest on each Note issued by the
Borrower pursuant to this Agreement, and the full and punctual payment of all
other amounts payable by the Borrower under this Agreement. Upon failure by
the Borrower to pay punctually any such amount, the Company shall forthwith
on demand pay the amount not so paid at the place and in the manner specified
in this Agreement.
Section 9.02. Guaranty Unconditional. The obligations of the Company
hereunder shall be unconditional, irrevocable and absolute and, without
limiting the generality of the foregoing, shall not be released, discharged
or otherwise affected by:
(i) any extension, renewal, settlement, compromise, waiver or release in
respect of any obligation of the Borrower under this Agreement or any Note,
by operation of law or otherwise;
(ii) any modification or amendment of or supplement to this Agreement or any
Note;
(iii) any release, impairment, non-perfection or invalidity of any direct or
indirect security for any obligation of the Borrower under this Agreement or
any Note;
(iv) any change in the corporate existence, structure or ownership of the
Borrower, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting the Borrower or its assets or any resulting release or
discharge of any obligation of the Borrower contained in this Agreement or
any Note;
(v) the existence of any claim, set-off or other rights which the Company
may have at any time against the Borrower, the Agent, any Bank or any other
Person, whether in connection herewith or any unrelated transactions,
provided that nothing herein shall prevent the assertion of any such claim by
separate suit or compulsory counterclaim;
(vi) any invalidity or unenforceability relating to or against the Borrower
for any reason of this Agreement or any Note, or any provision
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<PAGE>
of applicable law or regulation purporting to prohibit the payment by the
Borrower of the principal of or interest on any Note or any other amount
payable by it under this Agreement; or
(vii) any other act or omission to act or delay of any kind by the Borrower,
the Agent, any Bank or any other Person or any other circumstance whatsoever
which might, but for the provisions of this paragraph, constitute a legal or
equitable discharge of the Company's obligations hereunder.
Section 9.03. Discharge Only upon Payment in Full; Reinstatement In Certain
Circumstances. The Company's obligations hereunder shall remain in full force
and effect until the Commitments shall have terminated and the principal of
and interest on the Notes and all other amounts payable by the Company and
the Borrower under this Agreement shall have been indefeasibly paid in full.
If at any time any payment of the principal of or interest on any Note or any
other amount payable by the Borrower under this Agreement is rescinded or
must be otherwise restored or returned upon the insolvency, bankruptcy or
reorganization of the Borrower or otherwise, the Company's obligations
hereunder with respect to such payment shall be reinstated at such time as
though such payment had been due but not made at such time.
Section 9.04. Waiver by the Company. The Company irrevocably waives
acceptance hereof, presentment, demand, protest and any notice not provided
for herein, as well as any requirement that at any time any action be taken
by any Person against the Borrower or any other Person.
Section 9.05. Subrogation. The Company irrevocably waives any and all rights
to which it may be entitled, by operation of law or otherwise, upon making
any payment hereunder to be subrogated to the rights of the payee against the
Borrower with respect to such payment or against any direct or indirect
security therefor, or otherwise to be reimbursed, indemnified or exonerated
by or for the account of the Borrower in respect thereof.
Section 9.06. Stay of Acceleration. In the event that acceleration of the
time for payment of any amount payable by the Borrower under this Agreement
or its Notes is stayed upon insolvency, bankruptcy or reorganization of the
Borrower, all such amounts otherwise subject to acceleration under the terms
of this Agreement shall nonetheless be payable by the Company hereunder
forthwith on demand by the Agent made at the request of the Required Banks.
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ARTICLE 10
Miscellaneous
Section 10.01. Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including bank wire, telex, facsimile
transmission or similar writing) and shall be given to such party: (x) in
the case of the Company, the Borrower or the Agent, at its address or
facsimile number set forth on the signature pages hereof, (y) in the case of
any Bank, at its address or facsimile number set forth in its Administrative
Questionnaire or (z) in the case of any party, such other address or
facsimile number as such party may hereafter specify for the purpose by
notice to the Agent and the Company. Each such notice, request or other
communication shall be effective (i) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid, (ii) if given by facsimile transmission, when such
facsimile is transmitted to the facsimile number specified pursuant to this
Section 10.01 and telephonic confirmation of receipt thereof is received, or
(iii) if given by any other means, when delivered at the address specified in
this Section; provided that notices to the Agent under Article 2 or Article 8
shall not be effective until received.
Section 10.02. No Waivers. No failure or delay by the Agent or any Bank in
exercising any right, power or privilege hereunder or under any Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
Section 10.03. Expenses; Indemnification. (a) The Company shall pay (i) all
out-of-pocket expenses of the Agent, including fees and disbursements of
special counsel for the Agent, in connection with the preparation and
administration of this Agreement, any waiver or consent hereunder or any
amendment hereof or any Default or alleged Default hereunder and (ii) if an
Event of Default occurs, all out-of-pocket expenses incurred by the Agent and
each Bank, including fees and disbursements of counsel, in connection with
such Event of Default and collection, bankruptcy, insolvency and other
enforcement proceedings resulting therefrom.
(b) The Company agrees to indemnify the Agent and each Bank, their
respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of
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<PAGE>
counsel, which may be incurred by such Indemnitee in connection with any
investigative, administrative or judicial proceeding (whether or not such
Indemnitee shall be designated a party thereto) brought or threatened
relating to or arising out of this Agreement or any actual or proposed use of
proceeds of Loans hereunder; provided that (i) no Indemnitee shall have the
right to be indemnified hereunder for such Indemnitee's own gross negligence
or willful misconduct as determined by a court of competent jurisdiction and
(ii) the Company shall not be liable for any settlement entered into by an
Indemnitee without its consent (which shall not be unreasonably withheld).
(c) Each Indemnitee agrees to give the Company prompt written notice after
it receives any notice of the commencement of any action, suit or proceeding
for which such Indemnitee may wish to claim indemnification pursuant to
subsection (b). The Company shall have the right, exercisable by giving
written notice within fifteen Domestic Business Days after the receipt of
notice from such Indemnitee of such commencement, to assume, at the Company's
expense, the defense of any such action, suit or proceeding; provided, that
such Indemnitee shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such separate counsel shall be at such Indemnitee's
expense unless (1) the Company shall have agreed to pay such fees and
expenses; (2) the Company shall have failed to assume the defense of such
action, suit or proceeding or shall have failed to employ counsel reasonably
satisfactory to such Indemnitee in any such action, suit or proceeding; or
(3) such Indemnitee shall have been advised by independent counsel in writing
(with a copy to the Company) that there may be one or more defenses available
to such Indemnitee which are in conflict with those available to the Company
(in which case, if such Indemnitee notifies the Company in writing that it
elects to employ separate counsel at the Company's expense, the Company shall
be obligated to assume the expense, it being understood, however, that the
Company shall not be liable for the fees or expenses of more than one
separate firm of attorneys, which firm shall be designated in writing by such
Indemnitee).
Section 10.04. Sharing of Set-offs. Each Bank agrees that if it shall, by
exercising any right of set-off or counterclaim or otherwise, receive payment
of a proportion of the aggregate amount of principal and interest due with
respect to any Note held by it which is greater than the proportion received
by any other Bank in respect of the aggregate amount of principal and
interest due with respect to any Note held by such other Bank, the Bank
receiving such proportionately greater payment shall purchase such
participations in the Notes held by the other Banks, and such other
adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Notes held by the
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<PAGE>
Banks shall be shared by the Banks pro rata; provided that nothing in this
Section shall impair the right of any Bank to exercise any right of set-off
or counterclaim it may have and to apply the amount subject to such exercise
to the payment of indebtedness of the Borrower other than its indebtedness
hereunder. The Borrower agrees, to the fullest extent it may effectively do
so under applicable law, that any holder of a participation in a Note,
whether or not acquired pursuant to the foregoing arrangements, may exercise
rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of the Borrower in the amount of such participation.
Section 10.05. Amendments and Waivers. Any provision of this Agreement or the
Notes may be amended or waived if, but only if, such amendment or waiver is
in writing and is signed by the Company, the Borrower and the Required Banks
(and, if the rights or duties of the Agent are affected thereby, by the
Agent); provided that no such amendment or waiver shall, unless signed by all
the Banks, (i) increase or decrease the Commitment of any Bank (except for a
ratable decrease in the Commitments of all Banks) or subject any Bank to any
additional obligation, (ii) reduce the principal of or rate of interest on
any Loan or any fees hereunder, except as provided below, (iii) postpone the
date fixed for any payment of principal of or interest on any Loan or any
fees hereunder or for any reduction or termination of any Commitment, (iv)
amend or waive the provisions of Article 9 or (v) change the percentage of
the Commitments or of the aggregate unpaid principal amount of the Notes, or
the number of Banks, which shall be required for the Banks or any of them to
take any action under this Section or any other provision of this Agreement.
Section 10.06. Successors and Assigns. (a) The provisions of this Agreement
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns, except that neither the Company nor
the Borrower may assign or otherwise transfer any of its rights under this
Agreement without the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment
or any or all of its Loans, with (and subject to) the written consent of the
Company and the Agent, which consents shall not be unreasonably withheld. In
the event of any such grant by a Bank of a participating interest to a
Participant, such Bank shall remain responsible for the performance of its
obligations hereunder, and the Company, the Borrower and the Agent shall
continue to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Agreement. Any agreement pursuant
to which any Bank may grant such a
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participating interest shall provide that such Bank shall retain the sole
right and responsibility to enforce the obligations of the Company and the
Borrower hereunder including, without limitation, the right to approve any
amendment, modification or waiver of any provision of this Agreement;
provided that such participation agreement may provide that such Bank will
not agree to any modification, amendment or waiver of this Agreement
described in clause (i), (ii) or (iii) of Section 10.05 without the consent
of the Participant. The Borrower agrees that each Participant shall, to the
extent provided in its participation agreement, be entitled to the benefits
of Article 8 with respect to its participating interest. An assignment or
other transfer which is not permitted by subsection (c) or (d) below but
which is consented to in accordance with this subsection (b) shall be given
effect for purposes of this Agreement only to the extent of a participating
interest granted in accordance with this subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit G hereto executed
by such Assignee and such transferor Bank, with (and subject to) the
subscribed consent of the Company and the Agent, which consents shall not be
unreasonably withheld; provided that (i) if an Assignee is an affiliate of
such transferor Bank, no such consent shall be required; (ii) such assignment
may, but need not, include rights of the transferor Bank in respect of
outstanding Money Market Loans; and (iii) any assignment shall not be less
than $15,000,000, or if less, shall constitute an assignment of all of such
Bank's rights and obligations under this Agreement and the Notes except for
any rights retained in accordance with clause (ii) of this proviso. Upon
execution and delivery of such instrument and payment by such Assignee to
such transferor Bank of an amount equal to the purchase price agreed between
such transferor Bank and such Assignee, such Assignee shall be a Bank party
to this Agreement and shall have all the rights and obligations of a Bank
with a Commitment as set forth in such instrument of assumption, and the
transferor Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by any party shall be
required. Upon the consummation of any assignment pursuant to this
subsection (c), the transferor Bank, the Agent and the Borrower shall make
appropriate arrangements so that, if required, new Notes are issued to the
Assignee. In connection with any such assignment, the transferor Bank shall
pay to the Agent an administrative fee for processing such assignment in the
amount of $2,500. If the Assignee is not incorporated under the laws of the
United States of America or a state thereof, it shall deliver to the Company
and the Agent certification as to
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exemption from deduction or withholding of any United States federal income
taxes in accordance with Section 8.04.
(d) Any Bank may at any time assign all or any portion of its rights
under this Agreement and its Notes to a Federal Reserve Bank. No such
assignment shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights
shall be entitled to receive any greater payment under Section 8.03 or 8.04
than such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Company's prior written
consent or by reason of the provisions of Section 8.02, 8.03 or 8.04
requiring such Bank to designate a different Applicable Lending Office under
certain circumstances or at a time when the circumstances giving rise to such
greater payment did not exist.
Section 10.07. Termination of Existing Credit Agreements. The
Company and each of the Banks that is also a "Bank" party to the Existing
Credit Agreements agrees that the "Commitments" as defined in the Existing
Credit Agreements shall be terminated in their entirety on the Effective
Date. Each of such Banks waives (a) any requirement of notice of such
termination pursuant to Section 2.09 of the Existing Credit Agreements and
(b) any claim to any facility fees or other fees under the Existing Credit
Agreements for any day on or after the Effective Date. Each of the Company
and the Borrower (i) represents and warrants that (x) after giving effect to
the preceding sentences of this Section 10.07, the commitments under the
Existing Credit Agreements will be terminated effective not later than the
Effective Date, (y) no loans are, as of the date hereof, or will be, as of
the Effective Date, outstanding under the Existing Credit Agreements and (ii)
covenants that all accrued and unpaid facility fees and any other amounts due
and payable under the Existing Credit Agreements shall have been paid on or
prior to the Effective Date.
Section 10.08. Governing Law; Submission to Jurisdiction. This
Agreement and each Note shall be governed by and construed in accordance with
the laws of the State of New York. Each of the Company and the Borrower
hereby submits to the nonexclusive jurisdiction of the United States District
Court for the Southern District of New York and of any New York State court
sitting in New York City for purposes of all legal proceedings arising out of
or relating to this Agreement or the transactions contemplated hereby, and
irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such
proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.
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<PAGE>
Section 10.09. Counterparts; Integration; Effectiveness. This Agreement
may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject
matter hereof. This Agreement shall become effective upon receipt by the
Agent of counterparts hereof signed by each of the Company, the Borrower, the
Banks and the Agent (or, in the case of any party as to which an executed
counterpart shall not have been received, receipt by the Agent in form
satisfactory to it of telegraphic, telex or other written confirmation from
such party of execution of a counterpart hereof by such party).
Section 10.10. WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE BORROWER,
THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL
BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 10.11. Confidentiality. Each of the Agent and the Banks agrees
to use its reasonable best efforts to keep confidential any information
delivered or made available by the Company or the Borrower to it which is
clearly stated by the Company or the Borrower to be confidential; provided
that nothing herein shall prevent the Agent or any Bank from disclosing such
information (i) to the Agent or any other Bank in connection with the
transactions contemplated hereby, (ii) to its officers, directors, employees,
agents, attorneys and accountants who have a need to know such information in
accordance with customary banking practices and who receive such information
having been made aware of the restrictions set forth in this Section, (iii)
upon the order of any court or administrative agency, (iv) upon the request
or demand of any regulatory agency or authority having jurisdiction over such
party, (v) which has been publicly disclosed, (vi) which has been obtained
from any Person other than the Company and its Subsidiaries, provided that
such Person is not (x) known to it to be bound by a confidentiality agreement
with the Company or its Subsidiaries or (y) known to it to be otherwise
prohibited from transmitting the information to it by a contractual, legal or
fiduciary obligation, (vii) in connection with the exercise of any remedy
hereunder or under the Notes or (viii) to any actual or proposed participant
or assignee of all or any of its rights hereunder which has agreed in writing
to be bound by the provisions of this Section.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
U S WEST CAPITAL FUNDING, INC.
By /s/ Rahn K. Porter
-----------------------------
Title: Executive Director
Treasury Services
7800 East Orchard Road
Englewood, Colorado 80111
Facsimile number: 303-793-6307
Telephone number: 303-793-6250
Attention: Rahn Porter
U S WEST, INC.
By /s/ James T. Anderson
-----------------------------
Title: Vice President
& Treasurer
7800 East Orchard Road
Englewood, Colorado 80111
Facsimile number: 303-793-6307
Telephone number: 303-793-6250
Attention: Rahn Porter
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Commitments
- -----------
$140,000,000 MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By /s/ George J. Stapleton
------------------------
Title: Vice President
$ 140,000,000 CITIBANK, N.A.
By /s/ Carolyn A. Kee
------------------------
Title: Vice President
$ 140,000,000 THE BANK OF NEW YORK
By /s/ Kalpana Raina
------------------------
Title: Senior Vice President
$ 100,000,000 ABN AMRO BANK N.V.
By /s/ James J. Johnston
------------------------
Title: Vice President
By /s/ Mary L. Honda
------------------------
Title: Vice President
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<PAGE>
$ 37,500,000 BANK OF AMERICA NW, N.A. dba
SEAFIRST
By /s/ Barbara W. Trimble
--------------------------
Title: Vice President
$ 62,500,000 BANK OF AMERICA NT & SA
By /s/ Raymond E. Evans
--------------------------
Title: Senior Vice President
Manager Commercial Building
$100,000,000 BARCLAYS BANK PLC
By /s/ Les Bek
---------------------------
Title: Director
$ 100,000,000 CANADIAN IMPERIAL BANK OF
COMMERCE
By /s/ Matthew S. Hannon
---------------------------
Title: Director, CIBC Wood Gundy
Securities acting, as Agent
$100,000,000 THE CHASE MANHATTAN BANK
By /s/ Ann B. Kerns
---------------------------
Title: Vice President
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<PAGE>
$100,000,000 DEUTSCHE BANK AG
NEW YORK AND/OR CAYMAN
ISLANDS BRANCHES
By /s/ Ross A. Howard
---------------------------
Title: Director
By /s/ J. Scott Jessup
---------------------------
Title: Vice President
$100,000,000 THE FIRST NATIONAL BANK OF
BOSTON
By /s/ Shepard D. Rainie
---------------------------
Title: Director
$100,000,000 MELLON BANK N.A.
By /s/ Stephen R. Viehe
---------------------------
Title: Vice President
$ 100,000,000 THE SANWA BANK LIMITED,
CHICAGO BRANCH
By /s/ Kenneth C. Eichwald
---------------------------
Title: First Vice President and Assistant
General Manager
61
<PAGE>
$ 100,000,000 SWISS BANK CORPORATION,
SAN FRANCISCO BRANCH
By /s/ Hans-Uoli Surber
-------------------------
Title: Executive Director Merchant
Banking
By /s/ Nang S. Peechaphand
-------------------------
Title: Associate Director Accounting
$ 100,000,000 TORONTO-DOMINION BANK
(TEXAS), INC.
By /s/ Frederic B. Hawley
-------------------------
Title: Vice President
$ 70,000,000 BANQUE NATIONALE DE PARIS
By /s/ Clive Bettles
------------------------
Title: Senior Vice President & Manager
By /s/ Mitchell M. Ozawa
------------------------
Title: Vice President
$ 70,000,000 BANQUE PARIBAS
By /s/ John Acker
------------------------
Title: Group Vice President
62
<PAGE>
By /s/ Darlynn Ernst
-----------------------
Title: Assistant Vice President
$ 70,000,000 CREDIT SUISSE
By /s/ Stephen M. Flynn
-----------------------
Title: Member of Senior Management
By /s/ Maria N. Gaspara
-----------------------
Title: Associate
$ 70,000,000 THE DAI-ICHI KANGYO BANK,
LIMITED
By /s/ Teruhisa Yamaguchi
-----------------------
Title: Senior Vice President & Joint
General Manager
$ 70,000,000 THE FIRST NATIONAL BANK OF
CHICAGO
By /s/ Ronald L. Coleman
------------------------
Title: Vice President
$ 70,000,000 THE FUJI BANK LIMITED
LOS ANGELES AGENCY
63
<PAGE>
By /s/ Nobuhiro Umemura
-----------------------
Title: Joint General Manager
$ 70,000,000 THE INDUSTRIAL BANK OF JAPAN,
LTD. NEW YORK BRANCH
By /s/ Akijiro Yoshino
-----------------------
Title: Executive Vice President,
Houston Office
$ 70,000,000 NATIONSBANK OF TEXAS, N.A.
By /s/ David G. James
-----------------------
Title: Vice President
$ 70,000,000 ROYAL BANK OF CANADA
By /s/ John P. Page
-----------------------
Title: Senior Manager
$ 70,000,000 THE SAKURA BANK LIMITED
By /s/ Ofusa Sato
-----------------------
Title: Senior Vice President & Assistant
General Manager
64
<PAGE>
$ 70,000,000 THE SUMITOMO BANK, LIMITED
LOS ANGELES BRANCH
By /s/ Goro Hirai
-----------------------
Title: Joint General Manager
$ 70,000,000 UNION BANK OF CALIFORNIA, N.A.
By /s/ Roger Hartley
-----------------------
Title: Vice President
$ 70,000,000 WELLS FARGO BANK (COLORADO),
N.A.
By /s/ Jack W. Haye
-----------------------
Title: Vice President
$ 47,500,000 BANK OF MONTREAL
By /s/ Yvonne Bos
----------------------
Title: Senior Vice President
$ 47,500,000 CREDIT LYONNAIS
NEW YORK BRANCH
By /s/ James E. Morris
-----------------------
Title: Vice President
65
<PAGE>
$ 47,500,000 DRESDNER BANK AG, NEW YORK
AND GRAND CAYMAN BRANCHES
By /s/ William E. Lambert
--------------------------
Title: Assistant Vice President
By /s/ Brian Haughney
--------------------------
Title: Assistant Treasurer
$ 47,500,000 BAYERISCHE HYPO-BANK AG,
NEW YORK BRANCH
By /s/ Yoram Dankner
--------------------------
Title: Senior Vice President
By /s/ Christian F. Walter
--------------------------
Title: Vice President
$ 47,500,000 KREDIETBANK N.A.
By /s/ Tod R. Angus
--------------------------
Title: Vice President
By /s/ Robert Snauffer
--------------------------
Title: Vice President
$ 47,500,000 LLOYDS BANK PLC
66
<PAGE>
By /s/ Paul Briamonte
--------------------------
Title: Vice President B374
By /s/ Theodore R. Walser
--------------------------
Title: Senior Vice President W075
$ 47,500,000 THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
LOS ANGELES AGENCY
By /s/ T. Morgan Edwards II
--------------------------
Title: Deputy General Manager
$ 47,500,000 THE MITSUBISHI TRUST AND
BANKING CORPORATION
By /s/ Patricia Loret de Mola
----------------------------
Title: Senior Vice President & Assistant
General Manager
$ 47,500,000 THE ROYAL BANK OF SCOTLAND plc
By /s/ Grant F. Stoddart
--------------------------
Title: Senior Vice President & Manager
$ 47,500,000 SOCIETE GENERALE
67
<PAGE>
SOUTHWEST AGENCY
By /s/ Mark A. Cox
--------------------------
Title: Vice President
$ 47,500,000 THE TOKAI BANK, LIMITED
LOS ANGELES AGENCY
By /s/ Masahiko Saito
--------------------------
Title: Assistant General Manager
Corporate Finance
$ 47,500,000 WESTDEUTSCHE LANDESBANK
NEW YORK BRANCH
By /s/ Salvatore Battinelli
--------------------------
Title: Vice President
By /s/ Karen Hoplock
--------------------------
Title: Vice President Credit
Total Commitments:
$3,000,000,000
- --------------
- --------------
68
<PAGE>
CITIBANK, N.A., as Syndication Agent
By /s/ Carolyn A. Kee
---------------------------
Title: As-Attorney-in -Fact
THE BANK OF NEW YORK, as
Documentation Agent
By /s/ Kalpana Raina
---------------------------
Title: Senior Vice President
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Administrative Agent
By /s/ George J. Stapleton
---------------------------
Title: Vice President
Address
Attention: Mark Connor
Facsimile number: 302-634-1092
Telephone number: 302-634-4218
69
<PAGE>
PRICING SCHEDULE
The "Euro-Dollar Margin" and "Facility Fee Rate" for any day are the
respective percentages set forth below in the applicable row under the column
corresponding to the Status that exists on such day:
________________________________________________________________________________
Level Level Level Level Level
Status I II III IV V
________________________________________________________________________________
Euro-Dollar Margin .150% .175% .200% .290% .350%
________________________________________________________________________________
Facility Fee Rate .050% .050% .050% .060% .100%
________________________________________________________________________________
For purposes of this Schedule, the following terms have the following
meanings:
"Level I Status" exists at any date if, at such date, the Borrower's
outstanding senior unsecured long-term debt securities are rated A or higher
by S&P or A2 or higher by Moody's.
"Level II Status" exists at any date if, at such date, (i) the
Borrower's outstanding senior unsecured long-term debt securities are rated
A- or higher by S&P or A3 or higher by Moody's and (ii) Level I Status does
not exist.
"Level III Status" exists at any date if, at such date, (i) the
Borrower's outstanding senior unsecured long-term debt securities are rated
BBB+ or higher by S&P or Baa1 or higher by Moody's and (ii) neither Level I
Status nor Level II Status exists.
"Level IV Status" exists at any date if, at such date, (i) the
Borrower's outstanding senior unsecured long-term debt securities are rated
BBB or higher by S&P or Baa2 or higher by Moody's and none of Level I Status,
Level II Status or Level III Status exists.
"Level V Status" exists at any date if, at such date, none of Level I
Status, Level II Status, Level III Status or Level IV Status exists.
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation,
and its successors or, if such corporation shall be dissolved or liquidated
or shall no longer perform the functions of a securities rating agency,
"Moody's" shall be deemed to refer to any other nationally recognized
securities rating agency designated by the Required Banks, with the approval
of the Company, by notice to the Agent and the Company.
"S&P" means Standard & Poor's Ratings Group, a New York corporation, and
its successors or, if such corporation shall be dissolved or liquidated or
shall no longer perform the functions of a securities rating agency, "S&P"
shall be deemed to refer to any other nationally recognized securities rating
agency designated by the Required Banks, with the approval of the Company, by
notice to the Agent and the Company.
"Status" refers to the determination of which of Level I Status, Level
II Status, Level III Status, Level IV Status or Level V Status exists at any
date.
The credit ratings to be utilized for purposes of this Schedule are those
assigned to the senior unsecured long-term debt securities of the Borrower
without third-party credit enhancement, and any rating assigned to any other
debt security of the Borrower shall be disregarded. The rating in effect at
any date is that in effect at the close of business on such date.
2
<PAGE>
SCHEDULE 4.07
Environmental Matters
NONE.
<PAGE>
EXHIBIT A
NOTE
New York, New York
,19
For value received, U S WEST CAPITAL FUNDING, INC., a Colorado
corporation (the "Borrower"), promises to pay to the order of (the "Bank"),
for the account of its Applicable Lending Office, the unpaid principal amount
of each Loan made by the Bank to the Borrower pursuant to the Credit
Agreement referred to below on the maturity date therefor specified in the
Credit Agreement. The Borrower promises to pay interest on the unpaid
principal amount of each such Loan on the dates and at the rate or rates
provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or
other immediately available funds at the office of Morgan Guaranty Trust
Company of New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof
and all repayments of the principal thereof shall be recorded by the Bank
and, if the Bank so elects in connection with any transfer or enforcement
hereof, appropriate notations to evidence the foregoing information with
respect to each such Loan then outstanding may be endorsed by the Bank on the
schedule attached hereto, or on a continuation of such schedule attached to
and made a part hereof; provided that the inaccuracy of, or the failure of
the Bank to make, any such recordation or endorsement shall not affect the
obligations of the Borrower hereunder or under the Credit Agreement.
