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<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-8611
U S WEST, Inc.
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A Delaware Corporation IRS Employer No. 84-0926774
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7800 East Orchard Road, Englewood, Colorado 80111-2526
Telephone Number 303-793-6500
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 __
The number of shares of each class of U S WEST, Inc.'s common stock
outstanding (net of shares held in treasury), at July 31, 1997, was:
U S WEST Communications Group Common Stock - 483,129,022 shares;
U S WEST Media Group Common Stock - 606,683,005 shares
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<PAGE>
U S WEST, Inc.
Form 10-Q
TABLE OF CONTENTS
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Item Page
- ---- ----
PART I - FINANCIAL INFORMATION
1. U S WEST, Inc. Financial Information
Consolidated Statements of Operations -
Three and Six Months Ended June 30, 1997 and 1996 3
Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 5
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 7
Notes to Consolidated Financial Statements 8
2. U S WEST, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
1. U S WEST Communications Group Financial Information
Combined Statements of Operations -
Three and Six Months Ended June 30, 1997 and 1996 34
Combined Balance Sheets -
June 30, 1997 and December 31, 1996 35
Combined Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 37
Notes to Combined Financial Statements 38
2. U S WEST Communications Group Management's Discussion and
Analysis of Financial Condition and Results of Operations 42
1. U S WEST Media Group Financial Information
Combined Statements of Operations -
Three and Six Months Ended June 30, 1997 and 1996 55
Combined Balance Sheets -
June 30, 1997 and December 31, 1996 56
Combined Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 58
Notes to Combined Financial Statements 59
2. U S WEST Media Group Management's Discussion and
Analysis of Financial Condition and Results of Operations 66
PART II - OTHER INFORMATION
1. Legal Proceedings 81
4. Submission of Matters to a Vote of Security Holders 81
6. Exhibits and Reports on Form 8-K 82
</TABLE>
<PAGE>
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS
U S WEST, Inc.
(Unaudited)
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Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Dollars in millions 1997 1996 1997 1996
--------- --------- --------- ---------
Sales and other revenues $ 3,787 $ 3,124 $ 7,553 $ 6,174
Operating expenses:
Employee-related expenses 1,215 1,098 2,363 2,141
Other operating expenses 820 609 1,662 1,200
Taxes other than income taxes 115 111 239 218
Depreciation and amortization 830 588 1,660 1,172
--------- --------- --------- ---------
Total operating expenses 2,980 2,406 5,924 4,731
--------- --------- --------- ---------
Income from operations 807 718 1,629 1,443
Interest expense 266 136 544 271
Equity losses in unconsolidated ventures 153 77 318 143
Gains on sales of investments 44 - 95 -
Gains on sales of rural telephone exchanges 29 49 47 49
Guaranteed minority interest expense 22 12 44 24
Other expense - net 24 23 50 46
--------- --------- --------- ---------
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting principle 415 519 815 1,008
Provision for income taxes 180 206 350 398
--------- --------- --------- ---------
Income before extraordinary item and
cumulative effect of change in accounting
principle 235 313 465 610
Extraordinary item:
Early extinguishment of debt - net of tax 3 - 3 -
--------- --------- --------- ---------
Income before cumulative effect of change in
accounting principle 238 313 468 610
Cumulative effect of change in accounting
principle - net of tax - - - 34
--------- --------- --------- ---------
NET INCOME $ 238 $ 313 $ 468 $ 644
========= ========= ========= =========
Dividends on preferred stock 12 1 25 2
--------- --------- --------- ---------
EARNINGS AVAILABLE FOR
COMMON STOCK $ 226 $ 312 $ 443 $ 642
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS
U S WEST, Inc.
(Unaudited), continued
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Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
In thousands (except per share amounts) 1997 1996 1997 1996
---------- ---------- ---------- ----------
COMMUNICATIONS GROUP EARNINGS
PER COMMON SHARE:
Income before cumulative effect of change
in accounting principle $ 0.69 $ 0.68 $ 1.39 $ 1.30
Cumulative effect of change in accounting
principle - - - 0.07
---------- ---------- ---------- ----------
COMMUNICATIONS GROUP EARNINGS
PER COMMON SHARE $ 0.69 $ 0.68 $ 1.39 $ 1.37
========== ========== ========== ==========
COMMUNICATIONS GROUP
DIVIDENDS $ 0.535 $ 0.535 $ 1.07 $ 1.07
========== ========== ========== ==========
PER COMMON SHARE
COMMUNICATIONS GROUP AVERAGE
COMMON SHARES OUTSTANDING 482,542 476,803 481,945 475,929
========== ========== ========== ==========
MEDIA GROUP LOSS PER COMMON
SHARE $ (0.17) $ (0.03) $ (0.38) $ (0.02)
========== ========== ========== ==========
MEDIA GROUP AVERAGE COMMON
SHARES OUTSTANDING 606,446 473,593 606,486 473,298
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
U S WEST, Inc.
(Unaudited)
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<S> <C> <C>
June 30, December 31,
Dollars in millions 1997 1996
--------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 244 $ 201
Accounts and notes receivable - net 2,104 2,113
Inventories and supplies 218 159
Deferred directory costs 252 259
Deferred tax asset 237 213
Prepaid and other 104 167
--------- -------------
Total current assets 3,159 3,112
--------- -------------
Gross property, plant and equipment 38,546 37,756
Accumulated depreciation 20,260 19,475
--------- -------------
Property, plant and equipment - net 18,286 18,281
Investment in Time Warner Entertainment 2,483 2,477
Net investment in international ventures 1,322 1,548
Intangible assets - net 12,516 12,595
Net investment in assets held for sale 416 409
Other assets 2,184 2,433
--------- -------------
Total assets $ 40,366 $ 40,855
========= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
U S WEST, Inc.