This note is one of the Notes referred to in the 364-Day Credit
Agreement dated as of November 1, 1996 among U S WEST Capital Funding, Inc.,
U S WEST, Inc., the banks listed on the signature pages thereof, the other
agents named therein and Morgan Guaranty Trust Company of New York, as
Administrative Agent (as the same may be amended from time to time, the
"Credit Agreement"). Terms defined in the Credit Agreement are used herein
with the same meanings.
Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
<PAGE>
U S WEST, Inc., has, pursuant to the provisions of the Credit Agreement,
unconditionally guaranteed the payment in full of the principal of and
interest on this Note.
U S WEST CAPITAL FUNDING, INC.
By
----------------------------
Title:
2
<PAGE>
LOANS AND PAYMENTS OF PRINCIPAL
________________________________________________________________________________
Amount of
Amount of Principal Notation Made
Date Loan Type of Loan Repaid Maturity Date By
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
3
<PAGE>
EXHIBIT B
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: U S WEST Capital Funding, Inc.
Re: 364-Day Credit Agreement (the "Credit Agreement") dated as of November 1,
1996 among U S WEST Capital Funding, Inc., U S WEST, Inc., the Banks listed
on the signature pages thereof, the other agents named therein and the
Agent
We hereby give notice pursuant to Section 2.03 of the Credit Agreement that
we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing: __________________
Principal Amount** Interest Period***
- ------------------ ------------------
$
Such Money Market Quotes should offer a Money Market [Margin]
[Absolute Rate]. [The applicable base rate is the London Interbank Offered
Rate.] Terms used herein have the meanings assigned to them in the Credit
Agreement.
____________________
**Amount must be $25,000,000 or a larger multiple of
$5,000,000.
***Not less than one month (LIBOR Auction) or not less than 7 days
(Absolute Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE>
Terms used herein have the meanings assigned to them in the Credit
Agreement.
U S WEST CAPITAL FUNDING, INC.
By________________________
Title:
2
<PAGE>
EXHIBIT C
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to U S WEST Capital Funding, Inc.
(the "Borrower")
Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as
of November 1, 1996 among U S WEST Capital Funding, Inc., U S WEST, Inc., the
Banks parties thereto, the other agents named therein and the undersigned, as
Administrative Agent, we are pleased on behalf of the Borrower to invite you
to submit Money Market Quotes to the Borrower for the following proposed
Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
- ---------------- ---------------
$
Such Money Market Quotes should offer a Money Market [Margin]
[Absolute Rate]. [The applicable base rate is the London Interbank
Offered Rate.] Please respond to this invitation by no later than
[10:30 A.M.] [9:15 A.M.] (New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Administrative Agent
By______________________________
Authorized Officer
<PAGE>
EXHIBIT D
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York,
as Administrative Agent (the "Agent")
Re: Money Market Quote to
U S WEST Capital Funding, Inc. (the "Borrower")
In response to your invitation on behalf of the Borrower dated
_____________, 19__, we hereby make the following Money Market Quote on the
following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank: _____________________________
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the following
principal amounts, for the following Interest Periods and at the
following rates:
Principal Interest Money Market
Amount** Period*** [Margin****] [Absolute Rate*****]
- --------- --------- ------------- --------------------
$
$
[Provided, that the aggregate principal amount of Money Market Loans for which
the above offers may be accepted shall not exceed $____________.]**
__________
* As specified in the related Invitation.
(notes continued on following page)
<PAGE>
We understand and agree that the offer(s) set forth above, subject to
the satisfaction of the applicable conditions set forth in the 364-Day Credit
Agreement dated as of November 1, 1996 among U S WEST Capital Funding, Inc.,
U S WEST, Inc., the Banks listed on the signature pages thereof, the other
agents named therein and yourselves, as Agent, irrevocably obligates us to
make the Money Market Loan(s) for which any offer(s) are accepted, in whole
or in part.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
__________
** Principal amount bid for each Interest Period may not exceed principal
amount requested. Specify aggregate limitation if the sum of the individual
offers exceeds the amount the Bank is willing to lend. Bids must be made for
$5,000,000 or a larger multiple of $1,000,000.
*** Not less than one month or not less than 7 days, as specified in the
related Invitation. No more than five bids are permitted for each Interest
Period.
**** Margin over or under the London Interbank Offered Rate determined for
the applicable Interest Period. Specify percentage (to the nearest 1/10,000
of 1%) and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%).
2
<PAGE>
EXHIBIT E
OPINION OF
COUNSEL FOR THE COMPANY AND THE BORROWER
To the Banks and the Administrative
Agent Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Gentlemen and Ladies:
I have acted as counsel for U S WEST, Inc. and U S WEST Capital Funding,
Inc., in connection with the 364-Day Credit Agreement (the "Credit
Agreement") dated as of November 1, 1996, among them, the banks listed on the
signature pages thereof, the other agents named therein and Morgan Guaranty
Trust Company of New York, as Administrative Agent. Terms defined in the
Credit Agreement are used herein as therein defined. This opinion is being
rendered to you at the instruction of the client pursuant to Section 3.01(b)
of the Credit Agreement.
I am familiar with the proceedings taken by the Company and the Borrower
in connection with the authorization, execution and delivery of the Credit
Agreement and the Notes, and I have examined such documents, certificates,
and such other matters of fact and questions of law as I have deemed relevant
under the circumstances to express an informed opinion. Upon the basis of
the foregoing, I am of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and
in good standing under the laws of the State of Delaware, and has all
corporate powers and all governmental licenses, authorizations,
qualifications, consents and approvals required to carry on its business as
now conducted, except where the absence of any such license, authorization,
qualification, consent or approval would not have a material adverse effect
on the consolidated financial position or consolidated results of operations
of the Company and its Consolidated Subsidiaries considered as one enterprise.
<PAGE>
2. The execution, delivery and performance by the Company and the
Borrower of the Credit Agreement and by the Borrower of the Notes are within
such Person's corporate powers, have been duly authorized by all necessary
corporate action, and require no action by or in respect of, or filing with,
any governmental body, agency or official.
3. The execution, delivery and performance by the Company and the
Borrower of the Credit Agreement and by the Borrower of the Notes will not
(i) result in a breach or violation of, conflict with, or constitute a
default under, the articles of incorporation or bylaws of such Person or any
material law or regulation or any material order, judgment, agreement or
instrument to which such Person is a party or by which such Person is bound,
or (ii) result in the creation or imposition of any Lien on any asset of such
Person.
4. The Credit Agreement constitutes a valid and binding agreement of
the Company and the Borrower and the Notes constitute valid and binding
obligations of the Borrower.
5. To my knowledge, there is no action, suit or proceeding pending
against or threatened against or affecting the Company or any of its
Subsidiaries before any court or arbitrator or any governmental body, agency
or official, in which there is a reasonable possibility of an adverse
decision which could materially adversely affect the business, consolidated
financial position or consolidated results of operations of the Company and
its Consolidated Subsidiaries, considered as a whole, or which in any manner
draws into question the validity of the Credit Agreement or the Notes.
6. The Borrower and each of the Company's other corporate Significant
Subsidiaries is a corporation validly existing and in good standing under the
laws of their jurisdictions of incorporation, and have all corporate powers
and all governmental licenses, authorizations, qualifications, consents and
approvals required to carry on its business as now conducted, except where
the absence of any such license, authorization, qualification, consent or
approval would not have a material adverse effect on the consolidated
financial position or consolidated results of operations of the Company and
its Consolidated Subsidiaries considered as one enterprise.
For purposes of my opinion set forth in numbered paragraph 4 above, I
have assumed that the laws of the State of New York, which are stated to
govern the Credit Agreement and the Notes, are the same as the laws of
Colorado.
2
<PAGE>
In rendering the opinions set forth herein, I have assumed that the
Credit Agreement and the Notes will conform to the specimens thereof examined
by me, that the signatures on all documents examined by me were genuine, and
the authenticity of all documents submitted to me as originals or as copies
of originals, assumptions which I have not independently verified.
This opinion is furnished by me as counsel for the Company and the
Borrower and is solely for your benefit and the benefit of any Assignee under
the Credit Agreement. Without my prior written consent, this opinion may not
be relied upon by you or any Assignee in any other context or by any other
person. This opinion may not be quoted, in whole or in part, or copies
thereof furnished, to any other person without my prior written consent,
except that you may furnish copies hereof (a) to your auditors and attorneys,
(b) to any state or federal authority having regulatory jurisdiction over you
or the Company or the Borrower, (c) pursuant to order or legal process of any
court or governmental agency, (d) in connection with any legal action to
which you are a party arising out of the transactions contemplated by the
Credit Agreement, and (e) to any Participant or proposed Participant in the
Commitment of any Bank.
This opinion is limited to the present laws of the State of Colorado and
the General Corporation Law of the State of Delaware, to present judicial
interpretations thereof, and to the facts as they presently exist, and I
assume no responsibility as to the applicability or effect of the laws of any
other jurisdiction. In rendering this opinion, I assume no obligation to
revise or supplement this opinion should the present laws of the State of
Colorado or the General Corporation Law of the State of Delaware be changed
by legislative action, judicial decision, or otherwise.
Very truly yours,
Stephen E. Brilz
3
<PAGE>
EXHIBIT F
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE ADMINISTRATIVE AGENT
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the 364-Day Credit Agreement
(the "Credit Agreement") dated as of November 1, 1996 among U S WEST Capital
Funding, Inc., U S WEST, Inc., the banks listed on the signature pages
thereof (the "Banks"), the other agents named therein and Morgan Guaranty
Trust Company of New York, as Administrative Agent (the "Agent"), and have
acted as special counsel for the Agent for the purpose of rendering this
opinion pursuant to Section 3.01(c) of the Credit Agreement. Terms defined
in the Credit Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments and have conducted such other
investigations of fact and law as we have deemed necessary or advisable for
purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that, assuming
that the execution, delivery and performance by the Company and the Borrower
of the Credit Agreement and by the Borrower of the Notes are within such
Person's corporate powers and have been duly authorized by all necessary
corporate action, the Credit Agreement constitutes a valid and binding
agreement of the Company and the Borrower and the Notes constitute valid and
binding obligations of the Borrower.
<PAGE>
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York. In giving the
foregoing opinion, we express no opinion as to the effect (if any) of any law
of any jurisdiction (except the State of New York) in which any Bank is
located which limits the rate of interest that such Bank may charge or
collect.
This opinion is rendered solely to you in connection with the above
matter. This opinion may not be relied upon by you for any other purpose or
relied upon by or furnished to any other person without our prior written
consent.
Very truly yours,
2
<PAGE>
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of ________, __ 199_ among [ASSIGNOR] (the
"Assignor"), [ASSIGNEE] (the "Assignee"), U S WEST, Inc. (the "Company") and
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the
"Agent").
W I T N E S S E T H
WHEREAS, this Assignment and Assumption Agreement (the "Agreement")
relates to the 364-Day Credit Agreement dated as of November 1, 1996 among
the Company, the Borrower named therein, the Assignor and the other Banks
party thereto, as Banks, the other agents named therein and the Agent (the
"Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Loans in an aggregate principal amount at any time
outstanding not to exceed $__________;
WHEREAS, Committed Loans made by the Assignor under the Credit Agreement
in the aggregate principal amount of $__________ are outstanding at the date
hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the
rights of the Assignor under the Credit Agreement in respect of a portion of
its Commitment thereunder in an amount equal to $__________ (the "Assigned
Amount"), together with a corresponding portion of its outstanding Committed
Loans, and the Assignee proposes to accept assignment of such rights and
assume the corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
here in shall have the respective meanings set forth in the Credit Agreement.
<PAGE>
SECTION 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit
Agreement to the extent of the Assigned Amount, and the Assignee hereby
accepts such assignment from the Assignor and assumes all of the obligations
of the Assignor under the Credit Agreement to the extent of the Assigned
Amount, including the purchase from the Assignor of the corresponding portion
of the principal amount of the Committed Loans made by the Assignor
outstanding at the date hereof. Upon the execution and delivery hereof by
the Assignor, the Assignee, the Company and the Agent and the payment of the
amounts specified in Section 3 required to be paid on the date hereof (i) the
Assignee shall, as of the date hereof, succeed to the rights and be obligated
to perform the obligations of a Bank under the Credit Agreement with a
Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment
of the Assignor shall, as of the date hereof, be reduced by a like amount and
the Assignor released from its obligations under the Credit Agreement to the
extent such obligations have been assumed by the Assignee. The assignment
provided for herein shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on
the date hereof in Federal funds the amount heretofore agreed between
them.**** It is understood that commitment and/or facility fees accrued to
the date hereof are for the account of the Assignor and such fees accruing
from and including the date hereof are for the account of the Assignee. Each
of the Assignor and the Assignee hereby agrees to that if it receives any
amount under the Credit Agreement which is for the account of the other party
hereto, it shall receive the same for the account of such other party to the
extent of such other party's interest therein and shall promptly pay the same
to such other party.
[SECTION 4. Consent of the Company and the Agent. This Agreement is
conditioned upon the consent of the Company and the Agent pursuant to Section
10.06(c) of the Credit Agreement. The execution of this Agreement by the
Company and the Agent is evidence of this consent. Pursuant to Section 10.06(c)
the Company agrees to cause the Borrower to execute and deliver a Note payable
to the order of the Assignee to evidence the assignment and assumption provided
for herein.]
____________________
****Amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any portion
of any upfront fee to be paid by the Assignor to the Assignee. It may be
preferable in an appropriate case to specify these amounts generically or by
formula rather than as a fixed sum.
2
<PAGE>
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
representation or warranty in connection with, and shall have no
responsibility with respect to, the solvency, financial condition, or
statements of the Company or the Borrower, or the validity and enforceability
of the obligations of the Company or the Borrower in respect of the Credit
Agreement or any Note. The Assignee acknowledges that it has, independently
and without reliance on the Assignor, and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and will continue to be responsible for
making its own independent appraisal of the business, affairs and financial
condition of the Company and the Borrower.
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their duly authorized officers as of the date first
above written.
[ASSIGNOR]
By__________________________
Title:
3
<PAGE>
[ASSIGNEE]
By_________________________
Title:
[U S WEST, INC.
By_________________________
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Administrative Agent
By________________________
Title:]
4
<PAGE>
EXHIBIT H
EXTENSION AGREEMENT
US WEST Capital Funding, Inc.
US WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Morgan Guaranty Trust Company of
New York, as Administrative Agent
under the Credit Agreement referred
to below
60 Wall Street
New York, NY 10260
Gentlemen:
The undersigned hereby agree to extend the Revolving Credit Period under
the 364-Day Credit Agreement dated as of November 1, 1996 among US WEST
Capital Funding, Inc., US WEST, Inc., the Banks listed therein, the other
agents named therein and Morgan Guaranty Trust Company of New York, as
Administrative Agent (the "Credit Agreement") for 364 days to ____________
__, ____. Terms defined in the Credit Agreement are used herein as therein
defined.
This Extension Agreement shall be construed in accordance with and
governed by the law of the State of New York. It may be signed in any number
of counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
[NAME OF BANK]*****
By_________________________
____________________
*****Insert names of Banks which have responded
affirmatively in accordance with Section 2.01(b) of the Credit Agreement.
<PAGE>
Title:
[NAME OF BANK]*****
By________________________
Title:
[NAME OF BANK]*
By_______________________
Title:
[NAME OF BANK]*
By_______________________
Title:
[NAME OF BANK]*
By______________________
Title:
[NAME OF BANK]*
By______________________
Title:
____________________
*****Insert names of Banks which have responded affirmatively in
accordance with Section 2.01(b) of the Credit Agreement.
2
<PAGE>
Agreed and accepted:
US WEST CAPITAL FUNDING, INC.
By_________________________
Title
US WEST, INC.
By__________________________
Title
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Administrative Agent
By___________________________
Title
3
<PAGE>
CONFORMED COPY
$3,000,000,000
FIVE-YEAR
CREDIT AGREEMENT
dated as of
November 1, 1996
among
U S WEST Capital Funding, Inc.
U S WEST, Inc.
The Banks Listed Herein
Citibank, N.A.,
as Syndication Agent
The Bank of New York,
as Documentation Agent
and
Morgan Guaranty Trust Company of New York,
as Administrative Agent
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
Definitions
Section 1.01. Definitions.....................................................1
Section 1.02. Accounting Terms and Determinations............................11
Section 1.03. Types of Borrowings............................................12
ARTICLE 2
The Credit
Section 2.01. Commitments to Lend.......... .................................12
Section 2.02. Notice of Committed Borrowing..................................13
Section 2.03. Money Market Borrowings........................................14
Section 2.04. Notice to Banks; Funding of Loans..............................18
Section 2.05. Notes..........................................................19
Section 2.06. Maturity of Loans..............................................19
Section 2.07. Interest Rates.................................................19
Section 2.08. Facility Fees..................................................22
Section 2.09. Optional Termination or Reduction of Commitments...............22
Section 2.10. Method of Electing Interest Rates..............................22
Section 2.11. Optional Prepayments...........................................24
Section 2.12. General Provisions as to Payments..............................24
Section 2.13. Funding Losses.................................................25
Section 2.14. Computation of Interest and Fees...............................25
Section 2.15. Change of Control..............................................26
ARTICLE 3
Conditions
Section 3.01. Closing........................................................26
Section 3.02. Borrowings.....................................................27
- ------------------
*The Table of Contents is not part of this Agreement.
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ARTICLE 4
Representations and Warranties
Page
Section 4.01. Corporate Existence and Power.................................28
Section 4.02. Corporate and Governmental Authorization; No Contravention....28
Section 4.03. Binding Effect................................................28
Section 4.04. Financial Information.........................................28
Section 4.05. Litigation....................................................29
Section 4.06. Compliance with ERISA.........................................29
Section 4.07. Environmental Matters.........................................30
Section 4.08. Taxes.........................................................30
Section 4.09. Subsidiaries..................................................31
Section 4.10. Not an Investment Company.....................................31
Section 4.11. Full Disclosure...............................................31
ARTICLE 5
Covenants
Section 5.01. Information....................................................31
Section 5.02. Maintenance of Property; Insurance.............................33
Section 5.03. Maintenance of Existence.......................................34
Section 5.04. Compliance with Laws...........................................34
Section 5.05. Inspection of Property, Books and Records......................34
Section 5.06. Subsidiary Debt................................................34
Section 5.07. Debt Coverage..................................................35
Section 5.08. Negative Pledge................................................35
Section 5.09. Consolidations, Mergers and Sales of Assets....................36
Section 5.10. Use of Proceeds................................................36
ARTICLE 6
Defaults
Section 6.01. Events of Default..............................................37
Section 6.02. Notice of Default..............................................39
ARTICLE 7
The Agent
Section 7.01. Appointment and Authorization..................................39
Section 7.02. Agent and Affiliates...........................................39
Section 7.03. Action by Agent................................................40
Section 7.04. Consultation with Experts......................................40
Section 7.05. Liability of Agent.............................................40
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Page
Section 7.06. Indemnification..............................................40
Section 7.07. Credit Decision..............................................41
Section 7.08. Successor Agent..............................................41
Section 7.09. Agent's Fee..................................................41
Section 7.10. Other Agents.................................................41
ARTICLE 8
Changes in Circumstances
Section 8.01. Basis for Determining Interest Rate Inadequate
or Unfair....................................................42
Section 8.02. Illegality.....................................................42
Section 8.03. Increased Cost and Reduced Return..............................43
Section 8.04. Taxes..........................................................44
Section 8.05. Domestic Loans Substituted for Affected
Euro-Dollar Loans............................................46
Section 8.06. Substitution of Bank...........................................46
ARTICLE 9
Guaranty
Section 9.01. The Guaranty...................................................47
Section 9.02. Guaranty Unconditional.........................................47
Section 9.03. Discharge Only upon Payment in Full;
Reinstatement In Certain Circumstances.......................48
Section 9.04. Waiver by the Company..........................................48
Section 9.05. Subrogation....................................................48
Section 9.06. Stay of Acceleration...........................................49
ARTICLE 10
Miscellaneous
Section 10.01. Notices.......................................................49
Section 10.02. No Waivers....................................................49
Section 10.03. Expenses; Indemnification.....................................49
Section 10.04. Sharing of Set-offs...........................................51
Section 10.05. Amendments and Waivers........................................51
Section 10.06. Successors and Assigns.......................................51
Section 10.07. Termination of Existing Credit Agreements.....................53
Section 10.08. Governing Law; Submission to Jurisdiction.....................53
Section 10.09. Counterparts; Integration; Effectiveness......................54
Section 10.10. WAIVER OF JURY TRIAL..........................................54
Section 10.11. Confidentiality...............................................54
iii
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iv
<PAGE>
Pricing Schedule
Schedule 4.07 - Environmental Matters
Exhibit A - Note
Exhibit B - Money Market Quote Request
Exhibit C - Invitation for Money Market Quotes
Exhibit D - Money Market Quote
Exhibit E - Opinion of Counsel for the Company and the Borrower
Exhibit F - Opinion of Special Counsel for the Administrative Agent
Exhibit G - Assignment and Assumption Agreement
Exhibit H - Extension Agreement
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<PAGE>
CREDIT AGREEMENT
AGREEMENT dated as of November 1, 1996 among U S WEST Capital Funding,
Inc., U S WEST, Inc., the BANKS listed on the signature pages hereof,
CITIBANK, N.A., as Syndication Agent, THE BANK OF NEW YORK, as Documentation
Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent.
The parties hereto agree as follows:
ARTICLE 1
Definitions
Section 1.01. Definitions
The following terms, as used herein, have the following meanings:
"Absolute Rate Auction" means a solicitation of Money Market Quotes
setting forth Money Market Absolute Rates pursuant to Section 2.03.
"Acquisition" means the merger of Continental Cablevision, Inc.
("Continental"), with and into the Company or a Wholly-Owned Consolidated
Subsidiary, provided that the cash consideration payable to shareholders of
Continental in connection with such merger shall not exceed the "Cash
Consideration Amount" (as defined in the Agreement and Plan of Merger among
the Company, Continental Merger Corporation and Continental dated as of
February 27, 1996 and amended and restated as of June 27, 1996 and further
amended as of October 7, 1996) without the consent of the Required Banks,
which consent shall not be unreasonably withheld or delayed.
"Adjusted London Interbank Offered Rate" has the meaning set forth in
Section 2.07(b).
"Administrative Questionnaire" means, with respect to each Bank, an
administrative questionnaire in the form prepared by the Agent and submitted
to the Agent (with a copy to the Company) duly completed by such Bank.
"Agent" means Morgan Guaranty Trust Company of New York in its capacity
as administrative agent for the Banks hereunder, and its successors in such
capacity.
<PAGE>
"Applicable Lending Office" means, with respect to any Bank, (i) in the
case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of
its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case
of its Money Market Loans, its Money Market Lending Office.
"Assignee" has the meaning set forth in Section 10.06(c).
"Bank" means each bank listed on the signature pages hereof, each
Assignee which becomes a Bank pursuant to Section 10.06(c), and their
respective successors.
"Base Rate" means, for any day, a rate per annum equal to the higher of
(i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the
Federal Funds Rate for such day.
"Benefit Arrangement" means at any time an employee benefit plan within
the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer
Plan and which is maintained or otherwise contributed to by any member of the
ERISA Group.
"Borrower" means U S WEST Capital Funding, Inc., a Colorado corporation,
and its successors.
"Borrowing" has the meaning set forth in Section 1.03.
"Closing Date" means the date on or after the Effective Date on which
the Agent shall have received the documents specified in or pursuant to
Section 3.01.
"Commitment" means, with respect to each Bank, the amount set forth
opposite the name of such Bank on the signature pages hereof, as such amount
may be reduced from time to time pursuant to Sections 2.09 and 2.11.
"Committed Loan" means a loan to be made by a Bank pursuant to Section
2.01(a); provided that if any such loan or loans are combined or subdivided
pursuant to a Notice of Interest Rate Election, the term "Committed Loan"
shall refer to the combined principal amount resulting from such combination
or to each of the separate principal amounts resulting from such subdivision,
as the case may be.
"Company" means U S WEST, Inc., a Delaware corporation, and its
successors.
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<PAGE>
"Company's 1995 Form 10-K" means the Company's annual report on Form
10-K for 1995, as filed with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934.
"Consolidated Net Worth" means at any date the consolidated shareowners'
equity of the Company and its Consolidated Subsidiaries determined as of such
date.
"Consolidated Subsidiary" means at any date any Subsidiary or other
entity the accounts of which would be consolidated with those of the Company
in its consolidated financial statements if such statements were prepared as
of such date.
"Debt" of any Person means at any date, without duplication, (i) all
obligations of such Person for borrowed money, (ii) all obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments,
(iii) all obligations of such Person to pay the deferred purchase price of
property or services, except trade accounts payable arising in the ordinary
course of business, (iv) all obligations of such Person as lessee which are
capitalized in accordance with generally accepted accounting principles, (v)
all Debt secured by a Lien on any asset of such Person, whether or not such
Debt is otherwise an obligation of such Person, and (vi) all Debt of others
Guaranteed by such Person. Notwithstanding the foregoing, for purposes of
Sections 5.06 and 5.07 Debt shall in no event include the following:
(x) Debt of Persons which are not Consolidated Subsidiaries ("Joint
Ventures") (i) which is secured by a Lien on the assets or capital stock of a
Minor Subsidiary or the equity interests in such Joint Ventures or is
Guaranteed by a Minor Subsidiary, which Lien or Guarantee is incurred in
connection with the international operations of the Company and its
Subsidiaries, and (ii) for the payment of which no other recourse may be had
to the Company or any of its Subsidiaries; and
(y) Debt of the Company or the Borrower issued in connection with the
issuance of Trust Originated Preferred Securities or substantially similar
securities, so long as such Debt is subordinated and junior in right of
payment to substantially all liabilities of the Company or the Borrower, as
the case may be, including, without limitation, the Loans.
"Default" means any condition or event which constitutes an Event of
Default or which with the giving of notice or lapse of time or both would,
unless cured or waived, become an Event of Default.
3
<PAGE>
"Domestic Business Day" means any day except a Saturday, Sunday or other
day on which commercial banks in New York City are authorized by law to close.
"Domestic Lending Office" means, as to each Bank, its office located at
its address set forth in its Administrative Questionnaire (or identified in
its Administrative Questionnaire as its Domestic Lending Office) or such
other office as such Bank may hereafter designate as its Domestic Lending
Office by notice to the Company and the Agent.
"Domestic Loan" means (i) a Committed Loan which bears interest at the
Base Rate pursuant to the applicable Notice of Committed Borrowing or Notice
of Interest Rate Election or the provisions of Article 8 or (ii) an overdue
amount which was a Domestic Loan immediately before it became overdue.
"Effective Date" means the date this Agreement becomes effective in
accordance with Section 10.09.
"Environmental Laws" means any and all federal, state, local and foreign
statutes, laws, judicial decisions, regulations, ordinances, rules,
judgments, orders, decrees, plans, injunctions, permits, concessions, grants,
franchises, licenses, agreements and other governmental restrictions relating
to the environment, the effect of the environment on human health or to
emissions, discharges or releases of pollutants, contaminants, Hazardous
Substances or wastes into the environment including, without limitation,
ambient air, surface water, ground water, or land, or otherwise relating to
the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, or any successor statute.
"ERISA Group" means the Company, any Subsidiary and all members of a
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Company or any
Subsidiary, are treated as a single employer under Section 414 of the
Internal Revenue Code.
"Euro-Dollar Business Day" means any Domestic Business Day on which
commercial banks are open for international business (including dealings in
dollar deposits) in London.
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"Euro-Dollar Lending Office" means, as to each Bank, its office, branch
or affiliate located at its address set forth in its Administrative
Questionnaire (or identified in its Administrative Questionnaire as its
Euro-Dollar Lending Office) or such other office, branch or affiliate of such
Bank as it may hereafter designate as its Euro-Dollar Lending Office by
notice to the Company and the Agent.
"Euro-Dollar Loan" means (i) a Committed Loan which bears interest at a
Euro-Dollar Rate pursuant to the applicable Notice of Committed Borrowing or
Notice of Interest Rate Election or (ii) an overdue amount which was a
Euro-Dollar Loan before it became overdue.
"Euro-Dollar Margin" has the meaning set forth in Section 2.07(b).
"Euro-Dollar Rate" means a rate of interest determined pursuant to
Section 2.07(b) on the basis of an Adjusted London Interbank Offered Rate.
"Euro-Dollar Reference Banks" means the principal London offices of
Citibank, N.A., The Bank of New York and Morgan Guaranty Trust Company of New
York, and "Euro-Dollar Reference Bank" means any one of the foregoing.
"Euro-Dollar Reserve Percentage" has the meaning set forth in Section
2.07(b).
"Event of Default" has the meaning set forth in Section 6.01.
"Existing Credit Agreements" means the Credit Agreements dated as of
August 8, 1994, as amended, among the Borrower, the Company, the banks
listed on the signature pages thereof and Morgan Guaranty Trust Company of
New York, as Agent.
"Federal Funds Rate" means, for any day, the rate per annum (rounded
upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted
average of the rates on overnight Federal funds transactions with members of
the Federal Reserve System arranged by Federal funds brokers on such day, as
published by the Federal Reserve Bank of New York on the Domestic Business
Day next succeeding such day, provided that (i) if such day is not a Domestic
Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Domestic Business Day as so published on
the next succeeding Domestic Business Day, and (ii) if no such rate is so
published on such next succeeding Domestic Business Day, the Federal Funds
Rate for such day shall be the average rate quoted to Morgan Guaranty Trust
Company of New York on such day on such transactions as determined by the
Agent.
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"Fixed Rate Loans" means Euro-Dollar Loans or Money Market Loans
(excluding Money Market LIBOR Loans bearing interest at the Base Rate
pursuant to Section 8.01(a)) or any combination of the foregoing.
"Group of Loans" means at any time a group of Loans consisting of (i)
all Committed Loans which are Domestic Loans at such time or (ii) all
Committed Loans which are Euro-Dollar Loans having the same Interest Period
at such time; provided that, if a Committed Loan of any particular Bank is
converted to or made as a Domestic Loan pursuant to Section 8.02 or 8.05,
such Loan shall be included in the same Group or Groups of Loans from time to
time as it would have been in if it had not been so converted or made.
"Guarantee" by any Person means any obligation, contingent or otherwise,
of such Person directly or indirectly guaranteeing any Debt or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation (whether arising by
virtue of partnership arrangements, by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for the
purpose of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part), provided that the term Guarantee shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Hazardous Substances" means any toxic, radioactive, caustic or
otherwise hazardous substance, including petroleum, its derivatives,
by-products and other hydrocarbons, or any substance having any constituent
elements displaying any of the foregoing characteristics.
"Indemnitee" has the meaning set forth in Section 10.03(b).
"Indentures" means the agreements or instruments evidencing the
following Debt of Continental Cablevision, Inc., and its successors: (i) the
10 5/8% Senior Subordinated Notes Due June 15, 2002; (ii) the 11% Senior
Subordinated Debentures Due June 1, 2007; (iii) the 8 5/8% Senior Notes Due
August 15, 2003; (iv) the 9% Senior Debentures Due September 1, 2008; (v) the
8 7/8% Senior Debentures Due September 15, 2002; (vi) the 9 1/2% Senior
Debentures Due August 1, 2013; (vii) the 8 1/2% Senior Notes Due September
15, 2001; and (viii) any other Debt containing terms and conditions as or more
6
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favorable to the holders thereof than the terms and conditions of any of the
foregoing Debt.
"Interest Period" means: (1) with respect to each Euro-Dollar Loan, a
period commencing on the date of borrowing specified in the applicable Notice
of Borrowing or the date specified in the applicable Notice of Interest Rate
Election and ending one, two, three or six months thereafter, as the Borrower
may elect in the applicable notice; provided that:
(a) any Interest Period which would otherwise end on a day which
is not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
(c) any Interest Period which would otherwise end after a
Termination Date shall end on such Termination Date.
(2) with respect to each Money Market LIBOR Loan, the period commencing
on the date of borrowing specified in the applicable Notice of Borrowing and
ending such whole number of months thereafter as the Borrower may elect in
accordance with Section 2.03; provided that:
(a) any Interest Period which would otherwise end on a day which
is not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in
another calendar month, in which case such Interest Period shall end on the
next preceding Euro-Dollar Business Day;
(b) any Interest Period which begins on the last Euro-Dollar
Business Day of a calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at the end of such
Interest Period) shall, subject to clause (c) below, end on the last
Euro-Dollar Business Day of a calendar month; and
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(c) any Interest Period which would otherwise end after a
Termination Date shall end on such Termination Date.
(3) with respect to each Money Market Absolute Rate Loan, the period
commencing on the date of borrowing specified in the applicable Notice of
Borrowing and ending such number of days thereafter (but not less than 7
days) as the Borrower may elect in accordance with Section 2.03; provided
that:
(a) any Interest Period which would otherwise end on a day which
is not a Euro-Dollar Business Day shall be extended to the next succeeding
Euro-Dollar Business Day; and
(b) any Interest Period which would otherwise end after a
Termination Date shall end on such Termination Date.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended, or any successor statute.
"LIBOR Auction" means a solicitation of Money Market Quotes setting
forth Money Market Margins based on the London Interbank Offered Rate
pursuant to Section 2.03.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind, or any other type of
preferential arrangement that has the practical effect of creating a security
interest, in respect of such asset. For the purposes of this Agreement, the
Company or any Subsidiary shall be deemed to own subject to a Lien any asset
which it has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement relating to such asset.
"Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market
Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or Money Market
Loans or any combination of the foregoing.
"London Interbank Offered Rate" has the meaning set forth in Section
2.07(b).
"Margin Stock" means "margin stock" as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System, as in
effect from time to time.
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"Material Debt" means Debt (other than the Notes) of the Company and/or
one or more of its Subsidiaries, arising in one or more related or unrelated
transactions, in an aggregate principal amount exceeding $100,000,000.
"Material Plan" means at any time a Plan or Plans having aggregate
Unfunded Liabilities in excess of $100,000,000.
"Minor Subsidiary" means, for purposes of the last sentence of the
definition of Debt and of Section 5.08(f) (the "Relevant Provisions"), (i)
USW PCN Inc., and (ii) any other Subsidiary which, at the time of the
issuance of a Guarantee or grant of a Lien referred to in the Relevant
Provisions, had assets which, when taken together with all assets of
Subsidiaries at any earlier time when such Subsidiaries were deemed to be
Minor Subsidiaries pursuant to this clause (ii), did not exceed $250,000,000.
"Money Market Absolute Rate" has the meaning set forth in Section
2.03(d).
"Money Market Absolute Rate Loan" means a loan to be made by a Bank
pursuant to an Absolute Rate Auction.
"Money Market Lending Office" means, as to each Bank, its Domestic
Lending Office or such other office, branch or affiliate of such Bank as it
may hereafter designate as its Money Market Lending Office by notice to the
Company and the Agent; provided that any Bank may from time to time by notice
to the Company and the Agent designate separate Money Market Lending Offices
for its Money Market LIBOR Loans, on the one hand, and its Money Market
Absolute Rate Loans, on the other hand, in which case all references herein
to the Money Market Lending Office of such Bank shall be deemed to refer to
either or both of such offices, as the context may require.
"Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to
a LIBOR Auction (including such a loan bearing interest at the Base Rate
pursuant to Section 8.01(a)).
"Money Market Loan" means a Money Market LIBOR Loan or a Money Market
Absolute Rate Loan.
"Money Market Margin" has the meaning set forth in Section 2.03(d).
"Money Market Quote" means an offer by a Bank to make a Money Market
Loan in accordance with Section 2.03.
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"Multiemployer Plan" means at any time an employee pension benefit plan
within the meaning of Section 4001(a)(3) of ERISA to which any member of the
ERISA Group is then making or accruing an obligation to make contributions or
has within the preceding five plan years made contributions, including for
these purposes any Person which ceased to be a member of the ERISA Group
during such five year period.
"Notes" means promissory notes of the Borrower, substantially in the
form of Exhibit A hereto, evidencing the obligation of the Borrower to repay
the Loans made to it, and "Note" means any one of such promissory notes
issued hereunder.
"Notice of Borrowing" means a Notice of Committed Borrowing (as defined
in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section
2.03(f)). "Parent" means, with respect to any Bank, any Person controlling
such Bank.
"Participant" has the meaning set forth in Section 10.06(b). "PBGC"
means the Pension Benefit Guaranty Corporation or any entity succeeding to
any or all of its functions under ERISA.
"Person" means an individual, a corporation, a partnership, an
association, a trust or any other entity or organization, including a
government or political subdivision or an agency or instrumentality thereof.
"Plan" means at any time an employee pension benefit plan (other than a
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed to, by any Person
which was at such time a member of the ERISA Group for employees of any
Person which was at such time a member of the ERISA Group.
"Pricing Schedule" means the Schedule attached hereto and identified as
such.
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"Prime Rate" means the rate of interest publicly announced by Morgan
Guaranty Trust Company of New York in New York City from time to time as its
Prime Rate.
"Required Banks" means at any time Banks having more than 50% of the
aggregate amount of the Commitments or, if the Commitments shall have been
terminated, holding Notes evidencing more than 50% of the aggregate unpaid
principal amount of the Loans.
"Revolving Credit Period" means the period from and including the
Effective Date to but excluding the Termination Date.
"Significant Subsidiary" means any Subsidiary which would meet the
definition of "significant subsidiary" contained as of the date hereof in
Regulation S-X of the Securities and Exchange Commission.
"Subsidiary" means any corporation or other entity of which securities
or other ownership interests having ordinary voting power to elect a majority
of the board of directors or other persons performing similar functions are
at the time directly or indirectly owned by the Company.
"Super-Majority Banks" means at any time Banks having at least 85% of
the aggregate amount of the Commitments or, if the Commitments shall have
been terminated, holding Notes evidencing at least 85% of the aggregate
unpaid principal amount of the Loans.
"Termination Date" means, with respect to each Bank, November 1, 2001,
or such later date to which the Termination Date for such Bank shall have
been extended pursuant to Section 2.01(b), or, if such day is not a
Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day.
"Unfunded Liabilities" means, with respect to any Plan at any time, the
amount (if any) by which (i) the value of all benefit liabilities under such
Plan, determined on a plan termination basis using the assumptions prescribed
by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair
market value of all Plan assets allocable to such liabilities under Title IV
of ERISA (excluding any accrued but unpaid contributions), all determined as
of the then most recent valuation date for such Plan, but only to the extent
that such excess represents a potential liability of a member of the ERISA
Group to the PBGC or any other Person under Title IV of ERISA.
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"United States" means the United States of America, including the States
and the District of Columbia, but excluding its territories and possessions.
"Wholly-Owned Consolidated Subsidiary" means any Consolidated Subsidiary
all of the shares of capital stock or other ownership interests of which
(except directors' qualifying shares) are at the time directly or indirectly
owned by the Company.
Section 1.02. Accounting Terms and Determinations. Unless otherwise
specified herein, all accounting terms used herein shall be interpreted, all
accounting determinations hereunder shall be made, and all financial
statements required to be delivered hereunder shall be prepared in accordance
with generally accepted accounting principles as in effect from time to time
in the United States, applied on a basis consistent (except for changes
concurred in by the Company's independent public accountants) with the most
recent audited consolidated financial statements of the Company and its
Consolidated Subsidiaries delivered to the Banks; provided that, if the
Company notifies the Agent that the Company wishes to amend any covenant in
Article 5 to eliminate the effect of any change in such generally accepted
accounting principles on the operation of such covenant (or if the Agent
notifies the Company that the Required Banks wish to amend Article 5 for such
purpose), then compliance with such covenant shall be determined on the basis
of generally accepted accounting principles in effect in the United States
immediately before the relevant change in generally accepted accounting
principles became effective, until either such notice is withdrawn or such
covenant is amended in a manner satisfactory to the Company and the Required
Banks.
Section 1.03. Types of Borrowings. The term "Borrowing" denotes the
aggregation of Loans of one or more Banks to be made to the Borrower pursuant
to Article 2 on a single date, all of which Loans are of the same type
(subject to Article 8) and, except in the case of Domestic Loans, have the
same Interest Period or initial Interest Period. Borrowings are classified
for purposes of this Agreement either by reference to the pricing of Loans
comprising such Borrowing (e.g., a "Euro-Dollar Borrowing" is a Borrowing
comprised of Euro-Dollar Loans) or by reference to the provisions of Article
2 under which participation therein is determined (i.e., a "Committed
Borrowing" is a Borrowing under Section 2.01(a) in which all Banks
participate in proportion to their Commitments, while a "Money Market
Borrowing" is a Borrowing under Section
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2.03 in which the Bank participants are determined on the basis of their bids
in accordance therewith).
ARTICLE 2
The Credit
Section 2.01. Commitments to Lend.
(a) The Commitments. During the Revolving Credit Period each Bank
severally agrees, on the terms and conditions set forth in this Agreement, to
make loans to the Borrower pursuant to this Section from time to time in
amounts such that the aggregate principal amount of Committed Loans by such
Bank at any one time outstanding to the Borrower shall not exceed the amount
of its Commitment. Each Borrowing under this Section shall be in an
aggregate principal amount of $25,000,000 or any larger multiple of
$5,000,000 (except that any such Borrowing may be in the aggregate amount
available in accordance with Section 3.02(c)) and shall be made from the
several Banks ratably in proportion to their respective Commitments. Within
the foregoing limits, the Borrower may borrow under this Section, repay, or
to the extent permitted by Section 2.11, prepay Loans and reborrow at any
time during the Revolving Credit Period under this Section. The Commitments
shall terminate at the close of business on the Termination Date.
(b) Extension of Commitments. The Commitments may be extended in the
manner and amount set forth in this subsection (b), for a period of 364 days
measured from the Termination Date then in effect. If the Company wishes to
request an extension of each Bank's Commitment, it shall give notice to that
effect to the Agent not less than 45 days prior to the Termination Date then
in effect, whereupon the Agent shall promptly notify each of the Banks of
such request. Each Bank will use its best efforts to respond to such
request, whether affirmatively or negatively, as it may elect in its
discretion, within 30 days of such notice to the Agent. If any Bank shall
not have responded affirmatively within such 30-day period, such Bank shall
be deemed to have rejected the Company's proposal to extend its Commitment,
and only the Commitments of those Banks which have responded affirmatively
shall be extended, subject to receipt by the Agent of counterparts of an
Extension Agreement in substantially the form of Exhibit H hereto duly
completed and signed by the Borrower, the Company, the Agent and all of the
Banks which have responded affirmatively. The Agent shall provide to the
Company, no later than 10 days prior to the Termination Date then in effect,
a list of the Banks which have responded affirmatively. The Extension
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Agreement shall be executed and delivered no later than five days prior to
the Termination Date then in effect, and no extension of the Commitments
pursuant to this subsection (b) shall be legally binding on any party hereto
unless and until such Extension Agreement is so executed and delivered. The
Company and the Borrower may decline to execute and deliver such Extension
Agreement if any Bank has rejected the Company's proposal to extend its
Commitment or has failed to execute and deliver such Extension Agreement, and
will promptly notify the Agent and the Banks if it so declines.
Section 2.02. Notice of Committed Borrowing. The Borrower shall give the
Agent notice (a "Notice of Committed Borrowing") not later than 10:30 A.M.
(New York City time) on (x) the date of each Domestic Borrowing, and (y) the
third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying:
(i) the date of such Borrowing, which shall be a Domestic Business Day
in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case
of a Euro-Dollar Borrowing,
(ii) the aggregate amount of such Borrowing,
(iii) whether the Loans comprising such Borrowing bear interest
initially at the Base Rate or at a Euro-Dollar Rate, and
(iv) in the case of a Euro-Dollar Borrowing, the duration of the
initial Interest Period applicable thereto, subject to the provisions of the
definition of Interest Period.
Section 2.03. Money Market Borrowings. (a) The Money Market Option. In
addition to Committed Borrowings pursuant to Section 2.01(a), the Borrower
may, as set forth in this Section, request the Banks during the Revolving
Credit Period to make offers to make Money Market Loans to the Borrower. The
Banks may, but shall have no obligation to, make such offers and the Borrower
may, but shall have no obligation to, accept any such offers in the manner
set forth in this Section.
(b) Money Market Quote Request. When the Borrower wishes to request
offers to make Money Market Loans under this Section, it shall transmit to
the Agent by telex or facsimile transmission a Money Market Quote Request
substantially in the form of Exhibit B hereto so as to be received no later
than 9:00 A.M. (New York City time) on (x) the fourth Euro-Dollar Business
Day prior to the date of Borrowing proposed therein, in the case of a LIBOR
Auction or (y) the Domestic Business Day prior to the date of Borrowing
proposed therein,
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in the case of an Absolute Rate Auction (or, in either case, such other time
or date as the Company and the Agent shall have mutually agreed and shall
have notified to the Banks not later than the date of the Money Market Quote
Request for the first LIBOR Auction or Absolute Rate Auction for which such
change is to be effective) specifying:
(i) the proposed date of Borrowing, which shall be a Euro-Dollar
Business Day in the case of a LIBOR Auction or a Domestic Business Day in the
case of an Absolute Rate Auction,
(ii) the aggregate amount of such Borrowing, which shall be $25,000,000
or a larger multiple of $5,000,000,
(iii) the duration of the Interest Period applicable thereto, subject
to the provisions of the definition of Interest Period, and
(iv) whether the Money Market Quotes requested are to set forth a Money
Market Margin or a Money Market Absolute Rate.
The Borrower may request offers to make Money Market Loans for more than
one Interest Period in a single Money Market Quote Request. No Money Market
Quote Request shall be given within five Euro-Dollar Business Days (or such
other number of days as the Company and the Agent may agree) of any other
Money Market Quote Request.
(c) Invitation for Money Market Quotes. Promptly upon receipt of a
Money Market Quote Request, the Agent shall send to the Banks by telex or
facsimile transmission an Invitation for Money Market Quotes substantially in
the form of Exhibit C hereto, which shall constitute an invitation by the
Borrower to each Bank to submit Money Market Quotes offering to make the
Money Market Loans to which such Money Market Quote Request relates in
accordance with this Section.
(d) Submission and Contents of Money Market Quotes. (i) Each Bank may
submit a Money Market Quote containing an offer or offers to make Money
Market Loans in response to any Invitation for Money Market Quotes. Each
Money Market Quote must comply with the requirements of this subsection (d)
and must be submitted to the Agent by telex or facsimile transmission at its
offices specified in or pursuant to Section 10.01 not later than (x) 10:30
A.M. (New York City time) on the third Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:15 A.M.
(New York City time) on the proposed date of Borrowing, in the case of an
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Absolute Rate Auction (or, in either case, such other time or date as the
Company and the Agent shall have mutually agreed and shall have notified to
the Banks not later than the date of the Money Market Quote Request for the
first LIBOR Auction or Absolute Rate Auction for which such change is to be
effective); provided that Money Market Quotes submitted by the Agent (or any
affiliate of the Agent) in the capacity of a Bank may be submitted, and may
only be submitted, if the Agent or such affiliate notifies the Borrower of
the terms of the offer or offers contained therein not later than (x) one
hour prior to the deadline for the other Banks, in the case of a LIBOR
Auction or (y) 15 minutes prior to the deadline for the other Banks, in the
case of an Absolute Rate Auction. Subject to Articles 3 and 6, any Money
Market Quote so made shall be irrevocable except with the written consent of
the Agent given on the instructions of the Borrower.
(ii) Each Money Market Quote shall be in substantially the form of
Exhibit D hereto and shall in any case specify:
(A) the proposed date of Borrowing,
(B) the principal amount of the Money Market Loan for which each such
offer is being made, which principal amount (w) may be greater than or less
than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger
multiple of $1,000,000, (y) may not exceed the principal amount of Money
Market Loans for which offers were requested, and (z) may be subject to an
aggregate limitation as to the principal amount of Money Market Loans for
which offers being made by such quoting Bank may be accepted,
(C) in the case of a LIBOR Auction, the margin above or below the
applicable London Interbank Offered Rate (the "Money Market Margin") offered
for each such Money Market Loan, expressed as a percentage (specified to the
nearest 1/10,000th of 1%) to be added to or subtracted from such base rate,
(D) in the case of an Absolute Rate Auction, the rate of interest per
annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute
Rate") offered for each such Money Market Loan, and
(E) the identity of the quoting Bank.
A Money Market Quote may set forth up to five separate offers by the quoting
Bank with respect to each Interest Period specified in the related Invitation
for Money Market Quotes.
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(iii) Any Money Market Quote shall be disregarded if it:
(A) is not substantially in conformity with Exhibit D hereto or does
not specify all of the information required by subsection (d)(ii);
(B) contains qualifying, conditional or similar language;
(C) proposes terms other than or in addition to those set forth in the
applicable Invitation for Money Market Quotes; or
(D) arrives after the time set forth in subsection (d)(i).
(e) Notice to Borrower. The Agent shall promptly (and in any event no
later than 11:00 A.M. (New York time) on (i) the third Euro-Dollar Business
Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction
or (ii) the proposed date of Borrowing, in the case of an Absolute Rate
Auction) notify the Borrower of the terms (x) of any Money Market Quote
submitted by a Bank that is in accordance with subsection (d) and (y) of any
Money Market Quote that amends, modifies or is otherwise inconsistent with a
previous Money Market Quote submitted by such Bank with respect to the same
Money Market Quote Request. Any such subsequent Money Market Quote shall be
disregarded by the Agent unless such subsequent Money Market Quote is
submitted solely to correct a manifest error in such former Money Market
Quote. The Agent's notice to the Borrower shall specify (A) the aggregate
principal amount of Money Market Loans for which offers have been received
for each Interest Period specified in the related Money Market Quote Request,
(B) the respective principal amounts and Money Market Margins or Money Market
Absolute Rates, as the case may be, so offered and (C) if applicable,
limitations on the aggregate principal amount of Money Market Loans for which
offers in any single Money Market Quote may be accepted.
(f) Acceptance and Notice by Borrower. Not later than 11:15 A.M. (New
York City time) on (x) the third Euro-Dollar Business Day prior to the
proposed date of Borrowing, in the case of a LIBOR Auction or (y) the
proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in
either case, such other time or date as the Company and the Agent shall have
mutually agreed and shall have notified to the Banks not later than the date
of the Money Market Quote Request for the first LIBOR Auction or Absolute
Rate Auction for which such change is to be effective), the Borrower shall
notify the Agent of its acceptance or non-acceptance of the offers so
notified to it pursuant to subsection (e). In the case of acceptance, such
notice (a "Notice of Money Market Borrowing") shall specify the aggregate
principal amount of offers for each Interest Period that are
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accepted. The Borrower may accept any Money Market Quote in whole or in
part; provided that:
(i) the aggregate principal amount of each Money Market Borrowing may
not exceed the applicable amount set forth in the related Money Market Quote
Request,
(ii) the principal amount of each Money Market Borrowing must be
$25,000,000 or a larger multiple of $5,000,000,
(iii) acceptance of offers may only be made on the basis of ascending
Money Market Margins or Money Market Absolute Rates, as the case may be, and
(iv) the Borrower may not accept any offer that is described in
subsection (d)(iii) or that otherwise fails to comply with the requirements
of this Agreement.
(g) Allocation by Agent. If offers are made by two or more Banks with
the same Money Market Margins or Money Market Absolute Rates, as the case may
be, for a greater aggregate principal amount than the amount in respect of
which such offers are accepted for the related Interest Period, the principal
amount of Money Market Loans in respect of which such offers are accepted
shall be allocated by the Agent among such Banks as nearly as possible (in
multiples of $1,000,000, as the Agent may deem appropriate) in proportion to
the aggregate principal amounts of such offers. Determinations by the Agent
of the amounts of Money Market Loans shall be conclusive in the absence of
manifest error.
Section 2.04 Notice to Banks; Funding of Loans. (a) Upon receipt of a
Notice of Borrowing, the Agent shall promptly notify each Bank of the
contents thereof and of such Bank's share (if any) of such Borrowing and such
Notice of Borrowing shall not thereafter be revocable by the Borrower.
(b) Not later than 1:00 P.M. (New York City time) on the date of each
Borrowing, each Bank participating therein shall (except as provided in
subsection (c) of this Section) make available its share of such Borrowing,
in Federal or other funds immediately available in New York City, to the
Agent at its address referred to in Section 10.01. Unless any applicable
condition specified in Article 3 has not been satisfied, as determined by the
Agent in accordance with Article 3, the Agent will make the funds so received
from the Banks immediately available to the Borrower at the Agent's aforesaid
address.
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(c) If any Bank makes a new Loan hereunder to the Borrower on a day on
which the Borrower is to repay all or any part of an outstanding Loan from
such Bank, such Bank shall apply the proceeds of its new Loan to make such
repayment and only an amount equal to the difference (if any) between the
amount being borrowed by the Borrower and the amount being repaid shall be
made available by such Bank to the Agent as provided in subsection (b) of
this Section, or remitted by the Borrower to the Agent as provided in Section
2.12, as the case may be.