(Unaudited), continued
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June 30, December 31,
Dollars in millions 1997 1996
---------- --------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 1,443 $ 1,051
Accounts payable 1,250 1,316
Due to Continental Cablevision shareowners - 1,150
Employee compensation 387 470
Dividends payable 266 263
Other 2,315 1,824
---------- --------------
Total current liabilities 5,661 6,074
---------- --------------
Long-term debt 14,135 14,300
Postretirement and other postemployment
benefit obligations 2,492 2,479
Deferred income taxes 4,343 4,349
Deferred credits and other 989 973
Contingencies (See Note G to the Consolidated
Financial Statements)
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company-guaranteed debentures 1,080 1,080
Preferred stock subject to mandatory redemption 100 51
Shareowners' equity:
Preferred stock 921 920
Common shares 10,776 10,741
Retained earnings (deficit) (17) 18
LESOP guarantee (72) (91)
Foreign currency translation adjustments (42) (39)
---------- --------------
Total shareowners' equity 11,566 11,549
---------- --------------
Total liabilities and shareowners' equity $ 40,366 $ 40,855
========== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS U S
WEST, Inc.
(Unaudited)
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Six Six
Months Months
Ended Ended
June 30, June 30,
Dollars in millions 1997 1996
---------- ----------
OPERATING ACTIVITIES
Net income $ 468 $ 644
Adjustments to net income:
Depreciation and amortization 1,660 1,172
Equity losses in unconsolidated ventures 318 143
Gains on sales of investments (95) -
Gains on sales of rural telephone exchanges (47) (49)
Cumulative effect of change in accounting principle - (34)
Deferred income taxes and amortization of investment (85) (50)
tax credits
Changes in operating assets and liabilities:
Restructuring payments (50) (82)
Postretirement medical and life costs, net of cash fundings 10 (24)
Accounts and notes receivable (11) 21
Inventories, supplies and other current assets (91) (45)
Accounts payable and accrued liabilities 384 (55)
Other adjustments - net 117 (10)
---------- ----------
Cash provided by operating activities 2,578 1,631
---------- ----------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (1,558) (1,509)
Payment to Continental Cablevision shareowners (1,150) -
Investment in international ventures (44) (139)
Proceeds from sale of Time Warner, Inc. shares 220 -
Proceeds from sales of investments 355 -
Proceeds from disposals of property, plant and equipment 32 104
Cash from net investment in assets held for sale 50 93
Other - net (141) (74)
---------- ----------
Cash (used for) investing activities (2,236) (1,525)
---------- ----------
FINANCING ACTIVITIES
Net proceeds from (repayments of ) short-term debt (3,714) 340
Proceeds from issuance of long-term debt 4,110 330
Repayments of long-term debt (193) (476)
Dividends paid on common and preferred stock (498) (469)
Proceeds from issuance of common stock 49 104
Purchases of treasury stock (53) -
---------- ----------
Cash (used for) financing activities (299) (171)
---------- ----------
CASH AND CASH EQUIVALENTS
Increase (decrease) 43 (65)
Beginning balance 201 192
---------- ----------
Ending balance $ 244 $ 127
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 1997
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation. The Consolidated Financial Statements have been
prepared by U S WEST, Inc. ("U S WEST" or the "Company") pursuant to the
interim reporting rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
accompanying financial statements prepared in accordance with generally
accepted accounting principles ("GAAP") have been condensed or omitted
pursuant to such SEC rules and regulations. In the opinion of U S WEST's
management, the Consolidated Financial Statements include all adjustments,
consisting of only normal recurring adjustments, necessary to present fairly
the financial information set forth therein. It is suggested that these
Consolidated Financial Statements be read in conjunction with the 1996 U S
WEST Consolidated Financial Statements and notes thereto included in U S
WEST's proxy statement mailed to all shareowners on April 7, 1997.
Financial Instruments. Synthetic instrument accounting is used for interest
rate swaps, interest rate caps and foreign currency swaps if the index,
maturity, and amount of the instrument match the terms of the underlying debt.
Net interest accrued is recognized over the life of the instruments as an
adjustment to interest expense and is a component of cash provided by
operating activities. Any gain or loss on the termination of an instrument,
which qualifies for synthetic instrument accounting, would be deferred and
amortized over the remaining life of the original instrument.
Hedge accounting is used for foreign currency forward and zero-cost
combination contracts which qualify for and are designated as hedges of firm
equity investment commitments and for options and forward contracts which
qualify as hedges of future debt issues. To qualify for hedge accounting, the
contracts must have a high inverse correlation to the exposure being hedged,
and reduce the risk or volatility associated with changes in foreign exchange
or interest rates. Qualified contracts are carried at market value with gains
and losses recorded in equity until sale of the investment or are associated
with the related debt and amortized as yield adjustments. Any gain or loss on
the termination of a contract, which qualifies for hedge accounting, would be
deferred and accounted for with the related transaction.
Market value accounting is used for derivative contracts which do not qualify
for synthetic instrument or hedge accounting. Market value accounting is also
used for foreign exchange contracts designated as hedges of foreign
denominated receivables and payables. These contracts are carried at market
value in other assets or liabilities with gains and losses recorded as other
income (expense). U S WEST does not use derivative financial instruments for
trading purposes.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies (continued)
New Accounting Standards. In fourth-quarter 1997, U S WEST will adopt
Statement of Financial Accounting Standards ("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 is not expected to have a
material impact on Communications Group or Media Group earnings per share.
In 1998, U S WEST will adopt SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 requires that the components of and the total
amount for comprehensive income be displayed in the financial statements.
Comprehensive income includes net income and all changes in equity during a
period that arise from nonowner sources, such as foreign currency items and
unrealized gains and losses on certain investments in equity securities.
Among other things, SFAS No. 131 requires detailed operating segment
information of an enterprise on an annual and interim period basis. The
effects of adopting both SFAS No. 130 and 131 are being evaluated.