(d) Unless the Agent shall have received notice from a Bank prior to
the date of any Borrowing (or, in the case of a Base Rate Borrowing, prior to
Noon (New York City time) on the date of such Borrowing) that such Bank will
not make available to the Agent such Bank's share of such Borrowing, the
Agent may assume that such Bank has made such share available to the Agent on
the date of such Borrowing in accordance with subsections (b) and (c) of this
Section 2.04 and the Agent may, in reliance upon such assumption, make
available to the Borrower on such date a corresponding amount. If and to the
extent that such Bank shall not have so made such share available to the
Agent, such Bank and the Borrower severally agree to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower
until the date such amount is repaid to the Agent, at (i) in the case of the
Borrower, a rate per annum equal to the higher of the Federal Funds Rate and
the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the
case of such Bank, the Federal Funds Rate. If such Bank shall repay to the
Agent such corresponding amount, such amount so repaid shall constitute such
Bank's Loan included in such Borrowing for purposes of this Agreement. If
the Borrower shall have repaid such corresponding amount of such Bank, such
Bank shall reimburse the Borrower for any loss on account thereof incurred by
the Borrower.
Section 2.05. Notes. (a) The Loans of each Bank to the Borrower shall be
evidenced by a single Note of the Borrower payable to the order of such Bank
for the account of its Applicable Lending Office, unless such Bank requests
otherwise, in an amount equal to the aggregate unpaid principal amount of
such Bank's Loans to the Borrower.
(b) Each Bank may, by notice to the Borrower and the Agent, request
that its Loans of a particular type to the Borrower be evidenced by a
separate Note of the Borrower in an amount equal to the aggregate unpaid
principal amount of such Loans. Each such Note shall be in substantially the
form of Exhibit A hereto with appropriate modifications to reflect the fact
that it evidences solely Loans of the relevant type. Each reference in this
Agreement to a "Note" or the "Notes" of
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such Bank shall be deemed to refer to and include any or all of such Notes,
as the context may require.
(c) Upon receipt of each Bank's Note pursuant to Section 3.01, the
Agent shall forward such Note to such Bank. Each Bank shall record the date,
amount and type of each Loan made by it to the Borrower and the date and
amount of each payment of principal made with respect thereto, and may, if
such Bank so elects in connection with any transfer or enforcement of its
Note of the Borrower, endorse on the schedule forming a part thereof
appropriate notations to evidence the foregoing information with respect to
each such Loan to the Borrower then outstanding; provided that the failure of
any Bank to make any such recordation or endorsement shall not affect the
obligations of the Borrower hereunder or under the Notes. Each Bank is
hereby irrevocably authorized by the Borrower so to endorse its Notes and to
attach to and make a part of any Note a continuation of any such schedule as
and when required.
Section 2.06. Maturity of Loans. Each Loan by a Bank included in any
Borrowing made pursuant to Ssection 2.01(a) shall mature, and the principal
amount thereof shall be due and payable, together with accrued interest
thereon, on the Termination Date for such Bank. Each Loan included in any
Borrowing made pursuant to Section 2.03 shall mature, and the principal
amount thereof shall be due and payable, together with accrued interest
thereon, on the last day of the Interest Period applicable thereto.
Section 2.07. Interest Rates. (a) Each Domestic Loan shall bear
interest on the outstanding principal amount thereof, for each day from the
date such Loan is made until it becomes due, at a rate per annum equal to the
Base Rate for such day. Such interest shall be payable quarterly in arrears
on the last day of each calendar quarter and, with respect to the principal
amount of any Domestic Loan converted to a Euro-Dollar Loan, on each date a
Domestic Loan is so converted. Any overdue principal of or interest on any
Domestic Loan shall bear interest, payable on demand, for each day until paid
at a rate per annum equal to the sum of 2% plus the rate otherwise applicable
to Domestic Loans for such day.
(b) Each Euro-Dollar Loan shall bear interest on the outstanding
principal amount thereof, for the Interest Period applicable thereto, at a
rate per annum equal to the sum of the Euro-Dollar Margin plus the applicable
Adjusted London Interbank Offered Rate. Such interest shall be payable for
each Interest Period on the last day thereof and, if such Interest Period is
longer than three months, at intervals of three months after the first day
thereof.
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The "Adjusted London Interbank Offered Rate" applicable to any Interest
Period means a rate per annum equal to the quotient obtained (rounded upward,
if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable
London Interbank Offered Rate by (ii) 1.00 minus the Euro-Dollar Reserve
Percentage.
"Euro-Dollar Margin" means a rate per annum determined in accordance
with the Pricing Schedule.
The "London Interbank Offered Rate" applicable to any Interest Period
means the average (rounded upward, if necessary, to the next higher 1/16 of
1%) of the respective rates per annum at which deposits in dollars are
offered to each of the Euro-Dollar Reference Banks in the London interbank
market at approximately 11:00 A.M. (London time) two Euro-Dollar Business
Days before the first day of such Interest Period in an amount approximately
equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar
Reference Bank to which such Interest Period is to apply and for a period of
time comparable to such Interest Period.
"Euro-Dollar Reserve Percentage" means for any day that percentage
(expressed as a decimal) which is in effect on such day, as prescribed by the
Board of Governors of the Federal Reserve System (or any successor) for
determining the maximum reserve requirement for a member bank of the Federal
Reserve System in New York City with deposits exceeding five billion dollars
in respect of "Eurocurrency liabilities" (or in respect of any other category
of liabilities which includes deposits by reference to which the interest
rate on Euro-Dollar Loans is determined or any category of extensions of
credit or other assets which includes loans by a non-United States office of
any Bank to United States residents). The Adjusted London Interbank Offered
Rate shall be adjusted automatically on and as of the effective date of any
change in the Euro-Dollar Reserve Percentage.
(c) Any overdue principal of or interest on any Euro-Dollar Loan shall
bear interest, payable on demand, for each day from and including the date
payment thereof was due to but excluding the date of actual payment, at a
rate per annum equal to the sum of 2% plus the higher of (i) the Euro-Dollar
Margin plus the quotient obtained (rounded upward, if necessary, to the next
higher 1/100 of 1%) by dividing (x) the average (rounded upward, if
necessary, to the next higher 1/16 of 1%) of the respective rates per annum
at which one day (or, if such amount due remains unpaid more than three
Euro-Dollar Business Days, then for such other period of time not longer than
six months as the Agent may select) deposits in dollars in an amount
approximately equal to such overdue payment due to each of the Euro-Dollar
Reference Banks are offered to such Euro-Dollar
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Reference Bank in the London interbank market for the applicable period
determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve
Percentage (or, if the circumstances described in clause (a) or (b) of
Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the
rate applicable to Domestic Loans for such day) and (ii) the sum of the
Euro-Dollar Margin plus the Adjusted London Interbank Offered Rate applicable
to such Loan at the date such payment was due.
(d) Subject to Section 8.01, each Money Market LIBOR Loan shall bear
interest on the outstanding principal amount thereof, for the Interest Period
applicable thereto, at a rate per annum equal to the sum of the London
Interbank Offered Rate for such Interest Period (determined in accordance
with Section 2.07(b) as if the related Money Market LIBOR Borrowing were a
Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin
quoted by the Bank making such Loan in accordance with Section 2.03. Each
Money Market Absolute Rate Loan shall bear interest on the outstanding
principal amount thereof, for the Interest Period applicable thereto, at a
rate per annum equal to the Money Market Absolute Rate quoted by the Bank
making such Loan in accordance with Section 2.03. Such interest shall be
payable for each Interest Period on the last day thereof and, if such
Interest Period is longer than three months, at intervals of three months
after the first day thereof. Any overdue principal of or interest on any
Money Market Loan shall bear interest, payable on demand, for each day until
paid at a rate per annum equal to the sum of 2% plus the Base Rate for such
day.
(e) The Agent shall determine each interest rate applicable to the
Loans hereunder. The Agent shall give prompt notice to the Borrower and the
participating Banks of each rate of interest so determined, and its
determination thereof shall be conclusive in the absence of manifest error.
(f) Each Euro-Dollar Reference Bank agrees to use its best efforts to
furnish quotations to the Agent as contemplated hereby. If any Euro-Dollar
Reference Bank does not furnish a timely quotation, the Agent shall determine
the relevant interest rate on the basis of the quotation or quotations
furnished by the remaining Euro-Dollar Reference Bank or Banks or, if none of
such quotations is available on a timely basis, the provisions of Section
8.01 shall apply.
Section 2.08. Facility Fees. The Company shall pay to the Agent for the
account of the Banks ratably a facility fee at the Facility Fee Rate
(determined daily in accordance with the Pricing Schedule). Such facility
fee shall accrue (i) from and including the earlier of the Closing Date and
December 31, 1996 to but excluding the Termination Date (or earlier date of
termination of the
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Commitments in their entirety), on the daily average aggregate amount of the
Commitments (whether used or unused) and (ii) from and including the
Termination Date (or earlier date of termination of the Commitments in their
entirety) to but excluding the date the Loans shall be repaid in their
entirety, on the daily average aggregate outstanding principal amount of the
Loans. Accrued facility fees shall be payable quarterly in arrears on the
last day of each calendar quarter and upon the date of termination of the
Commitments in their entirety (and, if later, the date the Loans shall be
repaid in their entirety).
"Facility Fee Rate" means a rate per annum determined in accordance with
the Pricing Schedule.
Section 2.09. Optional Termination or Reduction of Commitments. During
the Revolving Credit Period, the Company may, upon at least three Domestic
Business Days' notice to the Agent, (i) terminate the Commitments at any
time, if no Loans are outstanding at such time or (ii) ratably reduce from
time to time by an aggregate amount of $25,000,000 or any larger multiple of
$5,000,000, the aggregate amount of the Commitments in excess of the
aggregate outstanding principal amount of the Loans.
Section 2.10. Method of Electing Interest Rates. (a) The Loans included
in each Committed Borrowing shall bear interest initially at the type of rate
specified by the Borrower in the applicable Notice of Committed Borrowing.
Thereafter, the Borrower may from time to time elect to change or continue
the type of interest rate borne by each Group of Loans (subject in each case
to the provisions of Article 8), as follows:
(i) if such Loans are Domestic Loans, the Borrower may elect to
convert such Loans to Euro-Dollar Loans as of any Euro-Dollar Business Day;
(ii) if such Loans are Euro-Dollar Loans, the Borrower may elect
to convert such Loans to Domestic Loans or elect to continue such Loans as
Euro-Dollar Loans for an additional Interest Period, in each case effective
on the last day of the then current Interest Period applicable to such Loans.
Each such election shall be made by delivering a notice (a "Notice of
Interest Rate Election") to the Agent at least three Euro-Dollar Business
Days before the conversion or continuation selected in such notice is to be
effective. A Notice of Interest Rate Election may, if it so specifies, apply
to only a portion of the aggregate principal amount of the relevant Group of
Loans; provided that (i) such
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portion is allocated ratably among the Loans comprising such Group and (ii)
the portion to which such Notice applies, and the remaining portion to which
it does not apply, are each $25,000,000 or any larger multiple of $5,000,000.
(b) Each Notice of Interest Rate Election shall specify:
(i) the Group of Loans (or portion thereof) to which such notice
applies;
(ii) the date on which the conversion or continuation selected in such
notice is to be effective, which shall comply with the applicable clause of
subsection (a) above;
(iii) if the Loans comprising such Group are to be converted, the new
type of Loans and, if such new Loans are Euro-Dollar Loans, the duration of
the initial Interest Period applicable thereto; and
(iv) if such Loans are to be continued as Euro-Dollar Loans for an
additional Interest Period, the duration of such additional Interest Period.
Each Interest Period specified in a Notice of Interest Rate Election shall
comply with the provisions of the definition of Interest Period.
(c) Upon receipt of a Notice of Interest Rate Election from the
Borrower pursuant to subsection (a) above, the Agent shall promptly notify
each Bank of the contents thereof and such notice shall not thereafter be
revocable by such Borrower. If the Borrower fails to deliver a timely Notice
of Interest Rate Election to the Agent for any Group of Euro-Dollar Loans,
such Loans shall be converted into Domestic Loans on the last day of the then
current Interest Period applicable thereto.
Section 2.11. Optional Prepayments.
(a) The Borrower may, upon at least one Domestic Business Day's notice
to the Agent, prepay the Group of Domestic Loans (or any Money Market
Borrowing bearing interest at the Base Rate pursuant to Section 8.01(a)) in
whole at any time, or from time to time in part in amounts aggregating
$25,000,000 or any larger multiple of $5,000,000, by paying the principal
amount to be prepaid together with accrued interest thereon to the date of
prepayment.
(b) The Borrower may, upon at least three Euro-Dollar Business Days'
notice to the Agent, in the case of a Group of Euro-Dollar Loans, prepay the
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Loans comprising such a Group on the last day of any Interest Period
applicable to such Group, in whole at any time, or from time to time in part
in amounts aggregating $25,000,000 or any larger multiple of $5,000,000, by
paying the principal amount to be prepaid together with accrued interest
thereon to the date of prepayment.
(c) Except as provided in subsection (a) above, the Borrower may not
prepay all or any portion of the principal amount of any Money Market Loan
prior to the maturity thereof.
(d) Upon receipt of a notice of prepayment pursuant to this Section,
the Agent shall promptly notify each Bank of the contents thereof and of such
Bank's ratable share (if any) of such prepayment and such notice shall not
thereafter be revocable by the Borrower. Each such prepayment shall be
applied to prepay ratably the Loans of the several Banks included in the
relevant Group or Borrowing.
Section 2.12. General Provisions as to Payments. (a) The Borrower
shall make each payment of principal of, and interest on, the Loans and of
fees and other amounts payable hereunder, not later than 12:00 Noon (New York
City time) on the date when due, in Federal or other funds immediately
available in New York City, without off set or counterclaim, to the Agent at
its address referred to in Section 10.01. The Agent will promptly distribute
to each Bank its ratable share of each such payment received by the Agent for
the account of the Banks. Whenever any payment of principal of, or interest
on, the Domestic Loans or of fees or other amounts payable hereunder shall be
due on a day which is not a Domestic Business Day, the date for payment
thereof shall be extended to the next succeeding Domestic Business Day.
Whenever any payment of principal of, or interest on, the Euro-Dollar Loans
shall be due on a day which is not a Euro-Dollar Business Day, the date for
payment thereof shall be extended to the next succeeding Euro-Dollar Business
Day unless such Euro-Dollar Business Day falls in another calendar month, in
which case the date for payment thereof shall be the next preceding
Euro-Dollar Business Day. Whenever any payment of principal of, or interest
on, the Money Market Loans shall be due on a day which is not a Euro-Dollar
Business Day, the date for payment thereof shall be extended to the next
succeeding Euro-Dollar Business Day. If the date for any payment of
principal is extended by operation of law or otherwise, interest thereon
shall be payable for such extended time.
(b) Unless the Agent shall have received notice from the Borrower prior
to the date on which any payment is due from the Borrower to the Banks
hereunder that the Borrower will not make such payment in full, the Agent may
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assume that the Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such due date an amount equal to the amount then
due such Bank. If and to the extent that the Borrower shall not have so made
such payment, each Bank shall repay to the Agent forthwith on demand such
amount distributed to such Bank together with interest thereon, for each day
from the date such amount is distributed to such Bank until the date such
Bank repays such amount to the Agent, at the Federal Funds Rate.
Section 2.13. Funding Losses. If the Borrower makes any payment of
principal with respect to any Fixed Rate Loan or any Fixed Rate Loan is
converted to a Domestic Loan (pursuant to Article 6 or 8 or otherwise) on any
day other than the last day of an Interest Period applicable thereto, or the
last day of an applicable period fixed pursuant to Section 2.07(c), or if the
Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been
given to any Bank in accordance with Section 2.04(a) or 2.11(d), the Company
shall reimburse each Bank within 15 days after demand for any resulting loss
or expense incurred by it (or by an existing or prospective Participant in
the related Loan), including (without limitation) any loss incurred in
obtaining, liquidating or employing deposits from third parties, but
excluding loss of margin for the period after any such payment or conversion
or failure to borrow or prepay, provided that such Bank shall have delivered
to the Company a certificate as to the amount of such loss or expense, which
certificate shall be conclusive in the absence of manifest error.
Section 2.14 Computation Of Interest And Fees. Interest based on the
Prime Rate hereunder shall be computed on the basis of a year of 365 days (or
366 days in a leap year) and paid for the actual number of days elapsed
(including the first day but excluding the last day). All other interest and
fees hereunder shall be computed on the basis of a year of 360 days and paid
for the actual number of days elapsed (including the first day but excluding
the last day).
Section 2.15. Change Of Control. If a Change of Control shall occur, the
Company will, within ten days after the occurrence thereof, give each Bank
notice thereof, which notice shall describe in reasonable details the facts
and circumstances giving rise thereto and shall specify an Optional
Termination Date for purposes of this Section (the "Optional Termination
Date") which date shall not be less than 30 nor more than 60 days after the
date of such notice. Each Bank may, by notice to the Company and the Agent
given not less than three Domestic Business Days prior to the Optional
Termination Date, terminate its Commitment (if any), which shall thereupon be
terminated, and declare the Note held by it (together with accrued interest
thereon) and any other amounts payable
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hereunder for its account to be, and such Note and such other amounts shall
thereupon become, due and payable without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Company and
the Borrower, in each case effective on the Optional Termination Date.
A "Change of Control" shall occur if any person or group of persons
(within the meaning of Section 13 or 14 of the Securities Exchange Act of
1934, as amended) shall have acquired beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission
under said Act) of 30% or more of the outstanding shares of common stock of
the Company; or, during any period of twelve consecutive calendar months,
individuals who were directors of the Company on the first day of such period
shall cease to constitute a majority of the board of directors of the Company.
ARTICLE 3
Conditions
Section 3.01. Closing. The closing hereunder shall occur upon receipt
by the Agent of the following documents, each dated the Closing Date unless
otherwise indicated:
(a) a duly executed Note of the Borrower for the account of each Bank
dated on or before the Closing Date complying with the provisions of Section
2.05;
(b) an opinion of Stephen E. Brilz, Esq., counsel for the Company and
the Borrower, substantially in the form of Exhibit E hereto and covering such
additional matters relating to the transactions contemplated hereby as the
Required Banks may reasonably request;
(c) an opinion of Davis Polk & Wardwell, special counsel for the Agent,
substantially in the form of Exhibit F hereto and covering such additional
matters relating to the transactions contemplated hereby as the Required
Banks may reasonably request;
(d) evidence satisfactory to the Agent that the commitments under the
Existing Credit Agreements have been terminated and that the principal and
interest on all loans and accrued fees outstanding thereunder have been paid
in full;
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(e) evidence satisfactory to the Agent that all conditions to the
consummation of the Acquisition have been satisfied; and
(f) all documents the Agent may reasonably request relating to the
existence of the Company, the corporate authority for and the validity of
this Agreement and the Notes, and any other matters relevant hereto, all in
form and substance satisfactory to the Agent.
The Agent shall promptly notify the Company and the Banks of the Closing
Date, and such notice shall be conclusive and binding on all parties hereto.
Section 3.02 Borrowings. The obligation of any Bank to make a Loan on
the occasion of any Borrowing is subject to the satisfaction of the following
conditions:
(a) the fact that the Closing Date shall have occurred on or prior to
February 15, 1997;
(b) receipt by the Agent of a Notice of Borrowing as required by Section
2.02 or 2.03, as the case may be;
(c) the fact that, immediately before and after such Borrowing, the
aggregate outstanding principal amount of the Loans will not exceed the
aggregate amount of the Commitments;
(d) the fact that, immediately before and after such Borrowing, no
Default shall have occurred and be continuing; and
(e) the fact that the representations and warranties contained in this
Agreement shall be true on and as of the date of such Borrowing (except, in
the case of the representations and warranties contained in Section 4.04(c),
as disclosed by the Borrower to the Banks in writing in the Notice of
Borrowing relating to such Borrowing).
Each Borrowing hereunder shall be deemed to be a representation and
warranty by the Borrower on the date of such Borrowing as to the facts
specified in clauses (c), (d) and (e) of this Section.
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ARTICLE 4
Representations And Warranties
Each of the Company and the Borrower represents and warrants that:
Section 4.01 Corporate Existence And Power. Each of the Company and the
Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation, and has all
corporate powers and all material governmental licenses, authorizations,
qualifications, consents and approvals required to carry on its business as
now conducted.
Section 4.02. Corporate And Governmental Authorization; No
Contravention. The execution, delivery and performance by the Company and the
Borrower of this Agreement and by the Borrower of the Notes are within such
Person's corporate powers, have been duly authorized by all necessary
corporate action, require no action by or in respect of, or filing with, any
governmental body, agency or official and do not contravene, or constitute a
default under, any provision of applicable law or regulation or of the
certificate of incorporation or by-laws of such Person or of any agreement,
judgment, injunction, order, decree or other instrument binding upon such
Person or any Significant Subsidiary or result in the creation or imposition
of any Lien on any material asset of such Person or any Significant
Subsidiary.
Section 4.03. Binding Effect. This Agreement constitutes a valid and
binding agreement of the Company and the Borrower, and the Notes, when
executed and delivered in accordance with this Agreement, will constitute
valid and binding obligations of the Borrower.
Section 4.04. Financial Information
(a) The consolidated balance sheet of the Company and its Consolidated
Subsidiaries as of December 31, 1995 and the related consolidated statements
of income and cash flows for the fiscal year then ended, reported on by
Coopers & Lybrand and set forth in the Company's 1995 Form 10-K, a copy of
which has been delivered to each of the Banks, fairly present, in conformity
with generally accepted accounting principles, the consolidated financial
position of the Company and its Consolidated Subsidiaries as of such date and
their consolidated results of operations and cash flows for such fiscal year.
(b) The unaudited consolidated balance sheet of the Company and its
Consolidated Subsidiaries as of June 30, 1996 and the related unaudited
consolidated statements of income and cash flows for the six months then
ended,
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set forth in the Company's quarterly report for the fiscal quarter ended June
30, 1996 as filed with the Securities and Exchange Commission on Form 10-Q, a
copy of which has been delivered to each of the Banks, fairly present, in
conformity with generally accepted accounting principles applied on a basis
consistent with the financial statements referred to in subsection (a) of
this Section, the consolidated financial position of the Company and its
Consolidated Subsidiaries as of such date and their consolidated results of
operations and cash flows for such six month period (subject to normal
year-end adjustments).
(c) Since June 30, 1996 there has been no material adverse change in
the financial position or results of operations of the Company and its
Consolidated Subsidiaries, considered as a whole (it being understood that
the consummation of the Acquisition shall not be considered such a change).
Section 4.05. Litigation. Except as disclosed in the Company's 1995 Form
10-K and quarterly report for the fiscal quarter ended June 30, 1996 as filed
with the Securities and Exchange Commission on Form 10-Q, there is no action,
suit or proceeding pending against, or to the knowledge of the Company
threatened against or affecting, the Company or any of its Subsidiaries
before any court or arbitrator or any governmental body, agency or official
in which there is a reasonable possibility of an adverse decision which would
materially adversely affect the consolidated financial position or
consolidated results of operations of the Company and its Consolidated
Subsidiaries, considered as a whole, or which in any manner draws into
question the validity of this Agreement or the Notes.
Section 4.06. Compliance With Erisa. Each member of the ERISA Group has
fulfilled its obligations under the minimum funding standards of ERISA and
the Internal Revenue Code with respect to each Plan and is in compliance in
all respects with the presently applicable provisions of ERISA and the
Internal Revenue Code with respect to each Plan, except where failure to
comply would not have a material adverse effect on the consolidated financial
position or consolidated results of operations of the Company and its
Consolidated Subsidiaries, considered as a whole. No member of the ERISA
Group has (i) sought a waiver of the minimum funding standard under Section
412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make
any contribution or payment to any Plan or Multiemployer Plan or in respect
of any Benefit Arrangement, or made any amendment to any Plan or Benefit
Arrangement, which has resulted or could result in the imposition of a Lien
or the posting of a bond or other security under ERISA or the Internal
Revenue Code or (iii) incurred any liability under Title IV of ERISA other
than a liability to the PBGC for premiums under Section 4007 of ERISA.
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Section 4.07. Environmental Matters. (a) The operations of the Company
and each of its Subsidiaries comply in all respects with all Environmental
Laws except such non-compliance which would not (if enforced in accordance
with applicable law) reasonably be expected to result, individually or in the
aggregate, in a material adverse effect on the financial position or results
of operations of the Company and its Consolidated Subsidiaries, considered as
a whole.
(b) Except as specifically identified in Schedule 4.07, the Company and
each of its Subsidiaries have obtained all material licenses, permits,
authorizations and registrations required under any Environmental Laws
("Environmental Permits") necessary for their respective operations, and all
such Environmental Permits are in good standing, and the Company and each of
its Subsidiaries is in compliance with all material terms and conditions of
such Environmental Permits.
(c) Except as specifically identified in Schedule 4.07, (i) none of the
Company, any of its Subsidiaries or any of their present property or
operations are subject to any outstanding written order from or settlement or
consent agreement with any governmental authority or other Person, nor is any
of the foregoing subject to any judicial or docketed administrative
proceedings, respecting any Environmental Laws or Hazardous Substances with a
potential liability in excess of $1,000,000 and (ii) there are no other
conditions or circumstances known to the Company which may give rise to any
claims respecting any Environmental Laws arising from the operations of the
Company or its Subsidiaries (including, without limitation, off-site
liabilities), or any additional costs of compliance with Environmental Laws,
that would reasonably be expected to have a material adverse effect on the
financial position or results of operations of the Company and its
Subsidiaries, considered as a whole.
Section 4.08. Taxes. United States Federal income tax returns of the
Company and its Subsidiaries have been examined and closed through the fiscal
year ended December 31, 1987. The Company and its Subsidiaries have filed
all United States Federal income tax returns and all other material tax
returns which are required to be filed by them and have paid all taxes due
pursuant to such returns or pursuant to any assessment received by the
Company or any Subsidiary, except for taxes the amount, applicability or
validity of which is being contested in good faith by appropriate
proceedings. The charges, accruals and reserves on the books of the Company
and its Subsidiaries in respect of taxes or other governmental charges are,
in the opinion of the Company, adequate.
Section 4.09. Subsidiaries. Each of the Company's corporate Significant
Subsidiaries (including, but not limited to, the Borrower) is a
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corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, and has all corporate powers
and all material governmental licenses, authorizations, qualifications,
consents and approvals required to carry on its business as now conducted.
Section 4.10. Not An Investment Company. Neither the Company nor the
Borrower is an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
Section 4.11. Full Disclosure. All written information heretofore
furnished by the Company or the Borrower to the Agent or any Bank for
purposes of or in connection with this Agreement or any transaction
contemplated hereby is, and all such information hereafter furnished by the
Company or the Borrower to the Agent or any Bank will be, true and accurate
in all material respects on the date as of which such information is stated
or certified.
ARTICLE 5
Covenants
The Company agrees that, so long as any Bank has any Commitment
hereunder or any amount payable under any Note remains unpaid:
Section 5.01. Information. The Company will deliver to each of the
Banks:
(a) as soon as available and in any event within 95 days after the end
of each fiscal year of the Company, a consolidated balance sheet of the
Company and its Consolidated Subsidiaries as of the end of such fiscal year
and the related consolidated statements of income and cash flows for such
fiscal year, setting forth in each case in comparative form the figures for
the previous fiscal year, all reported on in a manner acceptable to the
Securities and Exchange Commission by Arthur Andersen L.L.P. or other
independent public accountants of nationally recognized standing;
(b) as soon as available and in any event within 50 days after the end
of each of the first three quarters of each fiscal year of the Company, a
consolidated balance sheet of the Company and its Consolidated Subsidiaries
as of the end of such quarter and the related consolidated
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statements of income and cash flows for such quarter and for the portion of
the Company's fiscal year ended at the end of such quarter, setting forth in
the case of such statements of income and cash flows in comparative form the
figures for the corresponding quarter and the corresponding portion of the
Company's previous fiscal year, all certified (subject to normal year-end
adjustments) as to fairness of presentation, generally accepted accounting
principles and consistency by the chief financial officer or the chief
accounting officer of the Company;
(c) simultaneously with the delivery of each set of financial
statements referred to in clauses (a) and (b) above, a certificate of the
chief financial officer (or such officer's designee, designated in writing by
such officer) or the chief accounting officer of the Company (i) setting
forth in reasonable detail the calculations required to establish whether the
Company was in compliance with the requirements of Sections 5.06 to 5.08,
inclusive, on the date of such financial statements and (ii) stating whether
any Default exists on the date of such certificate and, if any Default then
exists, setting forth the details thereof and the action which the Company is
taking or proposes to take with respect thereto;
(d) within five Domestic Business Days after any officer of the Company
or the Borrower obtains knowledge of any Default, if such Default is then
continuing, a certificate of the chief financial officer or the chief
accounting officer of the Company or the Borrower setting forth the details
thereof and the action which the Company or the Borrower is taking or
proposes to take with respect thereto;
(e) promptly upon the mailing thereof to the shareholders of the Company
generally, copies of all financial statements, reports and proxy statements
so mailed;
(f) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration statements
on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or
their equivalents) (other than any amendment on Form 8-K the sole purpose of
which is to file exhibits relating to existing Debt meeting the requirements
of clause (ii) of the definition of Debt) which the Company shall have filed
with the Securities and Exchange Commission;
(g) if and when any member of the ERISA Group (i) gives or is required
to give notice to the PBGC of any "reportable event" (as defined in Section
4043 of ERISA) with respect to any Plan which might
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constitute grounds for a termination of such Plan under Title IV of ERISA, or
knows that the plan administrator of any Plan has given or is required to
give notice of any such reportable event, a copy of the notice of such
reportable event given or required to be given to the PBGC; (ii) receives
notice of complete or partial withdrawal liability under Title IV of ERISA or
notice that any Multiemployer Plan is in reorganization, is insolvent or has
been terminated, a copy of such notice; (iii) receives notice from the PBGC
under Title IV of ERISA of an intent to terminate, impose liability (other
than for premiums under Section 4007 of ERISA) in respect of, or appoint a
trustee to administer any Plan, a copy of such notice; (iv) applies for a
waiver of the minimum funding standard under Section 412 of the Internal
Revenue Code, a copy of such application; (v) gives notice of intent to
terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and
other information filed with the PBGC; (vi) gives notice of withdrawal from
any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii)
fails to make any payment or contribution to any Plan or Multiemployer Plan
or in respect of any Benefit Arrangement or makes any amendment to any Plan
or Benefit Arrangement which has resulted or could result in the imposition
of a Lien or the posting of a bond or other security, a certificate of the
chief financial officer or the chief accounting officer of the Company
setting forth details as to such occurrence and action, if any, which the
Company or applicable member of the ERISA Group is required or proposes to
take; and
(h) from time to time such additional information regarding the
financial position or business of the Company and its Subsidiaries and the
Borrower and its Subsidiaries as the Agent, at the request of any Bank, may
reasonably request.
Section 5.02. Maintenance Of Property; Insurance. (a) The Company will
keep, and will cause each Significant Subsidiary to keep, all property useful
and necessary in its business in good working order and condition, ordinary
wear and tear excepted.
(b) The Company will maintain, and will cause each Significant Subsidiary
to maintain (either in the name of the Borrower or in such Significant
Subsidiary's own name), with financially sound and responsible insurance
companies, insurance on all their respective properties in at least such
amounts and against at least such risks (and with such risk retention) as are
usually insured against in the same general area by companies of established
repute engaged in the same or a similar business; and will furnish to the
Banks, upon request from the Agent, information presented in reasonable
detail as to the insurance so
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carried; PROVIDED THAT, in lieu of any such insurance, the Company and any
Significant Subsidiary may maintain a system or systems of self-insurance and
reinsurance which will accord with sound practices of similarly situated
corporations maintaining such systems and with respect to which the Company
or such Significant Subsidiary will maintain adequate insurance reserves, all
in accordance with generally accepted accounting principles and in accordance
with sound insurance principles and practice.
Section 5.03. Maintenance Of Existence. The Company will, and will
cause each Significant Subsidiary to, preserve, renew and keep in full force
and effect their respective corporate existence and their respective rights,
privileges and franchises necessary or desirable in the normal conduct of
business; PROVIDED that nothing in this Section 5.03 shall prohibit or
interfere with the Company's publicly announced strategy to discontinue or
dispose of in one or more transactions the financial services businesses of
it or of any of its Subsidiaries.
Section 5.04. Compliance With Laws. The Company will comply, and will
cause each Significant Subsidiary to comply, in all material respects with
all applicable laws, ordinances, rules, regulations, and requirements of
governmental authorities (including, without limitation, Environmental Laws
and ERISA and the rules and regulations thereunder), except where the
necessity of compliance therewith is contested in good faith by appropriate
proceedings and for which adequate reserves in conformity with generally
accepted accounting principles have been established.
Section 5.05. Inspection Of Property, Books And Records. The Company
will keep, and will cause each Significant Subsidiary to keep, proper books
of record and account in which full, true and correct entries shall be made
of all dealings and transactions in relation to its business and activities;
and will permit, and will cause each Significant Subsidiary to permit,
representatives of any Bank at such Bank's expense to visit and inspect any
of their respective properties, to examine and make abstracts from any of
their respective books and records and to discuss their respective affairs,
finances and accounts with their respective officers, employees and
independent public accountants, all at such reasonable times and as often as
may reasonably be desired.
Section 5.06. Subsidiary Debt. Total Debt of all Consolidated
Subsidiaries (excluding Debt of a Consolidated Subsidiary to the Company or
to a Wholly-Owned Consolidated Subsidiary) will at no time exceed 250% of
Consolidated Net Worth. For purposes of this Section, any preferred stock of
a Consolidated Subsidiary other than the Borrower which is held by a Person
other than the Company or a Wholly-Owned Consolidated Subsidiary shall be
included,
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at the higher of its voluntary or involuntary liquidation value, in the Debt
of such Consolidated Subsidiary.
Section 5.07. Debt Coverage. Consolidated Debt of the Company and its
Consolidated Subsidiaries will at all times be less than 70% of the sum of
consolidated Debt of the Company and its Consolidated Subsidiaries and
consolidated shareowners' equity of the Company and its Consolidated
Subsidiaries.
Section 5.08. Negative Pledge. Neither the Company nor the Borrower
will, and the Company will not permit any Subsidiary to, create, assume or
suffer to exist any Lien on any asset now owned or hereafter acquired by it,
except:
(a) Liens existing on the date of this Agreement securing Debt
outstanding on the date of this Agreement in an aggregate principal amount
not exceeding $123,700,000;
(b) any Lien existing on any asset of any corporation at the time such
corporation becomes a Subsidiary and not created in contemplation of such
event;
(c) any Lien on any asset securing Debt incurred or assumed for the
purpose of financing all or any part of the cost of acquiring such asset,
PROVIDED that such Lien attaches to such asset concurrently with or within
180 days after the acquisition thereof;
(d) any Lien on any asset of any corporation existing at the time such
corporation is merged or consolidated with or into the Company or a
Subsidiary and not created in contemplation of such event;
(e) any Lien existing on any asset prior to the acquisition thereof by
the Company or a Subsidiary and not created in contemplation of such
acquisition;
(f) any Lien on assets or capital stock of Minor Subsidiaries which
secures Debt of Persons which are not Consolidated Subsidiaries in which the
Company or any of its Subsidiaries has made investments ("Joint Ventures"),
but for the payment of which Debt no other recourse may be had to the Company
or any Subsidiaries ("Limited Recourse Debt"), or any Lien on equity
interests in a Joint Venture securing Limited Recourse Debt of such Joint
Venture;
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(g) any Lien arising out of the refinancing, replacement, extension,
renewal or refunding of any Debt secured by any Lien permitted by any of the
foregoing clauses of this Section, provided that such Debt is not increased
and is not secured by any additional assets;
(h) Liens arising in the ordinary course of business which (i) do
not secure Debt, (ii) do not secure any obligation in an amount exceeding
$50,000,000 and (iii) do not in the aggregate materially detract from the
value of its assets or materially impair the use thereof in the operation of
its business;
(i) Liens not otherwise permitted by and in addition to the
foregoing clauses of this Section securing Debt in an aggregate principal
amount at any time outstanding not to exceed 10% of Consolidated Net Worth;
and
(j) any Lien on Margin Stock, if and to the extent the value of all
Margin Stock of the Company and its Subsidiaries exceeds 25% of the value of
the total assets subject to this Section.
Section 5.09. Consolidations, Mergers And Sales Of Assets. The Company
will not (i) consolidate with or merge into any other Person or (ii) sell,
lease or otherwise transfer, directly or indirectly, all or substantially all
of the assets of the Company and its Subsidiaries, taken as a whole, to any
other Person. The Company will retain ownership, directly or indirectly, of
at least 80% of the capital stock, and at least 80% of the voting power, of U
S WEST Communications, Inc. ("Communications"), and will cause Communications
to continue to own substantially all of the telecommunications assets it owns
on the date of this Agreement. Nothing in this Section shall be construed to
restrict any sales of Margin Stock for fair value as determined in good faith
by the board of directors of the Company.
Section 5.10. Use Of Proceeds. The proceeds of the Loans made under this
Agreement will be used by the Borrower for financing the Acquisition and for
general corporate purposes. None of such proceeds will be used, directly or
indirectly, in violation of any applicable law or regulation, and no use of
such proceeds for general corporate purposes will include any use for the
purpose, whether immediate, incidental or ultimate, of buying or carrying any
Margin Stock.
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ARTICLE 6
Defaults
Section 6.01. Events Of Default. If one or more of the following events
shall have occurred and be continuing:
(a) any principal of any Loan shall not be paid when due, or any
interest, any fees or any other amount payable hereunder shall not be paid
within five days of the due date thereof;
(b) the Company or the Borrower shall fail to observe or perform any
covenant contained in Sections 5.06 to 5.10, inclusive;
(c) the Company or the Borrower shall fail to observe or perform any
covenant or agreement contained in this Agreement (other than those covered
by clause (a) or (b) above) for 10 days after written notice thereof has been
given to the Company by the Agent at the request of any Bank;
(d) any representation, warranty, certification or statement made by
the Company or the Borrower in this Agreement or in any certificate,
financial statement or other document delivered pursuant to this Agreement
shall prove to have been incorrect in any material respect when made (or
deemed made);
(e) the Company or any Subsidiary shall fail to make any payment or
payments, in the aggregate in excess of $100,000,000, in respect of any
Material Debt when due or within any applicable grace period;
(f) any event or condition shall occur which results in the
acceleration of the maturity of any Material Debt;
(g) the Company or any Significant Subsidiary shall commence a
voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall consent to
any such relief or to the appointment of or taking possession by any such
official in an involuntary case or other proceeding commenced against it, or
shall make a general assignment for the benefit of creditors, or shall fail
generally to pay its debts as they become due, or shall take any corporate
action to authorize or otherwise acquiesce in any of the foregoing;
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(h) an involuntary case or other proceeding shall be commenced against
the Company or any Significant Subsidiary seeking liquidation, reorganization
or other relief with respect to it or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and such involuntary
case or other proceeding shall remain undismissed and unstayed for a period
of 60 days; or an order for relief shall be entered against the Company or
any Significant Subsidiary under the federal bankruptcy laws as now or
hereafter in effect;
(i) any member of the ERISA Group shall fail to pay when due an amount
or amounts aggregating in excess of $100,000,000 which it shall have become
liable to pay under Title IV of ERISA; or notice of intent to terminate a
Material Plan shall be filed under Title IV of ERISA by any member of the
ERISA Group, any plan administrator or any combination of the foregoing; or
the PBGC shall institute proceedings under Title IV of ERISA to terminate, to
impose liability (other than for premiums under Section 4007 of ERISA) in
respect of, or to cause a trustee to be appointed to administer any Material
Plan; or a condition shall exist by reason of which the PBGC would be
entitled to obtain a decree adjudicating that any Material Plan must be
terminated; or there shall occur a complete or partial withdrawal from, or a
default, within the meaning of Section 4219(c)(5) of ERISA, with respect to,
one or more Multiemployer Plans which could cause one or more members of the
ERISA Group to incur a current payment obligation in excess of $100,000,000;
(j) a judgment or order for the payment of money in excess of
$100,000,000 shall be rendered against the Company or any Subsidiary and such
judgment or order shall continue unsatisfied and unstayed for a period of 10
days;
(k) the Company shall repudiate in writing any of its obligations under
Article 9 or any such obligation shall be unenforceable against the Company
in accordance with its terms, or the Company shall so assert in writing; or
(l) (i) Continental Cablevision, Inc. shall have merged with and into
the Company and Debt is outstanding under the Indentures, and (ii) one or
more events or conditions shall occur which result in a default under any
agreement or agreements in respect of any Material Debt that is subject to
the Indentures and as a consequence of such default or defaults
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the Company or any of its Subsidiaries shall make any payment or give or
agree to give any consideration or benefit of any kind (including, without
limitation, any increased compensation, prepayment, shortening of maturities,
security or other credit support) to the holders of such Debt and such
payment, consideration or benefit is determined by the Required Banks, after
taking into account any payment, consideration or benefit made, given or
agreed to be given by such holders to the Company or any of its Subsidiaries
(other than a waiver of such default), to be a material benefit to the
holders of such Debt;
then, and in every such event, the Agent shall (i) if requested by Banks
having more than 50% in aggregate amount of the Commitments, by notice to the
Company terminate the Commitments and they shall thereupon terminate, and/or
(ii) if requested by Banks holding Notes evidencing more than 50% in
aggregate principal amount of the Loans, by notice to the Company declare the
Notes (together with accrued interest thereon) to be, and the Notes shall
thereupon become, immediately due and payable without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Company and the Borrower; provided that in the case of any of the Events of
Default specified in clause (g) or (h) above with respect to the Company or
the Borrower, without any notice to the Company or the Borrower or any other
act by the Agent or the Banks, the Commitments shall thereupon automatically
terminate and the Notes (together with accrued interest thereon) shall become
immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by the Company and the
Borrower.
Section 6.02. Notice Of Default. The Agent shall give notice to the
Company under Section 6.01(c) promptly upon being requested to do so by any
Bank and shall thereupon notify all the Banks thereof.
ARTICLE 7
The Agent
Section 7.01. Appointment And Authorization. Each Bank irrevocably
appoints and authorizes the Agent to take such action as agent on its behalf
and to exercise such powers under this Agreement and the Notes as are
delegated to the Agent by the terms hereof or thereof, together with all such
powers as are reasonably incidental thereto.
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Section 7.02. Agent And Affiliates. Morgan Guaranty Trust Company of
New York shall have the same rights and powers under this Agreement as any
other Bank and may exercise or refrain from exercising the same as though it
were not the Agent, and Morgan Guaranty Trust Company of New York and its
affiliates may accept deposits from, lend money to, and generally engage in
any kind of business with the Company, the Borrower or any Subsidiary or
affiliate of the Company or the Borrower as if it were not the Agent
hereunder.
Section 7.03. Action By Agent. The obligations of the Agent hereunder
are only those expressly set forth herein. Without limiting the generality
of the foregoing, the Agent shall not be required to take any action with
respect to any Default, except as expressly provided in Article 6.
Section 7.04. Consultation With Experts. The Agent may consult with
legal counsel (who may be counsel for the Company or the Borrower),
independent public accountants and other experts selected by it and shall not
be liable for any action taken or omitted to be taken by it in good faith in
accordance with the advice of such counsel, accountants or experts.
Section 7.05. Liability of Agent. Neither the Agent nor any of its
affiliates nor any of their respective directors, officers, agents or
employees shall be liable for any action taken or not taken by it in
connection herewith (i) with the consent or at the request of the Required
Banks or (ii) in the absence of its own gross negligence or willful
misconduct. Neither the Agent nor any of its affiliates nor any of their
respective directors, officers, agents or employees shall be responsible for
or have any duty to ascertain, inquire into or verify (i) any statement,
warranty or representation made in connection with this Agreement or any
borrowing hereunder; (ii) the performance or observance of any of the
covenants or agreements of the Company or the Borrower; (iii) the
satisfaction of any condition specified in Article 3, except receipt of items
required to be delivered to the Agent; or (iv) the validity, effectiveness or
genuineness of this Agreement, the Notes or any other instrument or writing
furnished in connection herewith. The Agent shall not incur any liability by
acting in reliance upon any notice, consent, certificate, statement, or other
writing (which may be a bank wire, telex or similar writing) believed by it
to be genuine or to be signed by the proper party or parties.
Section 7.06. Indemnification. Each Bank shall, ratably in accordance
with its Commitment, indemnify the Agent, its affiliates and their respective
directors, officers, agents and employees (to the extent not reimbursed by
the Company or the Borrower) against any cost, expense (including counsel
fees and disbursements), claim, demand, action, loss or liability (except
such as result from
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such indemnitees' gross negligence or willful misconduct) that such
indemnitees may suffer or incur in connection with this Agreement or any
action taken or omitted by such indemnitees hereunder.
Section 7.07. Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank, and
based on such documents and information as it has deemed appropriate, made
its own credit analysis and decision to enter into this Agreement. Each Bank
also acknowledges that it will, independently and without reliance upon the
Agent or any other Bank, and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions
in taking or not taking any action under this Agreement.
Section 7.08. Successor Agent. The Agent may resign at any time by
giving notice thereof to the Banks and the Company. Upon any such
resignation, the Required Banks shall have the right to appoint a successor
Agent. If no successor Agent shall have been so appointed by the Required
Banks, and shall have accepted such appointment, within 30 days after the
retiring Agent gives notice of resignation, then the retiring Agent may, on
behalf of the Banks, appoint a successor Agent (with the consent of the
Company, such consent not to be unreasonably withheld), which shall be a
commercial bank organized or licensed under the laws of the United States of
America or of any State thereof and having a combined capital and surplus of
at least $400,000,000. Upon the acceptance of its appointment as Agent
hereunder by a successor Agent, such successor Agent shall thereupon succeed
to and become vested with all the rights and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article shall inure to its benefit as to any actions taken
or omitted to be taken by it while it was Agent.
Section 7.09. Agent's Fee. The Company shall pay to the Agent for its
own account fees in the amounts and at the times previously agreed upon
between the Company and the Agent.
Section 7.10. Other Agents. Neither Citibank, N.A. nor The Bank of New
York shall have any responsibility, obligation or liability under this
Agreement in its capacity as Syndication Agent or Documentation Agent,
respectively.
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ARTICLE 8
Changes in Circumstances
Section 8.01. Basis for Determining Interest Rate Inadequate or Unfair.
If on or prior to the first day of any Interest Period for any Euro-Dollar
Loan or Money Market LIBOR Loan:
(a) the Agent is advised by the Euro-Dollar Reference Banks that deposits in
dollars (in the applicable amounts) are not being offered to the Euro-Dollar
Reference Banks in the market for such Interest Period, or
(b) in the case of Euro-Dollar Loans, Banks having 50% or more of the
aggregate amount of the Euro-Dollar Loans advise the Agent that the Adjusted
London Interbank Offered Rate as determined by the Agent will not adequately
and fairly reflect the cost to such Banks of funding their Euro-Dollar Loans
for such Interest Period,
the Agent shall forthwith give notice thereof to the Company and the Banks,
whereupon until the Agent notifies the Company that the circumstances giving
rise to such suspension no longer exist, (i) the obligations of the Banks to
make Euro-Dollar Loans or to convert outstanding Loans into Euro-Dollar Loans
shall be suspended and (ii) each outstanding Euro-Dollar Loan shall be
converted into a Domestic Loan on the last day of the then current Interest
Period applicable thereto. Unless the Borrower notifies the Agent at least
two Domestic Business Days before the date of any Fixed Rate Borrowing for
which a Notice of Borrowing has previously been given that it elects not to
borrow on such date, (i) if such Fixed Rate Borrowing is a Committed
Borrowing, such Borrowing shall instead be made as a Domestic Borrowing and
(ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the
Money Market LIBOR Loans comprising such Borrowing shall bear interest for
each day from and including the first day to but excluding the last day of
the Interest Period applicable thereto at the Base Rate for such day.
Section 8.02. Illegality. If, on or after the date of this Agreement,
the adoption of any applicable law, rule or regulation, or any change in any
applicable law, rule or regulation, or any change in the interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof,
or compliance by any Bank (or its Euro-Dollar Lending Office) with any
request or directive (whether or not having the force of law) of any such
authority, central bank or comparable agency shall make it unlawful or
impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain
or fund its Euro-Dollar Loans to the Borrower
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and such Bank shall so notify the Agent, the Agent shall forthwith give
notice thereof to the other Banks and the Company, whereupon until such Bank
notifies the Company and the Agent that the circumstances giving rise to such
suspension no longer exist, the obligation of such Bank to make Euro-Dollar
Loans to the Borrower, or to convert outstanding Loans into Euro-Dollar
Loans, shall be suspended. Before giving any notice to the Agent pursuant to
this Section, such Bank shall designate a different Euro-Dollar Lending
Office if such designation will avoid the need for giving such notice and
will not, in the judgment of such Bank, be otherwise disadvantageous to such
Bank. If such notice is given, each Euro-Dollar Loan of such Bank then
outstanding shall be converted to a Domestic Loan either (a) on the last day
of the then current Interest Period applicable to such Euro-Dollar Loan if
such Bank may lawfully continue to maintain and fund such Loan to such day or
(b) immediately if such Bank shall determine that it may not lawfully
continue to maintain and fund such Loan to such day.
Section 8.03. Increased Cost and Reduced Return. (a) If on or after (x)
the date hereof, in the case of any Committed Loan or any obligation to make
Committed Loans or (y) the date of the related Money Market Quote, in the
case of any Money Market Loan, the adoption of any applicable law, rule or
regulation, or any change in any applicable law, rule or regulation, or any
change in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the interpretation
or administration thereof, or compliance by any Bank (or its Applicable
Lending Office) with any request or directive (whether or not having the
force of law) of any such authority, central bank or comparable agency shall
impose, modify or deem applicable any reserve (including, without limitation,
any such requirement imposed by the Board of Governors of the Federal Reserve
System with respect to any Euro-Dollar Loan any such requirement included in
an applicable Euro-Dollar Reserve Percentage), special deposit, insurance
assessment or similar requirement against assets of, deposits with or for the
account of, or credit extended by, any Bank (or its Applicable Lending
Office) or shall impose on any Bank (or its Applicable Lending Office) or on
the United States market for certificates of deposit or the London interbank
market any other condition affecting its Fixed Rate Loans, its Note or its
obligation to make Fixed Rate Loans and the result of any of the foregoing is
to increase the cost to such Bank (or its Applicable Lending Office) of
making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum
received or receivable by such Bank (or its Applicable Lending Office) under
this Agreement or under its Note with respect thereto, by an amount deemed by
such Bank to be material, then, within 15 days after demand by such Bank
(with a copy to the Agent), the Company shall pay to such Bank such
additional amount or amounts as will compensate such Bank for such increased
cost or reduction.
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(b) If any Bank shall have determined that, after the date hereof, the
adoption of any applicable law, rule or regulation regarding capital
adequacy, or any change in any such law, rule or regulation, or any change in
the interpretation or administration thereof by any governmental authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency, has or would have the effect of reducing
the rate of return on capital of such Bank (or its Parent) as a consequence
of such Bank's obligations hereunder to a level below that which such Bank
(or its Parent) could have achieved but for such adoption, change, request or
directive (taking into consideration its policies with respect to capital
adequacy) by an amount deemed by such Bank to be material, then from time to
time, within 15 days after demand by such Bank (with a copy to the Agent),
the Company shall pay to such Bank such additional amount or amounts as will
compensate such Bank (or its Parent) for such reduction.
(c) Each Bank will promptly notify the Company and the Agent of any event of
which it has knowledge, occurring after the date hereof, which will entitle
such Bank to compensation pursuant to this Section and will designate a
different Applicable Lending Office if such designation will avoid the need
for, or reduce the amount of, such compensation and will not, in the judgment
of such Bank, be otherwise disadvantageous to such Bank. A certificate of
any Bank claiming compensation under this Section and setting forth the
additional amount or amounts to be paid to it hereunder shall be conclusive
in the absence of manifest error. In determining such amount, such Bank may
use any reasonable averaging and attribution methods.
Section 8.04. Taxes. (a) Any and all payments by the Company or the
Borrower to or for the account of any Bank or the Agent hereunder or under
any Note shall be made free and clear of and without deduction for any and
all present or future taxes, duties, levies, imposts, deductions, charges or
withholdings, and all liabilities with respect thereto, excluding, in the
case of each Bank and the Agent, taxes imposed on its income, and franchise
taxes imposed on it, by the jurisdiction under the laws of which such Bank or
the Agent (as the case may be) is organized or any political subdivision
thereof and, in the case of each Bank, taxes imposed on its income, and
franchise or similar taxes imposed on it, by the jurisdiction of such Bank's
Applicable Lending Office or any political subdivision thereof (all such
non-excluded taxes, duties, levies, imposts, deductions, charges,
withholdings and liabilities being hereinafter referred to as "Taxes"). If
the Company or the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder or under any Note to any Bank or
the Agent, (i) the sum payable shall be increased as necessary so that after
making all
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required deductions (including deductions applicable to additional sums
payable under this Section 8.04) such Bank or the Agent (as the case may be)
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) such Person shall make such deductions, (iii) such
Person shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law and (iv) such Person
shall furnish to the Agent, at its address referred to in Section 10.01, the
original or a certified copy of a receipt evidencing payment thereof.
(b) In addition, the Company agrees to pay any present or future stamp or
documentary taxes and any other excise or property taxes, or charges or
similar levies which arise from any payment made hereunder or under any Note
or from the execution or delivery of, or otherwise with respect to, this
Agreement or any Note (hereinafter referred to as "Other Taxes").