B. AirTouch Transaction
During 1994, U S WEST entered into a definitive agreement with AirTouch
Communications, Inc. ("AirTouch") to combine their domestic cellular
properties into a partnership in a multi-phased transaction (the "AirTouch
Joint Venture"). During Phase I, which commenced on November 1, 1995, the
cellular properties are owned separately. A wireless management company has
been formed and is providing services to both companies, as requested, on a
contract basis.
In February 1997, the King County Superior Court in Washington state ruled
that a subsidiary of Media Group violated the terms of its partnership
agreement with its minority partners in the Seattle cellular partnership by
entering into the AirTouch Joint Venture. The Company currently is complying
with the Court's order which requires the Company to issue a right of first
refusal to the minority partners with respect to the subsidiary's limited
partnership interest. The Court has also authorized the limited partners to
take legally appropriate steps by August 15, 1997, to secure unanimous
agreement for a substitute for the Company as the general partner. The
Company retains its right to appeal unfavorable rulings before transferring
any partnership interest in the Seattle cellular partnership. Similar
litigation has been filed in other jurisdictions regarding other cellular
partnerships by the same minority partner that brought the Seattle litigation.
The Company is also seeking declaratory relief from the Delaware Chancery
Court. The Company believes it will ultimately be successful in all
litigation asserting that the Company's entering into the AirTouch Joint
Venture violated its partnership agreements with its minority partners.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
B. AirTouch Transaction (continued)
In May 1997, Media Group and AirTouch entered into a definitive agreement to
merge Media Group's domestic cellular business and its interest in PrimeCo
Personal Communications ("PrimeCo") into AirTouch (the "AirTouch Merger").
Completing the AirTouch Merger, on a tax-free basis depended among other
things, upon the final status of the "Morris Trust" provision of the recent
tax legislation. Since the enacted legislation eliminated the "Morris Trust"
provision and did not provide transitional relief for the AirTouch Merger, the
Company will continue with the original AirTouch Joint Venture transaction.
Media Group and AirTouch have agreed not to proceed to Phase II of the
AirTouch Joint Venture before May 5, 1998. In Phase II of the AirTouch Joint
Venture, the partners will combine those domestic properties for which
authorizations and partnership approvals have been obtained. Media Group has
the right under Phase III of the AirTouch Joint Venture agreement to convert
its joint venture interest into AirTouch stock.
C. Dex Transfer
In May 1997, U S WEST announced its intention to transfer its domestic
directory business from the Media Group to the Communications Group (the "Dex
Transfer"). Under the terms of the Dex Transfer, $3.9 billion of U S WEST
debt will be reallocated from the Media Group to the Communications Group and
the Communications Group will issue shares of Communications Group common
stock to Media Group shareowners totaling $850. Contingent upon receiving
favorable federal income tax treatment, the Company intends to pursue the Dex
Transfer.
D. Asset Sales and Restructurings
Marketable Securities and Investments. During the second quarter of 1997,
Media Group sold an additional 2 million shares of Teleport Communications
Group, Inc. ("TCG") for proceeds of $58, bringing the total number of TCG
shares sold in 1997 to 6,075,000 for total proceeds of $178. In connection
with the November 15, 1996 merger of Continental Cablevision, Inc. into a
wholly owned subsidiary of U S WEST (the "Continental Merger"), Media Group
is required by a consent decree with the United States Department of Justice
to dispose of its interest in TCG by December 31, 1998. The share sales have
reduced Media Group's interest in TCG from
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
D. Asset Sales and Restructurings (continued)
11 percent at December 31, 1996, to approximately 7 percent at June 30, 1997.
Also during the second quarter of 1997, Media Group sold its shares of Time
Warner, Inc., acquired in the Continental Merger, for proceeds of $220 and a
pretax gain of $44.
During the first quarter of 1997, Media Group reached a settlement to transfer
its investment in Optus Vision, an Australian cable and telecommunications
venture acquired in the Continental Merger, to Optus Communications Pty Ltd,
an Australian telecommunications carrier. Upon satisfaction of various
pre-conditions, Media Group will receive convertible notes which can be
converted to shares of Optus Communications upon public offering of its
shares. The settlement released the Company from litigation and future
claims.
Each of the partners of PRIMESTAR Partners L.P., including Media Group, have
entered into an agreement whereby each partner's direct broadcast satellite
customers and certain assets will be contributed to a newly formed company,
PRIMESTAR, Inc. In exchange, each partner, including Media Group, will
receive a combination of cash and stock in PRIMESTAR, Inc. The transaction is
subject to various approvals and is expected to close in early 1998. In a
related transaction, an agreement has been entered into whereby the satellite
assets controlled by News Corp. and its partner MCI Communications Corporation
will be purchased by PRIMESTAR, Inc. in exchange for nonvoting convertible
securities. The transaction is subject to regulatory and other approvals.
Cable Systems. As a result of the Continental Merger, Media Group must
dispose of its wholly owned cable systems located within the telephone service
areas of U S WEST Communications, Inc. ("U S WEST Communications"). Media
Group has reached definitive agreements to sell its cable systems in Minnesota
and Idaho. The Minnesota systems are being sold for proceeds of approximately
$600 and serve 290,000 subscribers. The Idaho systems are being sold for
approximately $26 and serve 16,000 subscribers. In accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," U S WEST has stopped depreciation and amortization
related to these assets. In each case, the sale proceeds approximate the
carrying value of the cable systems. These systems contributed $6 and $7 in
operating income during the three- and six-month periods ended June 30, 1997,
respectively. The cable system sales are subject to federal and local
regulatory approvals, including the transfer of franchises, and are expected
to close in early 1998.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
(Unaudited)
D. Asset Sales and Restructurings (continued)
Rural Telephone Exchanges Held for Sale. In conjunction with its rural
telephone exchange sales program, U S WEST Communications sold certain rural
telephone exchanges for pretax gains of $29 and $47 during the three- and
six-month periods ended June 30, 1997, respectively. The carrying value of
the remaining rural telephone exchanges held for sale approximates $75 at June
30, 1997. The remaining rural telephone exchanges held for sale are expected
to be disposed of in the latter half of 1997 and first-quarter 1998. In
accordance with SFAS No. 121, the Company has stopped depreciating the
exchanges held for sale.
International Directories. On June 4, 1997, Media Group sold Thomson
Directories, its directory operation in the United Kingdom, for $121. Also,
in July 1997, Media Group entered into an agreement to sell U S WEST Polska,
its directory operation in Poland. The sale is awaiting approval from
Poland's Office of Competition and Consumer Protection. These transactions
will result in the disposition of Media Group's wholly owned international
directory operations.
E. Series E Preferred Stock Subject to Mandatory Redemption
On June 30, 1997, Media Group acquired cable systems serving 40,000
subscribers in the state of Michigan for cash of $25 and 994,082 shares of
nonvoting, Series E Convertible Preferred Stock (the "Preferred Stock") issued
by U S WEST. Dividends are payable quarterly at the annual rate of 6.34
percent. The Preferred Stock is recorded at the market value of $50.00 per
share at June 30, 1997, which is equal to its liquidation value. Upon
redemption, the preferred stockholders may elect to receive cash or convert
their Preferred Stock into Media Group common stock. Cash redemption is equal
to the Preferred Stock's liquidation value of $50.00 per share, plus accrued
dividends. The number of shares of Media Group common stock to be received
upon conversion is $47.50 per share divided by the then current market price
of Media Group common stock. The conversion rate is subject to adjustment by
U S WEST under certain circumstances.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
E. Series E Preferred Stock Subject to Mandatory Redemption (continued)
The Preferred Stock is redeemable as follows: (a) U S WEST may call for
redemption all or any part of the Preferred Stock beginning on June 30, 2002;
(b) on a yearly basis beginning August 1, 2007, and continuing through August
1, 2016, U S WEST will redeem 49,704 shares of Preferred Stock, and on June
30, 2017, all of the remaining outstanding shares of Preferred Stock; or (c)
all of the outstanding Preferred Stock shall be redeemed upon the occurrence
of certain events, including the dissolution or sale of Media Group.
The Preferred Stock ranks senior to all classes of U S WEST common stock, is
subordinated to any senior debt and ranks on equal terms with all other
preferred securities.
F. Subsequent Events
In July 1997, Media Group entered into an agreement to purchase up to the
remaining 50 percent of Fintelco, S.A., ("Fintelco"), a cable and
telecommunications venture with approximately 660,000 cable subscribers
located in Argentina. This additional interest could bring Media Group's
ownership in Fintelco up to 100 percent. Closing is contingent upon various
regulatory approvals, which are expected during the third quarter of 1997.
On August 6, 1997, Media Group announced it will relocate the corporate
offices of its domestic cable operations, MediaOne, Inc., from Boston to
Denver. Approximately 150 employees will be asked to relocate to Denver. The
move is designed to improve operations through better alignment and focus, and
will occur in phases between September 1997 and June 1998. In addition,
several changes in the senior management of MediaOne were announced. The
Media Group anticipates incurring a pretax charge of approximately $30 in
third-quarter 1997 for costs related to the move and management changes.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
G. Contingencies
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely U S WEST Communications' alternative form
of regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communication's earnings. In May 1997, the OPUC ordered U S WEST
Communications to reduce its annual revenues by $97, effective May 1,
1997, and to issue a one-time refund, including interest, of approximately
$102 to reflect the revenue reduction for the period May 1, 1996 through April
30, 1997. The one-time refund is for interim rates which became subject to
refund when U S WEST Communications' AFOR plan was terminated on May 1, 1996.
U S WEST Communications filed an appeal of the order and asked for an
immediate stay of the refund with the Oregon Circuit Court for the County of
Marion ("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court
granted U S WEST Communications' request for a stay, pending a full review of
the OPUC's order. The Oregon Circuit Court is scheduled to hear arguments on
the appeal in December 1997.
The one-time refund and cumulative amount of revenues collected subject to
refund, including interest, as of June 30, 1997, totals approximately $121.
In 1996, the Washington State Utilities and Transportation Commission ("WUTC")
acted on U S WEST Communications' 1995 rate request. U S WEST
Communications had sought to increase revenues by raising rates primarily for
basic residential services over a four-year period. Instead of granting U S
WEST Communications' request, the WUTC ordered $91.5 in annual net revenue
reductions, effective May 1, 1996.
Based on the WUTC 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. The Court declined to change the WUTC order. 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.
Oral arguments were heard in June 1997. U S WEST Communications is waiting a
decision by the State Supreme Court.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
G. Contingencies (continued)
Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund. The cumulative amount of revenues collected subject to
refund as of June 30, 1997, including interest, is approximately $135.
In another proceeding, the Utah Supreme Court 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 potential exposure, including interest, at June
30, 1997, is approximately $160.
The Communications Group has accrued $113 at June 30, 1997, which represents
its estimated liability for state regulatory proceedings. It is possible that
the ultimate liability could exceed the recorded liability by an amount up to
$300. The Communications Group continues to monitor and evaluate the risks
associated with its state regulatory environment, and will adjust estimates as
new information becomes available.
H. Net Investment in Assets Held for Sale
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 "net investment in
assets held for sale." The net realizable value of the assets is being
evaluated on an ongoing basis with adjustments to the existing reserve, if
any, being charged to continuing operations. No such adjustment has been
required. Prior to January 1, 1995, the entire capital assets segment was
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
H. Net Investment in Assets Held for Sale (continued)
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Dollars in millions 1997 1996
--------- -------------
ASSETS
Cash and cash equivalents $ 22 $ 21
Finance receivables - net 820 869
Investment in real estate - net of valuation allowance 184 182
Bonds, at market value 145 146
Investment in FSA 339 326
Other assets 173 165
--------- -------------
Total assets $ 1,683 $ 1,709
========= =============
LIABILITIES
Debt $ 442 $ 481
Deferred income taxes 681 671
Accounts payable, accrued liabilities and other 133 137
Minority interests 11 11
--------- -------------
Total liabilities 1,267 1,300
--------- -------------
Net investment in assets held for sale $ 416 $ 409
========= =============
</TABLE>
Building sales and operating revenues of the capital assets segment were $21
and $78 for the three- and six-month periods ended June 30, 1997,
respectively, and $21 and $51 for the three- and six-month periods ended June
30, 1996, respectively.