(c) The Company agrees to indemnify each Bank and the Agent for the full
amount of Taxes or Other Taxes (including, without limitation, any Taxes or
Other Taxes imposed or asserted by any jurisdiction on amounts payable under
this Section 8.04) paid by such Bank or the Agent (as the case may be) and
any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto. This indemnification shall be made within 15 days
from the date such Bank or the Agent (as the case may be) makes demand
therefor.
(d) Each Bank organized under the laws of a jurisdiction outside the United
States, on or prior to the date of its execution and delivery of this
Agreement in the case of each Bank listed on the signature pages hereof and
on or prior to the date on which it becomes a Bank in the case of each other
Bank, and from time to time thereafter if requested in writing by the Company
(but only so long as such Bank remains lawfully able to do so), shall provide
the Company with Internal Revenue Service form 1001 or 4224, as appropriate,
or any successor form prescribed by the Internal Revenue Service, certifying
that such Bank is entitled to benefits under an income tax treaty to which
the United States is a party which reduces the rate of withholding tax on
payments of interest or certifying that the income receivable pursuant to
this Agreement is effectively connected with the conduct of a trade or
business in the United States. If the form provided by a Bank at the time
such Bank first becomes a party to this Agreement indicates a United States
interest withholding tax rate in excess of zero, withholding tax at such rate
shall be considered excluded from "Taxes" as defined in Section 8.04(a)
imposed by the United States.
(e) For any period with respect to which a Bank has failed to provide the
Company with the appropriate form pursuant to Section 8.04(d) (unless such
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failure is due to a change in treaty, law or regulation occurring subsequent
to the date on which a form originally was required to be provided), such
Bank shall not be entitled to indemnification under Section 8.04(a) with
respect to Taxes imposed by the United States; provided, however, that should
a Bank, which is otherwise exempt from or subject to a reduced rate of
withholding tax, become subject to Taxes because of its failure to deliver a
form required hereunder, the Company shall take such steps as such Bank shall
reasonably request to assist such Bank to recover such Taxes.
(f) If the Company or the Borrower is required to pay additional amounts to
or for the account of any Bank pursuant to this Section 8.04, then such Bank
will change the jurisdiction of its Applicable Lending Office so as to
eliminate or reduce any such additional payment which may thereafter accrue
if such change, in the judgment of such Bank, is not otherwise
disadvantageous to such Bank.
Section 8.05. Domestic Loans Substituted for Affected Euro-Dollar Loans.
If (i) the obligation of any Bank to make Euro-Dollar Loans to the Borrower
has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded
compensation under Section 8.03 or 8.04 with respect to its Euro-Dollar Loans
and the Borrower shall, by at least five Euro-Dollar Business Days' prior
notice to such Bank through the Agent, have elected that the provisions of
this Section shall apply to such Bank, then, unless and until such Bank
notifies the Company that the circumstances giving rise to such suspension or
demand for compensation no longer exist:
(a) all Loans to the Borrower which would otherwise be made by such Bank as
(or continued as or converted into) Euro-Dollar Loans shall instead be
Domestic Loans (on which interest and principal shall be payable
contemporaneously with the related Euro-Dollar Loans of the other Banks), and
(b) after each of its Euro-Dollar Loans to the Borrower has been repaid (or
converted to a Domestic Loan), all payments of principal which would
otherwise be applied to repay such Euro-Dollar Loans shall be applied to
repay its Domestic Loans instead.
If such Bank notifies the Borrower that the circumstances giving rise to such
notice no longer apply, the principal amount of each such Domestic Loan shall
be converted into a Euro-Dollar Loan on the first day of the next succeeding
Interest Period applicable to the related Euro-Dollar Loans of the other
Banks.
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Section 8.06. Substitution of Bank. If (i) the obligation of any Bank to
make Euro-Dollar Loans has been suspended pursuant to Section 8.02, (ii) any
Bank has demanded compensation under Section 8.03 or (iii) any Bank has not
signed an amendment or waiver which must be signed by all the Banks to become
effective, and such amendment or waiver has been signed by the Super-Majority
Banks, the Company shall have the right, with the assistance of the Agent, to
seek a mutually satisfactory substitute bank or banks (which may be one or
more of the Banks) to purchase the Notes and assume the Commitment of such
Bank.
ARTICLE 9
Guaranty
Section 9.01. The Guaranty. The Company hereby unconditionally
guarantees the full and punctual payment (whether at stated maturity, upon
acceleration or otherwise) of the principal of and interest on each Note
issued by the Borrower pursuant to this Agreement, and the full and punctual
payment of all other amounts payable by the Borrower under this Agreement.
Upon failure by the Borrower to pay punctually any such amount, the Company
shall forthwith on demand pay the amount not so paid at the place and in the
manner specified in this Agreement.
Section 9.02. Guaranty Unconditional. The obligations of the Company
hereunder shall be unconditional, irrevocable and absolute and, without
limiting the generality of the foregoing, shall not be released, discharged
or otherwise affected by:
(i) any extension, renewal, settlement, compromise, waiver or release in
respect of any obligation of the Borrower under this Agreement or any Note, by
operation of law or otherwise;
(ii) any modification or amendment of or supplement to this Agreement or
any Note;
(iii) any release, impairment, non-perfection or invalidity of any direct
or indirect security for any obligation of the Borrower under this Agreement
or any Note;
(iv) any change in the corporate existence, structure or ownership of the
Borrower, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting the Borrower or its assets or any resulting
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release or discharge of any obligation of the Borrower contained in this
Agreement or any Note;
(v) the existence of any claim, set-off or other rights which the
Company may have at any time against the Borrower, the Agent, any Bank or
any other Person, whether in connection herewith or any unrelated
transactions, provided that nothing herein shall prevent the assertion of
any such claim by separate suit or compulsory counterclaim;
(vi) any invalidity or unenforceability relating to or against the
Borrower for any reason of this Agreement or any Note, or any provision of
applicable law or regulation purporting to prohibit the payment by the
Borrower of the principal of or interest on any Note or any other amount
payable by it under this Agreement; or
(vii) any other act or omission to act or delay of any kind by the
Borrower, the Agent, any Bank or any other Person or any other circumstance
whatsoever which might, but for the provisions of this paragraph, constitute
a legal or equitable discharge of the Company's obligations hereunder.
Section 9.03. Discharge Only upon Payment in Full; Reinstatement In
Certain Circumstances. The Company's obligations hereunder shall remain in
full force and effect until the Commitments shall have terminated and the
principal of and interest on the Notes and all other amounts payable by the
Company and the Borrower under this Agreement shall have been indefeasibly
paid in full. If at any time any payment of the principal of or interest on
any Note or any other amount payable by the Borrower under this Agreement is
rescinded or must be otherwise restored or returned upon the insolvency,
bankruptcy or reorganization of the Borrower or otherwise, the Company's
obligations hereunder with respect to such payment shall be reinstated at
such time as though such payment had been due but not made at such time.
Section 9.04. Waiver by the Company. The Company irrevocably waives
acceptance hereof, presentment, demand, protest and any notice not provided
for herein, as well as any requirement that at any time any action be taken
by any Person against the Borrower or any other Person.
Section 9.05. Subrogation. The Company irrevocably waives any and all
rights to which it may be entitled, by operation of law or otherwise, upon
making any payment hereunder to be subrogated to the rights of the payee
against the Borrower with respect to such payment or against any direct or
indirect security
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therefor, or otherwise to be reimbursed, indemnified or exonerated by or for
the account of the Borrower in respect thereof.
Section 9.06. Stay of Acceleration. In the event that acceleration of
the time for payment of any amount payable by the Borrower under this
Agreement or its Notes is stayed upon insolvency, bankruptcy or
reorganization of the Borrower, all such amounts otherwise subject to
acceleration under the terms of this Agreement shall nonetheless be payable
by the Company hereunder forthwith on demand by the Agent made at the request
of the Required Banks.
ARTICLE 10
Miscellaneous
Section 10.01. Notices. All notices, requests and other communications
to any party hereunder shall be in writing (including bank wire, telex,
facsimile transmission or similar writing) and shall be given to such party:
(x) in the case of the Company, the Borrower or the Agent, at its address or
facsimile number set forth on the signature pages hereof, (y) in the case of
any Bank, at its address or facsimile number set forth in its Administrative
Questionnaire or (z) in the case of any party, such other address or
facsimile number as such party may hereafter specify for the purpose by
notice to the Agent and the Company. Each such notice, request or other
communication shall be effective (i) if given by mail, 72 hours after such
communication is deposited in the mails with first class postage prepaid,
addressed as aforesaid, (ii) if given by facsimile transmission, when such
facsimile is transmitted to the facsimile number specified pursuant to this
Section 10.01 and telephonic confirmation of receipt thereof is received, or
(iii) if given by any other means, when delivered at the address specified in
this Section; provided that notices to the Agent under Article 2 or Article 8
shall not be effective until received.
Section 10.02. No Waivers. No failure or delay by the Agent or any Bank
in exercising any right, power or privilege hereunder or under any Note shall
operate as a waiver thereof nor shall any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The rights and remedies herein provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
Section 10.03. Expenses; Indemnification. (a) The Company shall pay (i)
all out-of-pocket expenses of the Agent, including fees and disbursements of
special counsel for the Agent, in connection with the preparation and
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administration of this Agreement, any waiver or consent hereunder or any
amendment hereof or any Default or alleged Default hereunder and (ii) if an
Event of Default occurs, all out-of-pocket expenses incurred by the Agent and
each Bank, including fees and disbursements of counsel, in connection with
such Event of Default and collection, bankruptcy, insolvency and other
enforcement proceedings resulting therefrom.
(b) The Company agrees to indemnify the Agent and each Bank, their
respective affiliates and the respective directors, officers, agents and
employees of the foregoing (each an "Indemnitee") and hold each Indemnitee
harmless from and against any and all liabilities, losses, damages, costs and
expenses of any kind, including, without limitation, the reasonable fees and
disbursements of counsel, which may be incurred by such Indemnitee in
connection with any investigative, administrative or judicial proceeding
(whether or not such Indemnitee shall be designated a party thereto) brought
or threatened relating to or arising out of this Agreement or any actual or
proposed use of proceeds of Loans hereunder; provided that (i) no Indemnitee
shall have the right to be indemnified hereunder for such Indemnitee's own
gross negligence or willful misconduct as determined by a court of competent
jurisdiction and (ii) the Company shall not be liable for any settlement
entered into by an Indemnitee without its consent (which shall not be
unreasonably withheld).
(c) Each Indemnitee agrees to give the Company prompt written notice after
it receives any notice of the commencement of any action, suit or proceeding
for which such Indemnitee may wish to claim indemnification pursuant to
subsection (b). The Company shall have the right, exercisable by giving
written notice within fifteen Domestic Business Days after the receipt of
notice from such Indemnitee of such commencement, to assume, at the Company's
expense, the defense of any such action, suit or proceeding; provided, that
such Indemnitee shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such separate counsel shall be at such Indemnitee's
expense unless (1) the Company shall have agreed to pay such fees and
expenses; (2) the Company shall have failed to assume the defense of such
action, suit or proceeding or shall have failed to employ counsel reasonably
satisfactory to such Indemnitee in any such action, suit or proceeding; or
(3) such Indemnitee shall have been advised by independent counsel in writing
(with a copy to the Company) that there may be one or more defenses available
to such Indemnitee which are in conflict with those available to the Company
(in which case, if such Indemnitee notifies the Company in writing that it
elects to employ separate counsel at the Company's expense, the Company shall
be obligated to assume the expense, it being understood, however, that the
Company shall not be liable for the fees or expenses
51
<PAGE>
of more than one separate firm of attorneys, which firm shall be designated
in writing by such Indemnitee).
Section 10.04. Sharing of Set-offs. Each Bank agrees that if it shall,
by exercising any right of set-off or counterclaim or otherwise, receive
payment of a proportion of the aggregate amount of principal and interest due
with respect to any Note held by it which is greater than the proportion
received by any other Bank in respect of the aggregate amount of principal
and interest due with respect to any Note held by such other Bank, the Bank
receiving such proportionately greater payment shall purchase such
participations in the Notes held by the other Banks, and such other
adjustments shall be made, as may be required so that all such payments of
principal and interest with respect to the Notes held by the Banks shall be
shared by the Banks pro rata; provided that nothing in this Section shall
impair the right of any Bank to exercise any right of set-off or counterclaim
it may have and to apply the amount subject to such exercise to the payment
of indebtedness of the Borrower other than its indebtedness hereunder. The
Borrower agrees, to the fullest extent it may effectively do so under
applicable law, that any holder of a participation in a Note, whether or not
acquired pursuant to the foregoing arrangements, may exercise rights of
set-off or counterclaim and other rights with respect to such participation
as fully as if such holder of a participation were a direct creditor of the
Borrower in the amount of such participation.
Section 10.05. Amendments and Waivers. Any provision of this Agreement
or the Notes may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Company, the Borrower and the
Required Banks (and, if the rights or duties of the Agent are affected
thereby, by the Agent); provided that no such amendment or waiver shall,
unless signed by all the Banks, (i) increase or decrease the Commitment of
any Bank (except for a ratable decrease in the Commitments of all Banks) or
subject any Bank to any additional obligation, (ii) reduce the principal of
or rate of interest on any Loan or any fees hereunder, except as provided
below, (iii) postpone the date fixed for any payment of principal of or
interest on any Loan or any fees hereunder or for any reduction or
termination of any Commitment, (iv) amend or waive the provisions of Article
9 or (v) change the percentage of the Commitments or of the aggregate unpaid
principal amount of the Notes, or the number of Banks, which shall be
required for the Banks or any of them to take any action under this Section
or any other provision of this Agreement.
Section 10.06. Successors and Assigns. (a) The provisions of this
Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, except that neither the
Company nor the
52
<PAGE>
Borrower may assign or otherwise transfer any of its rights under this
Agreement without the prior written consent of all Banks.
(b) Any Bank may at any time grant to one or more banks or other
institutions (each a "Participant") participating interests in its Commitment
or any or all of its Loans, with (and subject to) the written consent of the
Company and the Agent, which consents shall not be unreasonably withheld. In
the event of any such grant by a Bank of a participating interest to a
Participant, such Bank shall remain responsible for the performance of its
obligations hereunder, and the Company, the Borrower and the Agent shall
continue to deal solely and directly with such Bank in connection with such
Bank's rights and obligations under this Agreement. Any agreement pursuant
to which any Bank may grant such a participating interest shall provide that
such Bank shall retain the sole right and responsibility to enforce the
obligations of the Company and the Borrower hereunder including, without
limitation, the right to approve any amendment, modification or waiver of any
provision of this Agreement; provided that such participation agreement may
provide that such Bank will not agree to any modification, amendment or
waiver of this Agreement described in clause (i), (ii) or (iii) of Section
10.05 without the consent of the Participant. The Borrower agrees that each
Participant shall, to the extent provided in its participation agreement, be
entitled to the benefits of Article 8 with respect to its participating
interest. An assignment or other transfer which is not permitted by
subsection (c) or (d) below but which is consented to in accordance with this
subsection (b) shall be given effect for purposes of this Agreement only to
the extent of a participating interest granted in accordance with this
subsection (b).
(c) Any Bank may at any time assign to one or more banks or other
institutions (each an "Assignee") all, or a proportionate part of all, of its
rights and obligations under this Agreement and the Notes, and such Assignee
shall assume such rights and obligations, pursuant to an Assignment and
Assumption Agreement in substantially the form of Exhibit G hereto executed
by such Assignee and such transferor Bank, with (and subject to) the
subscribed consent of the Company and the Agent, which consents shall not be
unreasonably withheld; provided that (i) if an Assignee is an affiliate of
such transferor Bank, no such consent shall be required; (ii) such assignment
may, but need not, include rights of the transferor Bank in respect of
outstanding Money Market Loans; and (iii) any assignment shall not be less
than $15,000,000, or if less, shall constitute an assignment of all of such
Bank's rights and obligations under this Agreement and the Notes except for
any rights retained in accordance with clause (ii) of this proviso. Upon
execution and delivery of such instrument and payment by such Assignee to
such transferor Bank of an amount equal to the purchase price agreed between
such transferor Bank and such Assignee, such Assignee shall be a Bank
53
<PAGE>
party to this Agreement and shall have all the rights and obligations of a
Bank with a Commitment as set forth in such instrument of assumption, and the
transferor Bank shall be released from its obligations hereunder to a
corresponding extent, and no further consent or action by any party shall be
required. Upon the consummation of any assignment pursuant to this
subsection (c), the transferor Bank, the Agent and the Borrower shall make
appropriate arrangements so that, if required, new Notes are issued to the
Assignee. In connection with any such assignment, the transferor Bank shall
pay to the Agent an administrative fee for processing such assignment in the
amount of $2,500. If the Assignee is not incorporated under the laws of the
United States of America or a state thereof, it shall deliver to the Company
and the Agent certification as to exemption from deduction or withholding of
any United States federal income taxes in accordance with Section 8.04.
(d) Any Bank may at any time assign all or any portion of its rights under
this Agreement and its Notes to a Federal Reserve Bank. No such assignment
shall release the transferor Bank from its obligations hereunder.
(e) No Assignee, Participant or other transferee of any Bank's rights shall
be entitled to receive any greater payment under Section 8.03 or 8.04 than
such Bank would have been entitled to receive with respect to the rights
transferred, unless such transfer is made with the Company's prior written
consent or by reason of the provisions of Section 8.02, 8.03 or 8.04
requiring such Bank to designate a different Applicable Lending Office under
certain circumstances or at a time when the circumstances giving rise to such
greater payment did not exist.
Section 10.07. Termination of Existing Credit Agreements. The Company
and each of the Banks that is also a "Bank" party to the Existing Credit
Agreements agrees that the "Commitments" as defined in the Existing Credit
Agreements shall be terminated in their entirety on the Effective Date. Each
of such Banks waives (a) any requirement of notice of such termination
pursuant to Section 2.09 of the Existing Credit Agreements and (b) any claim
to any facility fees or other fees under the Existing Credit Agreements for
any day on or after the Effective Date. Each of the Company and the Borrower
(i) represents and warrants that (x) after giving effect to the preceding
sentences of this Section 10.07, the commitments under the Existing Credit
Agreements will be terminated effective not later than the Effective Date,
(y) no loans are, as of the date hereof, or will be, as of the Effective
Date, outstanding under the Existing Credit Agreements and (ii) covenants
that all accrued and unpaid facility fees and any other amounts due and
payable under the Existing Credit Agreements shall have been paid on or prior
to the Effective Date.
54
<PAGE>
Section 10.08. Governing Law; Submission to Jurisdiction. This Agreement
and each Note shall be governed by and construed in accordance with the laws
of the State of New York. Each of the Company and the Borrower hereby
submits to the nonexclusive jurisdiction of the United States District Court
for the Southern District of New York and of any New York State court sitting
in New York City for purposes of all legal proceedings arising out of or
relating to this Agreement or the transactions contemplated hereby, and
irrevocably waives, to the fullest extent permitted by law, any objection
which it may now or hereafter have to the laying of the venue of any such
proceeding brought in such a court and any claim that any such proceeding
brought in such a court has been brought in an inconvenient forum.
Section 10.09. Counterparts; Integration; Effectiveness. This Agreement
may be signed in any number of counterparts, each of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement constitutes the entire agreement
and understanding among the parties hereto and supersedes any and all prior
agreements and understandings, oral or written, relating to the subject
matter hereof. This Agreement shall become effective upon receipt by the
Agent of counterparts hereof signed by each of the Company, the Borrower, the
Banks and the Agent (or, in the case of any party as to which an executed
counterpart shall not have been received, receipt by the Agent in form
satisfactory to it of telegraphic, telex or other written confirmation from
such party of execution of a counterpart hereof by such party).
Section 10.10. WAIVER OF JURY TRIAL. EACH OF THE COMPANY, THE BORROWER,
THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL
BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT
OR THE TRANSACTIONS CONTEMPLATED HEREBY.
Section 10.11. Confidentiality. Each of the Agent and the Banks agrees
to use its reasonable best efforts to keep confidential any information
delivered or made available by the Company or the Borrower to it which is
clearly stated by the Company or the Borrower to be confidential; provided
that nothing herein shall prevent the Agent or any Bank from disclosing such
information (i) to the Agent or any other Bank in connection with the
transactions contemplated hereby, (ii) to its officers, directors, employees,
agents, attorneys and accountants who have a need to know such information in
accordance with customary banking practices and who receive such information
having been made aware of the restrictions set forth in this Section, (iii)
upon the order of any court or administrative agency, (iv) upon the request
or demand of any regulatory agency
55
<PAGE>
or authority having jurisdiction over such party, (v) which has been publicly
disclosed, (vi) which has been obtained from any Person other than the
Company and its Subsidiaries, provided that such Person is not (x) known to
it to be bound by a confidentiality agreement with the Company or its
Subsidiaries or (y) known to it to be otherwise prohibited from transmitting
the information to it by a contractual, legal or fiduciary obligation, (vii)
in connection with the exercise of any remedy hereunder or under the Notes or
(viii) to any actual or proposed participant or assignee of all or any of its
rights hereunder which has agreed in writing to be bound by the provisions of
this Section.
56
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by their respective authorized officers as of the day and year first
above written.
U S WEST CAPITAL FUNDING, INC.
By /s/ Rahn Porter
________________________________
Title: Executive Director Treasury
Services
7800 East Orchard Road
Englewood, Colorado 80111
Facsimile number: 303-793-6307
Telephone number: 303-793-6250
Attention: Rahn Porter
U S WEST, INC.
By /s/ James T. Anderson
________________________________
Title: Vice President & Treasurer
7800 East Orchard Road
Englewood, Colorado 80111
Facsimile number: 303-793-6307
Telephone number: 303-793-6250
Attention: Rahn Porter
57
<PAGE>
Commitments
___________
$140,000,000 MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By /s/ George J. Stapleton
________________________________
Title: Vice President
$ 140,000,000 CITIBANK, N.A.
By /s/ Carolyn A. Kee
________________________________
Title: Vice President
$ 140,000,000 THE BANK OF NEW YORK
By /s/ Kaplana Raina
________________________________
Title: Senior Vice President
$ 100,000,000 ABN AMRO BANK N.V.
By /s/ James J. Johnston
________________________________
Title: Vice President
By /s/ Mary L. Honda
________________________________
Title: Vice President
58
<PAGE>
$ 37,500,000 BANK OF AMERICA NW, N.A. dba
SEAFIRST
By /s/ Barbara W. Trimble
________________________________
Title: Vice President
$ 62,500,000 BANK OF AMERICA NT & SA
By /s/ Raymond E. Evans
________________________________
Title: Senior Vice President Manager
Commercial Building
$100,000,000 BARCLAYS BANK PLC
By /s/ Les Bek
________________________________
Title: Director
$ 100,000,000 CANADIAN IMPERIAL BANK OF
COMMERCE
By /s/ Matthew S. Hannon
________________________________
Title: Director, CIBC Wood Gundy
Securities acting, as Agent
$100,000,000 THE CHASE MANHATTAN BANK
By /s/ Ann B. Kerns
________________________________
Title: Vice President
59
<PAGE>
$100,000,000 DEUTSCHE BANK AG
NEW YORK AND/OR CAYMAN
ISLANDS BRANCHES
By /s/ Ross A. Howard
________________________________
Title: Director
By /s/ J. Scott Jessup
________________________________
Title: Vice President
$100,000,000 THE FIRST NATIONAL BANK OF
BOSTON
By /s/ Shepard D. Rainie
________________________________
Title: Director
$100,000,000 MELLON BANK N.A.
By /s/ Stephen R. Viehe
________________________________
Title: Vice President
$ 100,000,000 THE SANWA BANK LIMITED,
CHICAGO BRANCH
By /s/ Kenneth C. Eichwald
________________________________
Title: First Vice President and
Assistant General Manager
60
<PAGE>
$ 100,000,000 SWISS BANK CORPORATION,
SAN FRANCISCO BRANCH
By /s/ Hans-Uoli Surber
________________________________
Title: Executive Director Merchant
Banking
By /s/ Nang S. Peechaphand
________________________________
Title: Associate Director Accounting
$ 100,000,000 TORONTO DOMINION BANK
(TEXAS), INC.
By /s/ Frederic B. Hawley
________________________________
Title: Vice President
$ 70,000,000 BANQUE NATIONALE DE PARIS
By /s/ Clive Bettles
________________________________
Title: Senior Vice President
& Manager
By /s/ Mitchell Ozawa
________________________________
Title: Vice President
$ 70,000,000 BANQUE PARIBAS
By /s/ John Acker
________________________________
Title: Group Vice President
By /s/ Darlynn Ernst
________________________________
Title: Assistant Vice President
61
<PAGE>
$ 70,000,000 CREDIT SUISSE
By /s/ Stephen M.Flynn
________________________________
Title: Member of Senior Management
By /s/ Maria N. Gaspara
________________________________
Title: Associate
$ 70,000,000 THE DAI-ICHI KANGYO BANK,
LIMITED
By /s/ Teruhisa Yamaguchi
________________________________
Title: Senior Vice President & Joint
General Manager
$ 70,000,000 THE FIRST NATIONAL BANK OF
CHICAGO
By /s/ Ronald L. Coleman
________________________________
Title: Vice President
$ 70,000,000 THE FUJI BANK LIMITED
LOS ANGELES AGENCY
By /s/ Nobuhiro Umemura
________________________________
Title: Joint General Manager
62
<PAGE>
$ 70,000,000 THE INDUSTRIAL BANK OF JAPAN,
LTD. NEW YORK BRANCH
By /s/ Akijiro Yoshino
________________________________
Title: Executive Vice President,
Houston Office
$ 70,000,000 NATIONSBANK OF TEXAS, N.A.
By /s/ David G. James
________________________________
Title: Vice President
$ 70,000,000 ROYAL BANK OF CANADA
By /s/ John P. Page
________________________________
Title: Senior Manager
$ 70,000,000 THE SAKURA BANK LIMITED
By /s/ Ofusa Sato
________________________________
Title: Senior Vice President
& Assistant General Manager
$ 70,000,000 THE SUMITOMO BANK LIMITED
LOS ANGELES BRANCH
63
<PAGE>
By /s/ Goro Hirai
________________________________
Title: Joint General Manager
$ 70,000,000 UNION BANK OF CALIFORNIA, N.A.
By /s/ Roger Hartley
________________________________
Title: Vice President
$ 70,000,000 WELLS FARGO BANK (COLORADO), N.A.