<PAGE>
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
H. Net Investment in Assets Held for Sale (continued)
Revenues of U S WEST Financial Services, Inc., a member of the capital assets
segment, were $6 and $11 for the three- and six-month periods ended June 30,
1997, respectively, and $7 and $14 for the three- and six-month periods ended
June 30, 1996, respectively. Selected financial data for U S WEST Financial
Services follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
1997 1996
--------- -------------
Net finance receivables $ 861 $ 859
Total assets 1,066 1,058
Total debt 246 236
Total liabilities 996 998
Equity 70 60
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. 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 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.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH
1996
NET INCOME (LOSS)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Three Increase Increase Six Six Increase Increase
Months Months (Decrease) (Decrease) Months Months (Decrease) (Decrease)
Ended Ended Ended Ended
June 30, June 30, Dollars Percent June 30, June 30, Dollars Percent
1997 1996 1997 1996
---------- ----------
Communications Group $ 332 $ 324 $ 8 2.5 $ 671 $ 652 $ 19 2.9
Media Group (94) (11) (83) - (203) (8) (195) -
---------- ---------- ----------- ---------- ---------- ---------- ----------- ----------
Total net income $ 238 $ 313 $ (75) (24.0) $ 468 $ 644 $ (176) (27.3)
========== ========== =========== ========== ========== ========== =========== ==========
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts),
continued
Communications Group Net Income
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three Six Six
Months Months Increase Increase Months Months Increase
Ended Ended (Decrease) (Decrease) Ended Ended (Decrease)
Net Income: June 30, June 30, June 30, June 30,
1997 1996 Dollars Percent 1997 1996 Dollars
Reported net income $ 332 $ 324 $ 8 2.5 $ 671 $ 652 $ 19
Adjustments to reported net
income:
Gains on sales of rural
telephone exchanges (18) (30) 12 (40.0) (29) (30) 1
Cumulative effect of change in
accounting principle (1)<F1> - - - - - (34) 34
Current year effect of change
in accounting - (5) 5 - - (10) 10
---------- ---------- ----------- ---------- ---------- ---------- -----------
principle (1)<F1>
Normalized income $ 314 $ 289 $ 25 8.7 $ 642 $ 578 $ 64
========== ========== =========== ========== ========== ========== ===========
<S> <C>
Increase
(Decrease)
Net Income:
Percent
Reported net income 2.9
Adjustments to reported net
income:
Gains on sales of rural
telephone exchanges (3.3)
Cumulative effect of change in
accounting principle (1)<F1> -
Current year effect of change
in accounting -
----------
principle (1)<F1>
Normalized income 11.1
==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three Six Six
Months Months Months Months
Ended Ended Increase Increase Ended Ended Increase
June 30, June 30, (Decrease) (Decrease) June 30, June 30, (Decrease)
Earnings per Share: 1997 1996 Dollars Percent 1997 1996 Dollars
Reported earnings per share $ 0.69 $ 0.68 $ 0.01 1.5 $ 1.39 $ 1.37 $ 0.02
Adjustments to reported
earnings per share:
Gains on sales of rural
telephone exchanges (0.04) (0.06) 0.02 (33.3) (0.06) (0.06) -
Cumulative effect of change in
accounting principle (1)<F1> - - - - - (0.07) 0.07
Current year effect of change
in accounting - (0.01) 0.01 - - (0.02) 0.02
---------- ---------- ----------- ---------- ---------- ---------- -----------
principle (1)<F1>
Normalized earnings per share $ 0.65 $ 0.61 $ 0.04 6.6 $ 1.33 $ 1.22 $ 0.11
========== ========== =========== ========== ========== ========== ===========
<S> <C>
Increase
(Decrease)
Earnings per Share: Percent
Reported earnings per share 1.5
Adjustments to reported
earnings per share:
Gains on sales of rural
telephone exchanges -
Cumulative effect of change in
accounting principle (1)<F1> -
Current year effect of change
in accounting -
----------
principle (1)<F1>
Normalized earnings per share 9.0
==========
<FN>
<F1>
(1) 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."
</FN>
</TABLE>
The Communications Group's normalized income increased $25, or 8.7 percent, to
$314, and $64, or 11.1 percent to $642, for the three- and six-month periods
ended June 30, 1997, respectively. Normalized earnings per share were $0.65
per Communications share, an increase of $0.04, or 6.6 percent, and $1.33 per
Communications share, an increase of $0.11, or 9.0 percent for the three- and
six-month periods, respectively.
The increases are primarily due to higher demand for services and continued
cost control efforts which accelerated in the latter half of 1996. These
increases were partially offset by an accrual to recognize U S WEST
Communications' estimated state regulatory liabilities. (See "Contingencies")
The Communications Group anticipates net income growth will continue
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts),
continued
to be partially offset by increased costs related to growth initiatives and
interconnection requirements, and the impacts of access reform and price cap
regulation. (See "Regulatory Environment")
Effective January 1, 1996, U S WEST adopted SFAS No. 121 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 1996 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.
Media Group Net Loss
Media Group net loss increased to $94, or $0.17 per Media share, for the
three-month period, and to $203, or $0.38 per Media share, for the six-month
period. Excluding the after tax effects of the gains on sales of investments
totaling $25 ($0.04 per Media share) during the second quarter of 1997, and
$31 ($0.05 per Media share) during the first quarter of 1997, Media Group net
loss increased $108 and $251, for the three- and six-month periods ended June
30, 1997, respectively. The Continental Merger contributed approximately $73
of the loss during the three-month period ended June 30, 1997 and $183 of the
loss during the six-month period ended June 30, 1997. The merger resulted in
significant increases in interest and depreciation and amortization charges.