By /s/ Jack W. Haye
________________________________
Title: Vice President
$ 47,500,000 BANK OF MONTREAL
By /s/ Yvonne Bos
________________________________
Title: Senior Vice President
$ 47,500,000 CREDIT LYONNAIS
NEW YORK BRANCH
By /s/ James E. Morris
________________________________
Title: Vice President
64
<PAGE>
$ 47,500,000 DRESDNER BANK AG, NEW YORK
AND GRAND CAYMAN BRANCHES
By /s/ William E. Lambert
________________________________
Title: Assistant Vice President
By /s/ Brian Haughney
________________________________
Title: Assistant Treasurer
$ 47,500,000 BAYERISCHE HYPO-BANK AG,
NEW YORK BRANCH
By /s/ Yoram Dankner
________________________________
Title: Senior Vice President
By /s/ Christian F. Walter
________________________________
Title: Vice President
$ 47,500,000 KREDIETBANK N.A.
By /s/ Tod R. Angus
________________________________
Title: Vice President
By /s/ Robert Snauffer
________________________________
Title: Vice President
$ 47,500,000 LLOYDS BANK PLC
65
<PAGE>
By /s/ Paul Briamonte
________________________________
Title: Vice President B374
By /s/ Theodore R. Walser
_________________________________
Title: Senior Vice President W075
$ 47,500,000 THE LONG-TERM CREDIT BANK OF
JAPAN, LTD.
LOS ANGELES AGENCY
By /s/ T. Morgan Edwards II
________________________________
Title: Deputy General Manager
$ 47,500,000 THE MITSUBISHI TRUST AND
BANKING CORPORATION
By /s/ Patricia Loret de Mola
________________________________
Title: Senior Vice President
& Assistant General Manager
$ 47,500,000 THE ROYAL BANK OF SCOTLAND plc
By /s/ Grant F. Stoddart
________________________________
Title: Senior Vice President
& Manager
66
<PAGE>
$ 47,500,000 SOCIETE GENERALE
SOUTHWEST AGENCY
By /s/ Mark A. Cox
________________________________
Title: Vice President
$ 47,500,000 THE TOKAI BANK, LIMITED
LOS ANGELES AGENCY
By /s/ Masahiko Saito
________________________________
Title: Assistant General Manager
Corporate Finance
$ 47,500,000 WESTDEUTSCHE LANDESBANK
NEW YORK BRANCH
By /s/ Salvatore Battinelli
________________________________
Title: Vice President
By /s/ Karen Hoplock
________________________________
Title: Vice President Credit
Total Commitments:
$3,000,000,000
============
67
<PAGE>
CITIBANK, N.A., as Syndication Agent
By /s/ Carolyn A. Kee
________________________________
Title: As-Attorney-in-Fact
THE BANK OF NEW YORK, as
Documentation Agent
By /s/ Kalpana Raina
________________________________
Title: Senior Vice President
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Administrative Agent
By /s/ George J. Stapleton
________________________________
Title: Vice President
Address
Attention: Mark Connor
Facsimile number: 302-634-1092
Telephone number: 302-634-4218
<PAGE>
PRICING SCHEDULE
The "Euro-Dollar Margin" and "Facility Fee Rate" for any day are the
respective percentages set forth below in the applicable row under the column
corresponding to the Status that exists on such day:
- --------------------------------------------------------------------------------
Status Level I Level II Level III Level IV Level V
- --------------------------------------------------------------------------------
Euro-Dollar Margin .130% .150% .165% .240% .295%
- --------------------------------------------------------------------------------
Facility Fee Rate .070% .075% .085% .110% .155%
- --------------------------------------------------------------------------------
For purposes of this Schedule, the following terms have the following
meanings:
"Level I Status" exists at any date if, at such date, the Borrower's
outstanding senior unsecured long-term debt securities are rated A or higher
by S&P or A2 or higher by Moody's.
"Level II Status" exists at any date if, at such date, (i) the Borrower's
outstanding senior unsecured long-term debt securities are rated A- or higher
by S&P or A3 or higher by Moody's and (ii) Level I Status does not exist.
"Level III Status" exists at any date if, at such date, (i) the
Borrower's outstanding senior unsecured long-term debt securities are rated
BBB+ or higher by S&P or Baa1 or higher by Moody's and (ii) neither Level I
Status nor Level II Status exists.
"Level IV Status" exists at any date if, at such date, (i) the Borrower's
outstanding senior unsecured long-term debt securities are rated BBB or
higher by S&P or Baa2 or higher by Moody's and none of Level I Status, Level
II Status or Level III Status exists.
"Level V Status" exists at any date if, at such date, none of Level I
Status, Level II Status, Level III Status or Level IV Status exists.
<PAGE>
"Moody's" means Moody's Investors Service, Inc., a Delaware corporation,
and its successors or, if such corporation shall be dissolved or liquidated
or shall no longer perform the functions of a securities rating agency,
"Moody's" shall be deemed to refer to any other nationally recognized
securities rating agency designated by the Required Banks, with the approval
of the Company, by notice to the Agent and the Company.
"S&P" means Standard & Poor's Ratings Group, a New York corporation, and
its successors or, if such corporation shall be dissolved or liquidated or
shall no longer perform the functions of a securities rating agency, "S&P"
shall be deemed to refer to any other nationally recognized securities rating
agency designated by the Required Banks, with the approval of the Company, by
notice to the Agent and the Company.
"Status" refers to the determination of which of Level I Status, Level II
Status, Level III Status, Level IV Status or Level V Status exists at any
date.
The credit ratings to be utilized for purposes of this Schedule are those
assigned to the senior unsecured long-term debt securities of the Borrower
without third-party credit enhancement, and any rating assigned to any other
debt security of the Borrower shall be disregarded. The rating in effect at
any date is that in effect at the close of business on such date.
2
<PAGE>
SCHEDULE 4.07
Environmental Matters
NONE.
<PAGE>
EXHIBIT A
NOTE
New York, New York
,19
For value received, U S WEST CAPITAL FUNDING, INC., a Colorado
corporation (the "Borrower"), promises to pay to the order of (the "Bank"),
for the account of its Applicable Lending Office, the unpaid principal amount
of each Loan made by the Bank to the Borrower pursuant to the Credit
Agreement referred to below on the maturity date therefor specified in the
Credit Agreement. The Borrower promises to pay interest on the unpaid
principal amount of each such Loan on the dates and at the rate or rates
provided for in the Credit Agreement. All such payments of principal and
interest shall be made in lawful money of the United States in Federal or
other immediately available funds at the office of Morgan Guaranty Trust
Company of New York, 60 Wall Street, New York, New York.
All Loans made by the Bank, the respective types and maturities thereof
and all repayments of the principal thereof shall be recorded by the Bank
and, if the Bank so elects in connection with any transfer or enforcement
hereof, appropriate notations to evidence the foregoing information with
respect to each such Loan then outstanding may be endorsed by the Bank on the
schedule attached hereto, or on a continuation of such schedule attached to
and made a part hereof; provided that the inaccuracy of, or the failure of
the Bank to make, any such recordation or endorsement shall not affect the
obligations of the Borrower hereunder or under the Credit Agreement.
This note is one of the Notes referred to in the $3,000,000,000 Five-Year
Credit Agreement dated as of November 1, 1996 among U S WEST Capital
Funding, Inc., U S WEST, Inc., the banks listed on the signature pages
thereof, the other agents named therein and Morgan Guaranty Trust Company of
New York, as Administrative Agent (as the same may be amended from time to
time, the "Credit Agreement"). Terms defined in the Credit Agreement are
used herein with the same meanings.
Reference is made to the Credit Agreement for provisions for the
prepayment hereof and the acceleration of the maturity hereof.
<PAGE>
U S WEST, Inc., has, pursuant to the provisions of the Credit Agreement,
unconditionally guaranteed the payment in full of the principal of and
interest on this Note.
U S WEST CAPITAL FUNDING, INC.
By_____________________________
Title:
2
<PAGE>
LOANS AND PAYMENTS OF PRINCIPAL
________________________________________________________________________________
Date Amount of
Amount of Principal Notation Made
Loan Type of Loan Repaid Maturity Date By
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
3
<PAGE>
EXHIBIT B
Form of Money Market Quote Request
[Date]
To: Morgan Guaranty Trust Company of New York
(the "Agent")
From: U S WEST Capital Funding, Inc.
Re: $3,000,000,000 Five-Year Credit Agreement (the "Credit Agreement") dated
as of November 1, 1996 among U S WEST Capital Funding, Inc., U S WEST,
Inc., the Banks listed on the signature pages thereof, the other agents
named therein and the Agent
We hereby give notice pursuant to Section 2.03 of the Credit Agreement
that we request Money Market Quotes for the following proposed Money Market
Borrowing(s):
Date of Borrowing: __________________
Principal Amount** Interest Period***
- ------------------ ------------------
$
Such Money Market Quotes should offer a Money Market [Margin]
[Absolute Rate].
[The applicable base rate is the London Interbank Offered Rate.]Terms used
herein have the meanings assigned to them in the Credit Agreement.
- ----------------
** Amount must be $25,000,000 or a larger multiple of $5,000,000.
*** Not less than one month (LIBOR Auction) or not less than 7 days (Absolute
Rate Auction), subject to the provisions of the definition of Interest
Period.
<PAGE>
Terms used herein have the meanings assigned to them in the Credit Agreement.
U S WEST CAPITAL FUNDING, INC.
By________________________
Title:
2
<PAGE>
EXHIBIT C
Form of Invitation for Money Market Quotes
To: [Name of Bank]
Re: Invitation for Money Market Quotes to U S WEST Capital
Funding, Inc. (the "Borrower")
Pursuant to Section 2.03 of the $3,000,000,000 Five-Year Credit Agreement
dated as of November 1, 1996 among U S WEST Capital Funding, Inc., U S WEST,
Inc., the Banks parties thereto, the other agents named therein and the
undersigned, as Administrative Agent, we are pleased on behalf of the
Borrower to invite you to submit Money Market Quotes to the Borrower for the
following proposed Money Market Borrowing(s):
Date of Borrowing: __________________
Principal Amount Interest Period
$
Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate].
[The applicable base rate is the London Interbank Offered Rate.]
Please respond to this invitation by no later than [10:30 A.M.] [9:15 A.M.]
(New York City time) on [date].
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Administrative Agent
By______________________________
Authorized Officer
<PAGE>
EXHIBIT D
Form of Money Market Quote
To: Morgan Guaranty Trust Company of New York,
as Administrative Agent (the "Agent")
Re: Money Market Quote to
U S WEST Capital Funding, Inc. (the "Borrower")
In response to your invitation on behalf of the Borrower dated _____________,
19__, we hereby make the following Money Market Quote on the following terms:
1. Quoting Bank: ________________________________
2. Person to contact at Quoting Bank: _____________________________
3. Date of Borrowing: ____________________*
4. We hereby offer to make Money Market Loan(s) in the following principal
amounts, for the following Interest Periods and at the following rates:
Principal Interest Money Market
Amount** Period*** [Margin****] [Absolute Rate*****]
- --------- --------- ------------ --------------------
$
$
[Provided, that the aggregate principal amount of Money Market Loans for which
the above offers may be accepted shall not exceed $____________.]**
__________
* As specified in the related Invitation.
(notes continued on following page)
<PAGE>
We understand and agree that the offer(s) set forth above, subject to the
satisfaction of the applicable conditions set forth in the $3,000,000,000
Five-Year Credit Agreement dated as of November 1, 1996 among U S WEST
Capital Funding, Inc., U S WEST, Inc., the Banks listed on the signature
pages thereof, the other agents named therein and yourselves, as Agent,
irrevocably obligates us to make the Money Market Loan(s) for which any
offer(s) are accepted, in whole or in part.
Very truly yours,
[NAME OF BANK]
Dated:_______________ By:__________________________
Authorized Officer
__________
** Principal amount bid for each Interest Period may not exceed principal
amount requested. Specify aggregate limitation if the sum of the individual
offers exceeds the amount the Bank is willing to lend. Bids must be made for
$5,000,000 or a larger multiple of $1,000,000.
*** Not less than one month or not less than 7 days, as specified in the
related Invitation. No more than five bids are permitted for each Interest
Period.
**** Margin over or under the London Interbank Offered Rate determined for
the applicable Interest Period. Specify percentage (to the nearest 1/10,000
of 1%) and specify whether "PLUS" or "MINUS".
***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%).
2
<PAGE>
EXHIBIT E
OPINION OF
COUNSEL FOR THE COMPANY AND THE BORROWER
To the Banks and the Administrative
Agent Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Gentlemen and Ladies:
I have acted as counsel for U S WEST, Inc. and U S WEST Capital Funding,
Inc., in connection with the $3,000,000,000 Five-Year Credit Agreement (the
"Credit Agreement") dated as of November 1, 1996, among them, the banks
listed on the signature pages thereof, the other agents named therein and
Morgan Guaranty Trust Company of New York, as Administrative Agent. Terms
defined in the Credit Agreement are used herein as therein defined. This
opinion is being rendered to you at the instruction of the client pursuant to
Section 3.01(b) of the Credit Agreement.
I am familiar with the proceedings taken by the Company and the Borrower in
connection with the authorization, execution and delivery of the Credit
Agreement and the Notes, and I have examined such documents, certificates,
and such other matters of fact and questions of law as I have deemed relevant
under the circumstances to express an informed opinion. Upon the basis of
the foregoing, I am of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware, and has all corporate
powers and all governmental licenses, authorizations, qualifications,
consents and approvals required to carry on its business as now conducted,
except where the absence of any such license, authorization, qualification,
consent or approval would not have a material adverse effect on the
consolidated financial position or consolidated results of operations of the
Company and its Consolidated Subsidiaries considered as one enterprise.
<PAGE>
2. The execution, delivery and performance by the Company and the Borrower
of the Credit Agreement and by the Borrower of the Notes are within such
Person's corporate powers, have been duly authorized by all necessary
corporate action, and require no action by or in respect of, or filing with,
any governmental body, agency or official.
3. The execution, delivery and performance by the Company and the Borrower
of the Credit Agreement and by the Borrower of the Notes will not (i) result
in a breach or violation of, conflict with, or constitute a default under,
the articles of incorporation or bylaws of such Person or any material law or
regulation or any material order, judgment, agreement or instrument to which
such Person is a party or by which such Person is bound, or (ii) result in
the creation or imposition of any Lien on any asset of such Person.
4. The Credit Agreement constitutes a valid and binding agreement of the
Company and the Borrower and the Notes constitute valid and binding
obligations of the Borrower.
5. To my knowledge, there is no action, suit or proceeding pending against
or threatened against or affecting the Company or any of its Subsidiaries
before any court or arbitrator or any governmental body, agency or official,
in which there is a reasonable possibility of an adverse decision which could
materially adversely affect the business, consolidated financial position or
consolidated results of operations of the Company and its Consolidated
Subsidiaries, considered as a whole, or which in any manner draws into
question the validity of the Credit Agreement or the Notes.
6. The Borrower and each of the Company's other corporate Significant
Subsidiaries is a corporation validly existing and in good standing under the
laws of their jurisdictions of incorporation, and have all corporate powers
and all governmental licenses, authorizations, qualifications, consents and
approvals required to carry on its business as now conducted, except where
the absence of any such license, authorization, qualification, consent or
approval would not have a material adverse effect on the consolidated
financial position or consolidated results of operations of the Company and
its Consolidated Subsidiaries considered as one enterprise.
For purposes of my opinion set forth in numbered paragraph 4 above, I have
assumed that the laws of the State of New York, which are stated to govern
the Credit Agreement and the Notes, are the same as the laws of Colorado.
2
<PAGE>
In rendering the opinions set forth herein, I have assumed that the Credit
Agreement and the Notes will conform to the specimens thereof examined by me,
that the signatures on all documents examined by me were genuine, and the
authenticity of all documents submitted to me as originals or as copies of
originals, assumptions which I have not independently verified.
This opinion is furnished by me as counsel for the Company and the Borrower
and is solely for your benefit and the benefit of any Assignee under the
Credit Agreement. Without my prior written consent, this opinion may not be
relied upon by you or any Assignee in any other context or by any other
person. This opinion may not be quoted, in whole or in part, or copies
thereof furnished, to any other person without my prior written consent,
except that you may furnish copies hereof (a) to your auditors and attorneys,
(b) to any state or federal authority having regulatory jurisdiction over you
or the Company or the Borrower, (c) pursuant to order or legal process of any
court or governmental agency, (d) in connection with any legal action to
which you are a party arising out of the transactions contemplated by the
Credit Agreement, and (e) to any Participant or proposed Participant in the
Commitment of any Bank.
This opinion is limited to the present laws of the State of Colorado and
the General Corporation Law of the State of Delaware, to present judicial
interpretations thereof, and to the facts as they presently exist, and I
assume no responsibility as to the applicability or effect of the laws of any
other jurisdiction. In rendering this opinion, I assume no obligation to
revise or supplement this opinion should the present laws of the State of
Colorado or the General Corporation Law of the State of Delaware be changed
by legislative action, judicial decision, or otherwise.
Very truly yours,
Stephen E. Brilz
3
<PAGE>
EXHIBIT F
OPINION OF
DAVIS POLK & WARDWELL, SPECIAL COUNSEL
FOR THE ADMINISTRATIVE AGENT
To the Banks and the Administrative Agent
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Administrative Agent
60 Wall Street
New York, New York 10260
Dear Sirs:
We have participated in the preparation of the $3,000,000,000 Five-Year
Credit Agreement (the "Credit Agreement") dated as of November 1, 1996 among
U S WEST Capital Funding, Inc., U S WEST, Inc., the banks listed on the
signature pages thereof (the "Banks"), the other agents named therein and
Morgan Guaranty Trust Company of New York, as Administrative Agent (the
"Agent"), and have acted as special counsel for the Agent for the purpose of
rendering this opinion pursuant to Section 3.01(c) of the Credit Agreement.
Terms defined in the Credit Agreement are used herein as therein defined.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records, certificates of
public officials and other instruments and have conducted such other
investigations of fact and law as we have deemed necessary or advisable for
purposes of this opinion.
Upon the basis of the foregoing, we are of the opinion that, assuming that
the execution, delivery and performance by the Company and the Borrower of
the Credit Agreement and by the Borrower of the Notes are within such
Person's corporate powers and have been duly authorized by all necessary
corporate action, the Credit Agreement constitutes a valid and binding
agreement of the Company and the Borrower and the Notes constitute valid and
binding obligations of the Borrower.
<PAGE>
We are members of the Bar of the State of New York and the foregoing
opinion is limited to the laws of the State of New York. In giving the
foregoing opinion, we express no opinion as to the effect (if any) of any law
of any jurisdiction (except the State of New York) in which any Bank is
located which limits the rate of interest that such Bank may charge or
collect.
This opinion is rendered solely to you in connection with the above matter.
This opinion may not be relied upon by you for any other purpose or relied
upon by or furnished to any other person without our prior written consent.
Very truly yours,
2
<PAGE>
EXHIBIT G
ASSIGNMENT AND ASSUMPTION AGREEMENT
AGREEMENT dated as of _________, 19__ among [ASSIGNOR] (the "Assignor"),
[ASSIGNEE](the "Assignee"), U S WEST, Inc. (the "Company") and MORGAN
GUARANTY TRUST COMPANY OF NEW YORK, as Administrative Agent (the "Agent").
W I T N E S S E T H
WHEREAS, this Assignment and Assumption Agreement (the "Agreement")
relates to the $3,000,000,000 Five-Year Credit Agreement dated as of November
1, 1996 among the Company, the Borrower named therein, the Assignor and the
other Banks party thereto, as Banks, the other agents named therein and the
Agent (the "Credit Agreement");
WHEREAS, as provided under the Credit Agreement, the Assignor has a
Commitment to make Loans in an aggregate principal amount at any time
outstanding not to exceed $__________;
WHEREAS, Committed Loans made by the Assignor under the Credit Agreement
in the aggregate principal amount of $__________ are outstanding at the date
hereof; and
WHEREAS, the Assignor proposes to assign to the Assignee all of the
rights of the Assignor under the Credit Agreement in respect of a portion of
its Commitment thereunder in an amount equal to $__________ (the "Assigned
Amount"), together with a corresponding portion of its outstanding Committed
Loans, and the Assignee proposes to accept assignment of such rights and
assume the corresponding obligations from the Assignor on such terms;
NOW, THEREFORE, in consideration of the foregoing and the mutual
agreements contained herein, the parties hereto agree as follows:
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein shall have the respective meanings set forth in the Credit Agreement.
<PAGE>
SECTION 2. Assignment. The Assignor hereby assigns and sells to the
Assignee all of the rights of the Assignor under the Credit Agreement to the
extent of the Assigned Amount, and the Assignee hereby accepts such
assignment from the Assignor and assumes all of the obligations of the
Assignor under the Credit Agreement to the extent of the Assigned Amount,
including the purchase from the Assignor of the corresponding portion of the
principal amount of the Committed Loans made by the Assignor outstanding at
the date hereof. Upon the execution and delivery hereof by the Assignor, the
Assignee, the Company and the Agent and the payment of the amounts specified
in Section 3 required to be paid on the date hereof (i) the Assignee shall,
as of the date hereof, succeed to the rights and be obligated to perform the
obligations of a Bank under the Credit Agreement with a Commitment in an
amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor
shall, as of the date hereof, be reduced by a like amount and the Assignor
released from its obligations under the Credit Agreement to the extent such
obligations have been assumed by the Assignee. The assignment provided for
herein shall be without recourse to the Assignor.
SECTION 3. Payments. As consideration for the assignment and sale
contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on
the date hereof in Federal funds the amount heretofore agreed between them.
**** It is understood that commitment and/or facility fees accrued to the
date hereof are for the account of the Assignor and such fees accruing from
and including the date hereof are for the account of the Assignee. Each of
the Assignor and the Assignee hereby agrees to that if it receives any amount
under the Credit Agreement which is for the account of the other party
hereto, it shall receive the same for the account of such other party to the
extent of such other party's interest therein and shall promptly pay the same
to such other party.
[SECTION 4. Consent of the Company and the Agent. This Agreement is
conditioned upon the consent of the Company and the Agent pursuant to Section
10.06(c) of the Credit Agreement. The execution of this Agreement by the
Company and the Agent is evidence of this consent. Pursuant to Section
10.06(c) the Company agrees to cause the Borrower to execute and deliver
a Note payable to the order of the Assignee to evidence the assignment and
assumption provided for herein.]
- -----------------------
**** Amount should combine principal together with accrued interest and
breakage compensation, if any, to be paid by the Assignee, net of any
portion of any upfront fee to be paid by the Assignor to the Assignee.
It may be preferable in an appropriate case to specify these amounts
generically or by formula rather than as a fixed sum.
2
<PAGE>
SECTION 5. Non-Reliance on Assignor. The Assignor makes no
representation or warranty in connection with, and shall have no
responsibility with respect to, the solvency, financial condition, or
statements of the Company or the Borrower, or the validity and enforceability
of the obligations of the Company or the Borrower in respect of the Credit
Agreement or any Note. The Assignee acknowledges that it has, independently
and without reliance on the Assignor, and based on such documents and
information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and will continue to be responsible for
making its own independent appraisal of the business, affairs and financial
condition of the Company and the Borrower.
SECTION 6. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
and delivered by their duly authorized officers as of the date first above
written.
[ASSIGNOR]
By______________________________
Title:
3
<PAGE>
[ASSIGNEE]
By______________________________
Title:
[U S WEST, INC.
By_______________________________
Title:
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK, as
Administrative Agent
By______________________________
Title:]
4
<PAGE>
EXHIBIT H
EXTENSION AGREEMENT
US WEST Capital Funding, Inc.
US WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Morgan Guaranty Trust Company of
New York, as Administrative Agent
under the Credit Agreement referred
to below
60 Wall Street
New York, NY 10260
Gentlemen:
The undersigned hereby agree to extend the Revolving Credit Period under
the Five-Year Credit Agreement dated as of November 1, 1996 among US WEST
Capital Funding, Inc., US WEST, Inc., the Banks listed therein, the other
agents named therein and Morgan Guaranty Trust Company of New York, as
Administrative Agent (the "Credit Agreement") for 364 days to ____________
__, ____. Terms defined in the Credit Agreement are used herein as therein
defined.
This Extension Agreement shall be construed in accordance with and governed
by the law of the State of New York. It may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if
the signatures thereto and hereto were upon the same instrument.
[NAME OF BANK] *****
By
----------------------------
- -----------------
***** Insert names of Banks which have responded
affirmatively in accordance with Section 2.01(b) of the Credit Agreement.
<PAGE>
Title:
[NAME OF BANK]******
By__________________________
Title:
[NAME OF BANK]*
By__________________________
Title:
[NAME OF BANK]*
By__________________________
Title:
[NAME OF BANK]*
By__________________________
Title:
[NAME OF BANK]*
By__________________________
Title:
- -------------
******Insert names of Banks which have responded affirmatively in accordance
with Section 2.01(b) of the Credit Agreement.
2
<PAGE>
Agreed and accepted:
US WEST CAPITAL FUNDING, INC.
By__________________________
Title
US WEST, INC.
By__________________________
Title
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK, as Administrative Agent
By__________________________
Title
3
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1996 1995*
---------- ----------
EARNINGS PER COMMON SHARE (1)
Income before extraordinary item.................. $ 311,382 $ 284,242
Extraordinary item:
Early extinguishment of debt--net of tax.......... -- (3,079)
---------- ----------
Net income for per share calculation.............. $ 311,382 $ 281,163
---------- ----------
---------- ----------
Weighted average common shares outstanding........ 479,947 472,614
---------- ----------
---------- ----------
Income before extraordinary item.................. $ 0.65 $ 0.60
Extraordinary item: Early extinguishment
of debt--net of tax............................. -- (0.01)
---------- ----------
Earnings per common share......................... $ 0.65 $ 0.59
---------- ----------
---------- ----------
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
1
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995*
------------ ------------
EARNINGS PER COMMON SHARE (1)
Income before extraordinary item and
cumulative effect of change
in accounting principle......................... $ 1,215,365 $ 1,184,138
Extraordinary item:
Early extinguishment of debt--net of tax.......... -- (7,988)
Cumulative effect of change in
accounting principle--net of tax................ 34,158 --
------------ ------------
Net income for per share calculation.............. $ 1,249,523 $ 1,176,150
------------ ------------
------------ ------------
Weighted average common shares outstanding........ 477,549 470,716
------------ ------------
------------ ------------
Income before extraordinary item and
cumulative effect of change
in accounting principle......................... $ 2.55 $ 2.52
Extraordinary item:
Early extinguishment of debt--net of tax........ -- (0.02)
Cumulative effect of change in
accounting principle--net of tax................ 0.07 --
------------ ------------
Earnings per common share......................... $ 2.62 $ 2.50
------------ ------------
------------ ------------
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
2
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1996 1995*
---------- ----------
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE: (1)
Income before extraordinary item................... $ 311,382 $ 284,242
Extraordinary item:
Early extinguishment of debt--net of tax......... -- (3,079)
---------- ----------
Net income for per share calculation............... $ 311,382 $ 281,163
---------- ----------
---------- ----------
Weighted average common shares outstanding......... 479,947 472,614
Incremental shares from assumed exercise
of stock options................................ 1,378 1,702
---------- ----------
Total common shares........................... 481,325 474,316
---------- ----------
---------- ----------
Income before extraordinary item................... $ 0.65 $ 0.60
Extraordinary item:
Early extinguishment of debt--net of tax......... -- (0.01)
---------- ----------
Earnings per common and common equivalent share.... $ 0.65 $ 0.59
---------- ----------
---------- ----------
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
3
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995*
------------ ------------
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE: (1)
Income before extraordinary item and
cumulative effect of change
in accounting principle......................... $ 1,215,365 $ 1,184,138
Extraordinary item:
Early extinguishment of debt--net of tax......... -- (7,988)
Cumulative effect of change in
accounting principle--net of tax................. 34,158 --
------------ ------------
Net income for per share calculation.............. $ 1,249,523 $ 1,176,150
------------ ------------
------------ ------------
Weighted average common shares outstanding........ 477,549 470,716
Incremental shares from assumed exercise
of stock options................................ 1,556 1,459
------------ ------------
Total common shares............................... 479,105 472,175
------------ ------------
------------ ------------
Income before extraordinary item
and cumulative effect of change
in accounting principle......................... $ 2.54 $ 2.51
Extraordinary item:
Early extinguishment of debt--net of tax........ -- (0.02)
Cumulative effect of change in
accounting principle--net of tax................ 0.07 --
------------ ------------
Earnings per common and common equivalent share... $ 2.61 $ 2.49
------------ ------------
------------ ------------
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
4
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
THREE MONTHS ENDED
DECEMBER 31,
----------------------
1996 1995*
---------- ----------
EARNINGS PER COMMON SHARE--ASSUMING
FULL DILUTION: (1)
Income before extraordinary item..................... $ 311,382 $ 284,242
Interest on Convertible Liquid Yield
Option Notes (LYONS)............................... 3,356 3,220
---------- ----------
Adjusted income before extraordinary item............ 314,738 287,462
Extraordinary item: Early extinguishment
of debt--net of tax................................ -- (3,079)
---------- ----------
Adjusted net income for per share calculation........ $ 314,738 $ 284,383
---------- ----------
---------- ----------
Weighted average common shares outstanding........... 479,947 472,614
Incremental shares from assumed exercise
of stock options................................... 1,583 2,188
Shares issued upon conversion of LYONS............... 9,386 9,634
---------- ----------
Total common shares.................................. 490,916 484,436
---------- ----------
---------- ----------
Adjusted income before extraordinary item............ $ 0.64 $ 0.59
Extraordinary item:
Early extinguishment of debt--net of tax........... -- (0.01)
---------- ----------
Earnings per common share -assuming full dilution.... $ 0.64 $ 0.58
---------- ----------
---------- ----------
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
5
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1995*
------------ ------------
EARNINGS PER COMMON SHARE--ASSUMING
FULL DILUTION: (1)
Income before extraordinary item.................................. $ 1,215,365 $ 1,184,138
Interest on Convertible Liquid Yield
Option Notes (LYONS)............................................ 12,854 12,366
------------ ------------
Adjusted income before extraordinary item
and cumulative effect of
change in accounting principle.................................. 1,228,219 1,196,504
Extraordinary item:
Early extinguishment of debt--net of tax........................ -- (7,988)
Cumulative effect of change in
accounting principle--net of tax................................ 34,158 --
------------ ------------
Adjusted net income for per share calculation..................... $ 1,262,377 $ 1,188,516
------------ ------------
------------ ------------
Weighted average common shares outstanding........................ 477,549 470,716
Incremental shares from assumed
exercise of stock options....................................... 1,594 1,780
Shares issued upon conversion of LYONS............................ 9,506 9,758
------------ ------------
Total common shares.......................................... 488,649 482,254
------------ ------------
------------ ------------
Adjusted income before extraordinary item
and cumulative effect of change in
accounting principle............................................ $ 2.51 $ 2.48
Extraordinary item:
Early extinguishment of debt--net of tax........................ -- (0.02)
Cumulative effect of change in
accounting principle--net of tax................................ 0.07 --
------------ ------------
Earnings per common share -
assuming full dilution.......................................... $ 2.58 $ 2.46
------------ ------------
------------ ------------
</TABLE>
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
6
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1996 1995*
---------- ---------
EARNINGS PER COMMON SHARE (1)
Income before extraordinary item....................................... ($ 81,385) $ 72,025
Extraordinary item:
Early extinguishment of debt--net of tax............................. -- (1)
---------- ---------
Net income............................................................. (81,385) 72,024
Less preferred dividends............................................... 6,744 854
---------- ---------
Earnings available for common
share calculation.................................................... ($ 88,129) $ 71,170
---------- ---------
---------- ---------
Weighted average common shares outstanding............................. 546,792 471,953
---------- ---------
---------- ---------
Income before extraordinary item....................................... ($ 0.16) $ 0.15
Extraordinary item:
Early extinguishment of debt--net of tax............................. -- --
---------- ---------
Earnings per common share.............................................. ($ 0.16) $ 0.15
---------- ---------
---------- ---------
</TABLE>
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
1
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995*
---------- ----------
EARNINGS PER COMMON SHARE (1)
Income before extraordinary item...................................... ($ 70,929) $ 144,570
Extraordinary item:
Early extinguishment of debt--net of tax............................ -- (3,742)
---------- ----------
Net income............................................................ (70,929) 140,828
Less preferred dividends.............................................. 9,307 3,390
---------- ----------
Earnings available for common share calculation....................... (80,236) 137,438
---------- ----------
---------- ----------
Weighted average common shares outstanding............................ 491,924 470,549
---------- ----------
---------- ----------
Income before extraordinary item...................................... ($ 0.16) $ 0.30
Extraordinary item:
Early extinguishment of debt--net of tax............................ -- (0.01)
---------- ----------
Earnings per common share............................................. ($ 0.16) $ 0.29
---------- ----------
---------- ----------
</TABLE>
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
2
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1996 1995*
---------- ---------
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: (1)
Income before extraordinary item....................................... ($ 81,385) $ 72,025
Extraordinary item:
Early extinguishment of debt--net of tax............................. -- (1)
---------- ---------
Net income............................................................. (81,385) 72,024
Less preferred dividends............................................... 6,744 854
---------- ---------
Earnings available for common
share calculation.................................................... ($ 88,129) $ 71,170
---------- ---------
---------- ---------
Weighted average common shares outstanding............................. 546,792 471,953
Incremental shares from assumed
exercise of stock options............................................ 999 1,102
---------- ---------
Total common shares.............................................. 547,791 473,055
---------- ---------
---------- ---------
Income before extraordinary item....................................... ($ 0.16) $ 0.15
Extraordinary item:
Early extinguishment of debt--net of tax............................. -- --
---------- ---------
Earnings per common and common
equivalent share..................................................... ($ 0.16) $ 0.15
---------- ---------
---------- ---------
</TABLE>
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
3
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995*
---------- ----------
EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE: (1)
Income before extraordinary item...................................... ($ 70,929) $ 144,570
Extraordinary item:
Early extinguishment of debt--net of tax............................ -- (3,742)
---------- ----------
Net income............................................................ (70,929) 140,828
Less preferred dividends.............................................. 9,307 3,390
---------- ----------
Earnings available for common
share calculation................................................... ($ 80,236) $ 137,438
---------- ----------
---------- ----------
Weighted average common shares outstanding............................ 491,924 470,549
Incremental shares from assumed
exercise of stock options........................................... 1,149 1,063
---------- ----------
Total common shares.............................................. 493,073 471,612
---------- ----------
---------- ----------
Income before extraordinary item...................................... ($ 0.16) $ 0.30
Extraordinary item:
Early extinguishment of debt--net of tax............................ -- (0.01)
---------- ----------
Earnings per common and common
equivalent share.................................................... ($ 0.16) $ 0.29
---------- ----------
---------- ----------
</TABLE>
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
4
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1996 1995*
---------- ---------
EARNINGS PER COMMON SHARE--ASSUMING
FULL DILUTION: (1) (2)
Income before extraordinary item....................................... ($ 81,385) $ 72,025
Interest on Convertible Liquid Yield
Option Notes (LYONS)................................................. -- 2,351
---------- ---------
Adjusted income before extraordinary
item................................................................. ($ 81,385) 74,376
Extraordinary item:
Early extinguishment of debt--net of tax............................. -- (1)
---------- ---------
Adjusted net income.................................................... ($ 81,385) $ 74,375
Less preferred dividends............................................... 6,744 854
---------- ---------
Earnings available for common
share calculation.................................................... ($ 88,129) $ 73,521
---------- ---------
---------- ---------
Weighted average common shares outstanding............................. 546,792 471,953
Incremental shares from assumed
exercise of stock options............................................ 1,150 1,221
Shares issued upon conversion of LYONS................................. -- 9,634
---------- ---------
Total common shares............................................... 547,942 482,808
---------- ---------
---------- ---------
Income before extraordinary item....................................... ($ 0.16) $ 0.15
Extraordinary item:
Early extinguishment of debt--net of tax............................. -- --
---------- ---------
Earnings per common share--assuming
full dilution........................................................ ($ 0.16) $ 0.15
---------- ---------
---------- ---------
</TABLE>
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
(2) The effects of converting the Liquid Yield Option Notes (LYONS) are excluded
from the fully diluted earnings per common share calculation due to their
anti-dilutive effect.
5
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995*
---------- ----------
EARNINGS PER COMMON SHARE--ASSUMING
FULL DILUTION: (1) (2)
Income before extraordinary item.......................................................... ($ 70,929) $ 144,570
Interest on Convertible Liquid Yield
Option Notes (LYONS).................................................................... -- --
---------- ----------
Adjusted income before extraordinary
item.................................................................................... (70,929) 144,570
Extraordinary item:
Early extinguishment of debt--net of tax................................................ -- (3,742)
---------- ----------
Adjusted net income....................................................................... ($ 70,929) $ 140,828
Less preferred dividends.................................................................. 9,307 3,390
---------- ----------
Earnings available for common
share calculation....................................................................... ($ 80,236) $ 137,438
---------- ----------
---------- ----------
Weighted average common shares outstanding................................................ 491,924 470,549
Incremental shares from assumed
exercise of stock options............................................................... 1,149 1,127
Shares issued upon conversion of LYONS -- --
---------- ----------
Total common shares.................................................................. 493,073 471,676
---------- ----------
---------- ----------
Income before extraordinary item.......................................................... ($ 0.16) $ 0.30
Extraordinary item:
Early extinguishment of debt--net of tax................................................ -- (0.01)
---------- ----------
Earnings per common share--assuming
full dilution........................................................................... ($ 0.16) $ 0.29
---------- ----------
---------- ----------
</TABLE>
- ------------------------
* Pro forma
(1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share for 1995
has been presented on a pro forma basis to reflect the two classes of stock
as if they had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST, Inc.
(2) The effects of converting the Liquid Yield Option Notes (LYONS) are excluded
from the fully diluted earnings per common share calculation due to their
anti-dilutive effect.
6
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
Income before income taxes, extraordinary item and
cumulative effect of change in accounting
principles.......................................... $ 1,840 $ 2,154 $ 2,283 $ 745 $ 1,569
Interest expense (net of amounts capitalized)......... 612 527 442 439 453
Interest factor on rentals (1/3)...................... 91 95 96 102 98
Equity losses in unconsolidated ventures (less than
50% owned).......................................... 168 66 -- -- --
Guaranteed minority interest expense.................. 55 14 -- -- --
--------- --------- --------- --------- ---------
Earnings.............................................. $ 2,766 $ 2,856 $ 2,821 $ 1,286 $ 2,120
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest expense...................................... $ 680 $ 599 $ 486 $ 439 $ 453
Interest factor on rentals (1/3)...................... 91 95 96 102 98
Guaranteed minority interest expense.................. 55 14 -- -- --
--------- --------- --------- --------- ---------
Fixed charges......................................... $ 826 $ 708 $ 582 $ 541 $ 551
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges.................... 3.35 4.03 4.85 2.38 3.85
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
</TABLE>
All years have been restated to exclude the capital assets segment which was
discontinued as of June 1, 1993.
The 1993 ratio is based on earnings from continuing operations before
extraordinary charges associated with the decision to discontinue accounting for
the operations of the Company in accordance with SFAS No. 71 of $3,123 and the
early extinguishment of debt of $77. The 1993 ratio includes a restructuring
charge of $1,000. Excluding the restructuring charge, the 1993 ratio of earnings
to fixed charges would have been 4.22.
The 1992 ratio is based on earnings before the cummulative effect of change
in accounting principles which reduced net income by $1,793.
<PAGE>
EXHIBIT 12
U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Income before income taxes.............................................. $ 16,150 $ 9,125 $ 12,217 $ 123,596 $ 83,283
Interest expense........................................................ 21,523 29,091 40,816 144,980 150,394
Interest factor on rentals.............................................. 56 56 123 789 924
--------- --------- --------- --------- ---------
Earnings................................................................ $ 37,729 $ 38,272 $ 53,156 $ 269,365 $ 234,601
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest expense........................................................ $ 21,523 $ 29,091 $ 40,816 $ 144,980 $ 150,394
Interest factor on rentals.............................................. 56 56 123 789 924
--------- --------- --------- --------- ---------
Fixed charges........................................................... $ 21,579 $ 29,147 $ 40,939 $ 145,769 $ 151,318
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of earnings to fixed charges...................................... 1.75 1.31 1.30 1.85 1.55
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Note: A Termination Agreement and Guarantee was entered into on June 24, 1994
between U S WEST, Inc., U S WEST Capital Corporation and U S WEST Financial
Services, Inc. (USWFS). The Agreement terminates the Support Agreement dated
January 5, 1990 whereby U S WEST, Inc. agreed to provide finaicial support to
USWFS. The Agreement provides replacement financial support in the form of a
direct guarantee by U S WEST of all outstanding indebtedness of USWFS.
<PAGE>
EXHIBIT 12
U S WEST, INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
<S> <C> <C> <C> <C>
1996 1995 1994 1993
----------- ----------- ----------- -----------
Income before income taxes, extraordinary item and cumulative effect of
change in accounting principles....................................... $ 1,840 $ 2,154 $ 2,283 $ 745
Interest expense (net of amounts capitalized)........................... 612 527 442 439
Interest factor on rentals (1/3)........................................ 91 95 96 102
Equity losses in unconsolidated ventures (less than 50% owned).......... 168 66 -- --
Guaranteed minority interest expense.................................... 55 14 -- --
----------- ----------- ----------- -----------
Earnings................................................................ $ 2,766 $ 2,856 $ 2,821 $ 1,286
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Interest expense........................................................ $ 680 $ 599 $ 486 $ 439
Interest factor on rentals (1/3)........................................ 91 95 96 102
Guaranteed minority interest expense.................................... 55 14 -- --
Preferred stock dividends (pre-tax equivalent).......................... 15 -- -- --
----------- ----------- ----------- -----------
Fixed charges........................................................... $ 841 $ 708 $ 582 $ 541
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Ratio of earnings to combined fixed charges and preferred stock
dividends............................................................. 3.29 4.03 4.85 2.38
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
<S> <C>
1992
-----------
Income before income taxes, extraordinary item and cumulative effect of
change in accounting principles....................................... $ 1,569
Interest expense (net of amounts capitalized)........................... 453
Interest factor on rentals (1/3)........................................ 98
Equity losses in unconsolidated ventures (less than 50% owned).......... --
Guaranteed minority interest expense.................................... --
-----------
Earnings................................................................ $ 2,120
-----------
-----------
Interest expense........................................................ $ 453
Interest factor on rentals (1/3)........................................ 98
Guaranteed minority interest expense.................................... --
Preferred stock dividends (pre-tax equivalent).......................... --
-----------
Fixed charges........................................................... $ 551
-----------
-----------
Ratio of earnings to combined fixed charges and preferred stock
dividends............................................................. 3.85
-----------
-----------
</TABLE>
All years have been restated to exclude the capital assets segment which was
discontinued as of June 1, 1993.
The 1993 ratio is based on earnings from continuing operations before
extraordinary charges associated with the decision to discontinue accounting for
the operations of the Company in accordance with SFAS No. 71 of $3,123 and the
early extinguishment of debt of $77. The 1993 ratio includes a restructuring
charge of $1,000. Excluding the restructuring charge, the 1993 ratio of earnings
to combined fixed charges and preferred stock dividends would have been 4.22.
The 1992 ratio is based on earnings before the cumulative effect of change
in accounting principles which reduced net income by $1,793.
2
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF U S WEST, INC.
A Delaware Corporation
As of January 31, 1997
U S WEST Communications Group, Inc., a Colorado corporation
U S WEST Advanced Technologies, Inc., a Colorado corporation
U S WEST Business Resources, Inc., a Colorado corporation
U S WEST Communications, Inc., a Colorado corporation
El Paso County Telephone Company, a Colorado corporation
Malheur Home Telephone Company, an Oregon corporation
U S WEST Communications Federal Services, Inc., a Colorado corporation
U S WEST Communications Services, Inc., a Colorado corporation
U S WEST Interprise America, Inc., a Colorado corporation
(d/b/a !nterprise America, Inc.)
U S WEST Long Distance, Inc. a Colorado corporation
U S WEST Enhanced Services, Inc., a Washington corporation
U S WEST Capital Funding, Inc., a Colorado corporation
U S WEST Federal Relations, Inc., a Delaware corporation
U S WEST Investment Management Company, a Colorado corporation
U S WEST Media Group, Inc., a Delaware corporation
U S WEST Capital Corporation, a Colorado corporation
U S WEST Capital (America) Inc., a Colorado corporation
U S WEST Financial Services, Inc., a Colorado corporation
Commercial Funding, Inc., a New York corporation
U S WEST Delta, Inc., a Colorado corporation
USW Finance Corporation, a Colorado corporation
U S WEST Financial Services Foreign Sales, Inc., a Virgin Islands
corporation
USWFS Leasing 1995, Inc., a Colorado corporation
New York Cogenco, Inc., a Delaware corporation
USW Shacres, Inc., a California corporation
<PAGE>
SIFD ONE, LTD., a Delaware corporation
USW FSC ONE, LTD., a Bermuda corporation
SIFD TWO, LTD., a Delaware corporation
USW FSC TWO, LTD., a Bermuda corporation
USW FSC THREE, LTD., a Bermuda corporation
Valertex, Inc., a Texas corporation
U S WEST Services (America) Inc., a Colorado corporation
U S WEST Cellular Holdings, Inc., a Delaware corporation
Continental Cablevision, Inc., a Delaware corporation
U S WEST Dex, Inc., a Colorado corporation
Interactive Video Enterprises, Inc., a Colorado corporation
LOCALTouch Holdings, Inc., a Colorado corporation
LOCALTouch Directory Services, Inc., a Colorado corporation
Please Hold Promotions, Inc., an Arizona corporation
U S WEST Interactive Services, Inc., a Colorado corporation
U S WEST International Holdings, Inc., a Delaware corporation
U S WEST Cable Europe, Inc., a Colorado corporationU S WEST Cable
Partnership Holdings, Inc., a Colorado corporation
U S WEST Cable Programming Corporation, a Colorado corporation
U S WEST Czech Cable Company, a Delaware corporationU S WEST Espana
Telecommunications, Inc., a Delaware corporation
U S WEST Europe, Inc., a Colorado corporation
U S WEST Far East Telecommunications, Inc., a Delaware corporationU S
WEST Foreign Investments, Inc., a Colorado corporation
U S WEST International, Inc., a Colorado corporation
U S WEST International Systems Group, Inc., a Colorado corporationU S
WEST ISG Technologies, Inc., a Colorado corporation
U S WEST Overseas Operations, Inc., a Colorado corporation
USW PCN, Inc., a Colorado corporation
RTDC Holdings, Inc., a Delaware corporation
U S WEST U.K. Cable, Inc., a Colorado corporation
U S WEST India B.V., a Netherland corporation
U S WEST International B.V., a Netherlands corporation
U S WEST Deutschland GmbH, a German corporation
U S WEST Polska Sp. z. o.o., a Polish corporation
U S WEST U.K. Limited, a U.K. corporation
U S WEST International Systems Group Limited, a U.K. corporation
U S WEST ISG Installation Services Limited, a U.K. corporation
U S WEST Marketing Resources (U.K.) Limited, a U.K. corporation
U S Westelcom B.V., a Netherlands corporation
<PAGE>
U S WEST Investments, Inc., a Colorado corporation
U S WEST Real Estate, Inc., a Colorado corporation
USW Cardinal I, Inc., an Ohio corporation
USW Cardinal II, Inc., an Ohio corporation
USW Fresno, Inc., a Colorado corporation
USW Lodging, Inc., a Delaware corporation
NP, Inc., a Colorado corporation
Taurus Laurel, Inc., a Colorado corporation
Taurus Properties, Inc., a Colorado corporation
Verend, Inc., a Texas corporation
MediaOne of Michigan, Inc., a Delaware corporation
U S WEST Multimedia Communications, Inc., a Colorado corporation
MediaOne, Inc., a Georgia corporation
MediaOne Business Services, Inc., a Colorado corporation
MediaOne of Clayton County, Inc., a Georgia corporation
MediaOne of Cobb County, Inc., a Georgia corporation
MediaOne of Conyers-Rockdale, Inc., a Georgia corporation
MediaOne of Fayette County, Inc., a Georgia corporation
MediaOne of Fulton County, Inc., a Georgia corporation
MediaOne of Georgia, Inc., a Georgia corporation
MediaOne of Henry County, Inc., a Georgia corporation
Peachtree SMATV Corp, a Georgia corporation
The Classified Channel, Inc., a Georgia corporation
U S WEST NewVector Group, Inc., a Colorado corporation (d/b/a U S WEST
Cellular)
Ardael, Inc., a Washington corporation
NewVector Communications, Inc., a Delaware corporation
U S WEST NewVector Materials, Inc., a Colorado corporation
Pacific Cellular, Inc., a Washington corporation
Pacific Telecom Cellular of Colorado, Inc., a Colorado corporation
Pacific Telecom Cellular of Whitman, Inc., a Washington corporation
U S WEST Paging, Inc., a Minnesota corporation
U S WEST PCS Holdings, Inc., a Delaware corporation
U S WEST PCS Services, Inc., a Colorado corporation
U S WEST SPF Co., a Colorado corporation
Western Range Insurance Co., a Vermont corporation
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, Inc., a Delaware corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31, 1996; and
WHEREAS, each of the undersigned is a Director of the Company;
NOW THEREFORE, each of the undersigned consititutes and appoints MICHAEL P.
GLINSKY, JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys
for him or her and in his or her name, place, and stead, and in his or her
capacity as a Director of the Company, to execute and file such annual report,
and thereafter to execute and file any amendment or amendments thereto on Form
10-K/A, hereby giving and granting to said attorneys full power and authority to
do and perform all and every act and thing whatsoever requisite and necessary to
be done in and about the premises as fully, to all intents and purposes, as he
or she might or could do if personally present at the doing thereof, hereby
ratifying and confirming all that said attorneys may or shall lawfully do, or
cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 14th day of March 1997.
<TABLE>
<S> <C>
/s/ REMEDIOS DIAZ-OLIVER /s/ ALLEN F. JACOBSON
Remedios Diaz-Oliver Allen F. Jacobson
/s/ GRANT A. DOVE /s/ MARILYN C. NELSON
Grant A. Dove Marilyn C. Nelson
/s/ ALLAN D. GILMOUR /s/ FRANK POPOFF
Allan D. Gilmour Frank Popoff
/s/ PIERSON M. GRIEVE /s/ JERRY O. WILLIAMS
Pierson M. Grieve Jerry O. Williams
</TABLE>
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, U S WEST, Inc., a Delaware corporation (hereinafter referred to as
the "Company"), proposes to file with the Securities and Exchange Commission,
under the provisions of the Securities Exchange Act of 1934, as amended, an
annual report on Form 10-K for the fiscal year ended December 31, 1996; and
WHEREAS, the undersigned is an officer or Director, or both, of the Company
and holds the office, or offices, in the Company as indicated below his name;
NOW THEREFORE, the undersigned hereby consititutes and appoints MICHAEL P.
GLINSKY, JAMES T. ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys
for him and in his name, place, and stead, and in each of his offices and
capacities in the Company, to execute and file such annual report, and
thereafter to execute and file any amendment or amendments thereto on Form
10-K/A, hereby giving and granting to said attorneys full power and authority to
do and perform all and every act and thing whatsoever requisite and necessary to
be done in and about the premises as fully, to all intents and purposes, as he
might or could do if personally present at the doing thereof, hereby ratifying
and confirming all that said attorneys may or shall lawfully do, or cause to be
done, by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney this
14th day of March 1997.
/s/ RICHARD D. MCCORMICK
Richard D. McCormick
Chairman of the Board, Chief Executive
Officer and President
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated February 12, 1997 on our audits of the
consolidated financial statements and Supplementary Selected Proportionate
Results of Operations of U S WEST, Inc., the combined financial statements of
U S WEST Communications Group, and the combined financial statements and
Supplementary Selected Proportionate Results of Operations of U S WEST Media
Group as of December 31, 1996 included in this Annual Report on Form 10-K,
into U S WEST, Inc.'s previously filed Registration Statements on Forms S-3
(Nos. 33-50047, 33-50047-01, 333-14865, 333-14865-01, 33-50049, 33-50049-01,
33-62451 and 33-63087) and on Forms S-8 (Nos. 333-01931, 33-63089, 33-63093,
33-63085 and 33-63091). We also consent to the incorporation by reference of
our report dated February 12, 1997 on the related consolidated financial
statement schedule of U S WEST, Inc. which is included on page S-1 in this
Annual Report on Form 10-K.
/S/ ARTHUR ANDERSEN LLP
Denver, Colorado
March 27, 1997.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000732718
<NAME> U S WEST, INC
<MULTIPLIER> 1,000,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 201
<SECURITIES> 0
<RECEIVABLES> 2,113
<ALLOWANCES> 125
<INVENTORY> 159
<CURRENT-ASSETS> 3,112
<PP&E> 37,756
<DEPRECIATION> 19,475
<TOTAL-ASSETS> 40,855
<CURRENT-LIABILITIES> 6,074
<BONDS> 14,300
1,131
920
<COMMON> 10,741
<OTHER-SE> (112)
<TOTAL-LIABILITY-AND-EQUITY> 40,855
<SALES> 12,911
<TOTAL-REVENUES> 12,911
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,056
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 612
<INCOME-PRETAX> 1,840
<INCOME-TAX> 696
<INCOME-CONTINUING> 1,144
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 34
<NET-INCOME> 1,178
<EPS-PRIMARY> 2.61
<EPS-DILUTED> 2.58
</TABLE>