The remaining increase in net loss is due to greater losses from
unconsolidated ventures, partially offset by an increase in earnings from
domestic cellular and directories operations.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three Proforma Proforma
Months Months Increase Increase Increase Increase
Ended Ended (Decrease) (Decrease) Proforma (Decreases) (Decreases)
June 30, June 30,
1997 1996 Dollars Percent 1996 Dollars Percent
Communications Group $ 2,543 $ 2,500 $ 43 1.7 $ 2,500 $ 43 1.7
Media Group 1,277 658 619 94.1 1,132 145 12.8
Intergroup eliminations (33) (34) 1 (2.9) (34) 1 (2.9)
---------- ---------- ----------- ---------- ---------- ------------ -----------
Total $ 3,787 $ 3,124 $ 663 21.2 $ 3,598 $ 189 5.2
========== ========== =========== ========== ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Six Six Proforma Proforma
Months Months Increase Increase Increase Increase
Ended Ended (Decrease) (Decrease) Proforma (Decreases) (Decreases)
June 30, June 30,
1997 1996 Dollars Percent 1996 Dollars Percent
Communications Group $ 5,130 $ 4,965 $ 165 3.3 $ 4,965 $ 165 3.3
Media Group 2,484 1,271 1,213 95.4 2,207 277 12.6
Intergroup eliminations (61) (62) 1 (1.6) (62) 1 (1.6)
---------- ---------- ----------- ---------- ---------- ------------ -----------
Total $ 7,553 $ 6,174 $ 1,379 22.3 $ 7,110 $ 443 6.2
========== ========== =========== ========== ========== ============ ===========
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Communications Group Sales and Other Revenues
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lower Increase Increase
Price (Higher) (Decrease) (Decrease)
1997 1996 Demand Changes Refunds Other Dollars Percent
Local service
Second quarter $1,151 $1,179 $ 97 $ (4) $ 8 $ (129) $ (28) (2.4)
Six months 2,382 2,324 198 (14) 17 (143) 58 2.5
Interstate access
Second quarter 678 626 74 (5) (7) (10) 52 8.3
Six months 1,365 1,248 138 (10) 3 (14) 117 9.4
Intrastate access
Second quarter 200 189 16 3 - (8) 11 5.8
Six months 400 379 25 5 - (9) 21 5.5
Long-distance
network
Second quarter 240 278 (25) (4) - (9) (38) (13.7)
Six months 490 568 (47) (5) - (26) (78) (13.7)
Other services
Second quarter 274 228 - - - 46 46 20.2
Six months 493 446 - - - 47 47 10.5
Total revenues
Second quarter 2,543 2,500 162 (10) 1 (110) 43 1.7
Six months $5,130 $4,965 $ 314 $ (24) $ 20 $ (145) $ 165 3.3
====== ====== ======== ========= ========= ======= =========== ==========
</TABLE>
Local Services Revenues. Local service revenues decreased $28, or 2.4
percent, during the three-month period ended June 30, 1997. The decrease is
largely the result of an $84 accrual to recognize U S WEST Communications'
estimated state regulatory liabilities. (See "Contingencies") Also
contributing to the decrease was a $30 reclassification of public telephone
revenues to other services revenues. The reclassification was in conjunction
with the Federal Communications Commission's ("FCC") payphone orders, which
took effect April 15, 1997, as mandated by the Telecommunications Act of 1996
(the "Telecommunications Act"). Lower wireless interconnection access prices,
also mandated by the Telecommunications Act, reduced local service revenues by
$11.
Partially offsetting these decreases were access line growth and increased
demand for new product and service offerings, and existing central office
features. Total reported access lines increased 616,000, or 4.1 percent,
during the past 12 months, of which 249,000 was attributable to second lines.
Second line installations increased 26.7 percent. Access lines grew 686,000,
or 4.6 percent, when adjusted for sales of approximately 70,000 rural
telephone access lines during the past twelve months.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Local service revenues increased $58, or 2.5 percent, during the six-month
period primarily as a result of access line growth and increased demand for
new product and service offerings, and existing central office features.
Partially offsetting the increase is a $91 accrual to recognize U S WEST
Communications' estimated state regulatory liabilities. Lower wireless
interconnection access prices and the reclassification of public telephone
revenues, both mandated by the Telecommunications Act, further reduced local
service revenues for the six-month period by $27 and $30, respectively.
Excluding the non-recurring effects of the regulatory accrual and the public
telephone revenues reclassification, local service revenues increased 6.4
percent and 6.8 percent, during the three- and six-month periods ended June
30, 1997, respectively. (See "Contingencies")
Interstate Access Revenues. Higher interstate access revenues resulted from
increased demand for private line services and access line growth. Also
contributing were increases of 6.1 and 6.3 percent in billed interstate access
minutes of use for the three- and six-month periods, respectively. The
increases were partially offset by the effects of price reductions and
accruals of $14 and $22 for refunds to interexchange carriers, during the
three- and six-month periods, respectively. The refunds relate to a one-time
$22 exogenous cost adjustment ordered by the FCC as a condition of granting U
S WEST Communications' waiver from price cap sharing rules for the first half
of 1997. (See "Regulatory Environment") True-ups of $18 to the 1996 price cap
sharing accruals partially offset the one-time $22 exogenous cost adjustment
in the six-month period.
The Communications Group anticipates future interstate access revenue growth
will be negatively impacted by the FCC's recent orders to restructure the
access charge system and its current price cap plan. (See "Regulatory
Environment")
Intrastate Access Revenues. Intrastate access revenues increased largely as a
result of increases of 12.5 and 10.5 percent in billed intrastate minutes of
use for the three- and six-month periods, respectively, and increased demand
for private line services.
Long-distance Network Service Revenues. Long-distance network service
revenues decreased 13.7 percent for the three- and six-month periods primarily
due to the effects of competition and the implementation of multiple toll
carrier plans ("MTCPs") in Iowa and Nebraska in 1996, and in Iowa, Oregon and
Washington in first-quarter 1997. The MTCPs essentially allow independent
telephone companies to act as toll carriers. During the three- and six-month
periods ended June 30, 1997, the MTCPs reduced long-distance revenues by $12
and $29, which was offset by increased intrastate access revenues of $1 and
$3, and decreased other operating expenses (i.e., access expense) of $9 and
$23, respectively.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Excluding the effects of the MTCPs, long-distance network service revenues
decreased by 9.4 and 8.6 percent for the three- and six-month periods,
respectively. Erosion of long-distance network service revenues will continue
due to the loss of exclusivity of 1+ dialing in Minnesota and Arizona,
effective in February and April 1996, respectively, and continued competitive
dial-around activity in other states within the Communications Group's 14
state region. The Communications Group is responding to competitive losses
through competitive pricing of intraLATA long-distance services and increased
promotional efforts to retain customers.
Other Services Revenues. Other services revenues increased largely due to the
second-quarter 1997 $30 reclassification of public telephone revenues from
local service revenues. Also contributing to the increase was interim
compensation revenue from interexchange carriers as a result of the FCC's
payphone orders which took effect April 15, 1997. The amount of interim
compensation may change as a result of the District of Columbia Court of
Appeals recent review and remand of the FCC's payphone orders. Increases in
voice messaging, inside wire maintenance and billing and collection services
revenues were almost entirely offset by a reduction in contract revenues due
to the completion of a large federal government telephony project in 1996.
Future revenues at U S WEST Communications may be affected by pending
regulatory actions in federal and local regulatory jurisdictions.
Media Group Sales and Other Revenues
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Three Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ 585 $ 59 - $ 533 9.8
International 4 - - - -
------ ----- -------- ---------- ----------
589 59 - 533 10.5
Wireless communications:
Domestic:
Cellular service 327 267 22.5 267 22.5
Cellular equipment 36 23 56.5 23 56.5
------ ----- -------- ---------- ----------
363 290 25.2 290 25.2
Directory and information services:
Domestic 296 279 6.1 279 6.1
International 23 25 (8.0) 25 (8.0)
------ ----- -------- ---------- ----------
319 304 4.9 304 4.9
Other 6 5 20.0 5 20.0
------ ----- -------- ---------- ----------
Sales and other revenues $1,277 $ 658 94.1 $ 1,132 12.8
====== ===== ======== ========== ==========
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Media Group Sales and Other Revenues (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Six Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $1,137 $ 116 - $ 1,052 8.1
International 8 - - - -
------ ------ ------- ---------- ---------
1,145 116 - 1,052 8.8
Wireless communications:
Domestic:
Cellular service 630 506 24.5 506 24.5
Cellular equipment 68 48 41.7 48 41.7
------ ------ ------- ---------- ---------
698 554 26.0 554 26.0
Directory and information services:
Domestic 583 550 6.0 550 6.0
International 45 42 7.1 42 7.1
------ ------ ------- ---------- ---------
628 592 6.1 592 6.1
Other 13 9 44.4 9 44.4
------ ------ ------- ---------- ---------
Sales and other revenues $2,484 $1,271 95.4 $ 2,207 12.6
====== ====== ======= ========== =========
</TABLE>
Media Group sales and other revenues increased 94.1 percent, to $1,277, and
95.4 percent, to $2,484, for the three- and six-month periods, respectively.
On a pro forma basis, which gives effect to the Continental Merger as though
it had occurred as of January 1, 1996, Media Group sales and other revenues
increased 12.8 percent and 12.6 percent, respectively. The increases were
primarily a result of growth in cellular service revenue and domestic cable
and telecommunications revenue.
Cable and Telecommunications. On a pro forma basis, domestic cable and
telecommunications revenue increased 9.8 percent, to $585, and 8.1 percent, to
$1,137, for the three- and six-month periods, respectively. The increases
resulted primarily from price increases of approximately 6 to 8 percent, the
addition of new channels and basic subscriber increases of 1.8 percent, on a
same property basis. Increases in pay-per-view and direct broadcast satellite
("DBS") service revenues also contributed to the increase in revenue. DBS
service revenues increased primarily as a result of a 53.4 percent increase in
DBS customers in 1997 compared with 1996.
Wireless Communications. Cellular service revenues increased 22.5 percent, to
$327, and 24.5 percent, to $630, for the three- and six-month periods,
respectively. These increases are a result of a 33 percent increase in
subscribers during the last twelve months, partially offset by an 8.8 percent
drop in average revenue per subscriber to $48.00 per month. The increase in
subscribers relates to continued growth in demand for wireless services.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Cellular equipment revenues increased 56.5 percent, to $36, and 41.7 percent,
to $68, for the three- and six-month periods, respectively. These increases
are primarily a result of an increase in unit sales associated with a 68
percent increase in gross customer additions in the first six months of 1997,
partially offset by a decrease in selling price per unit.
In May 1997, Media Group and AirTouch entered into a definitive agreement to
merge Media Group's domestic cellular business and its interest in PrimeCo
into AirTouch. Completing the AirTouch Merger, on a tax-free basis depended
among other things, upon the final status of the "Morris Trust" provision of
the recent tax legislation. Since the enacted legislation eliminated the
"Morris Trust" provision and did not provide transitional relief for the
AirTouch Merger, the Company will continue with the original AirTouch Joint
Venture transaction. See Note B - AirTouch Transaction - to the Consolidated
Financial Statements.
Directory and Information Services. Revenues related to Yellow Pages
directory advertising represent 98 percent of domestic directory and
information services. Yellow Pages directory advertising revenues increased
6.6 percent, to $291, and 6.9 percent, to $575, during the three- and
six-month periods ended June 30, 1997, respectively. The increases are
largely a result of a 7.4 percent increase in revenue per local advertiser
primarily resulting from price increases of 4.6 percent and an increase in
volume and complexity of advertisements sold. These increases are offset by
decreased revenue associated with exited product lines which were nonstrategic
to the directories business.
On June 4, 1997, Media Group sold Thomson Directories, its directory operation
in the United Kingdom, for $121. Also, in July 1997, Media Group entered into
an agreement to sell U S WEST Polska, its directory operation in Poland. The
sale is awaiting approval from Poland's Office of Competition and Consumer
Protection. These transactions will result in the disposition of Media
Group's wholly owned international directory operations.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
OPERATING INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three
Months Months Proforma Proforma
Ended Ended Increase Increase ProForma Increase Increase
June 30, June 30,
1997 1996 Dollars Percent 1996 Dollars Percent
Communications Group $ 620 $ 574 $ 46 8.0 $ 574 $ 46 8.0
Media Group 187 144 43 29.9 135 52 38.5
--------- --------- --------- -------- --------- --------- --------
Total operating income $ 807 $ 718 $ 89 12.4 $ 709 $ 98 13.8
========= ========= ========= ======== ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Six Six
Months Months Proforma Proforma
Ended Ended Increase Increase ProForma Increase Increase
1997 1996 Dollars Percent 1996 Dollars Percent
Communications Group $ 1,264 $ 1,170 $ 94 8.0 $ 1,170 $ 94 8.0
Media Group 365 273 92 33.7 247 118 47.8
------- ------- --------- -------- --------- --------- --------
Total operating income $ 1,629 $ 1,443 $ 186 12.9 $ 1,417 $ 212 15.0
======= ======= ========= ======== ========= ========= ========
</TABLE>
Communications Group Operating Income
The Communications Group's operating income increased 8.0 percent, to $620 and
$1,264, during the three and six-month periods, respectively. The increase in
operating income is primarily due to revenue increases as a result of higher
demand for services, and continued cost control efforts which accelerated in
the latter half of 1996. Partially offsetting the increase was an accrual to
recognize U S WEST Communications' estimated state regulatory liabilities (See
"Contingencies"). For a further discussion of Communications Group's costs
and expenses, see Management's Discussion and Analysis of Financial Condition
and Results of Operations - "Cost and Expenses."
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Media Group Operating Income (Loss)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Three Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ - $ 4 - $ (5) -
International (3) - - - -
------ ------ -------- ----------- ----------
(3) 4 - (5) (40.0)
Wireless communications:
Domestic 100 59 69.5 59 69.5
International (6) - - - -
------ ------ -------- ----------- ----------
94 59 59.3 59 59.3
Directory and information services:
Domestic 132 115 14.8 115 14.8
International (2) (3) (33.3) (3) (33.3)
------ ------ -------- ----------- ----------
130 112 16.1 112 16.1
Other (see Note 1) (34) (31) 9.7 (31) 9.7
------ ------ -------- ----------- ----------
Operating income $ 187 $ 144 29.9 $ 135 38.5
====== ====== ======== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Six Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ (19) $ 8 - $ (18) 5.6
International (7) - - - -
------ ------ -------- ----------- ----------
(26) 8 - (18) 44.4
Wireless communications:
Domestic 195 109 78.9 109 78.9
International (9) - - - -
------ ------ -------- ----------- ----------
186 109 70.6 109 70.6
Directory and information services:
Domestic 262 225 16.4 225 16.4
International (9) (11) (18.2) (11) (18.2)
------ ------ -------- ----------- ----------
253 214 18.2 214 18.2
Other (see Note 1) (48) (58) (17.2) (58) (17.2)
------ ------ -------- ----------- ----------
Operating income $ 365 $ 273 33.7 $ 247 47.8
</TABLE>
Note 1 - Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
Media Group's operating income increased $43, or 29.9 percent, to $187, and
$92, or 33.7 percent, to $365, during the three- and six-month periods,
respectively. On a pro forma basis, operating income increased 38.5 and 47.8
percent, respectively. The increases were primarily due to strong growth in
domestic wireless communications operations.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Cable and Telecommunications. On a pro forma basis, cable and
telecommunications operating loss decreased $2, to $3, for the three-month
period. Revenue increases were partially offset by higher programming fees
associated with rate increases, subscriber growth and special events, and
costs associated with changing the domestic cable brand name to "MediaOne".
Media Group expects to incur additional costs related to the brand name change
during the remainder of 1997, as well as for the deployment of new products
and services. The remaining decline is attributed to the third-quarter 1996
consolidation of the Media Group's cable operation in the Czech Republic
("Kabel Plus").
For the six-month period, on a pro forma basis, cable and telecommunications
operating loss increased $8 to $26. The slight increase in domestic cable and
telecommunications operating loss was a result of revenue increases being more
than offset by the expense increases mentioned above. The remainder of the
decline is due to the third-quarter 1996 consolidation of Kabel Plus.
On August 6, 1997, Media Group announced it will relocate the corporate
offices of its domestic cable operations, MediaOne, Inc., from Boston to
Denver. Approximately 150 employees will be asked to relocate to Denver. The
move is designed to improve operations through better alignment and focus, and
will occur in phases between September 1997 and June 1998. In addition,
several changes in the senior management of MediaOne were announced. The
Media Group anticipates incurring a pretax charge of approximately $30 in
third-quarter 1997 for costs related to the move and management changes.
Wireless Communications. Domestic wireless communications operating income
increased 69.5 percent, to $100, and 78.9 percent, to $195, for the three- and
six-month periods, respectively. These increases are a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. On a per subscriber basis, the 1997 decline in revenue of
8.8 percent has been more than offset by the 21.9 percent decrease in the
costs to acquire and support customers. Increased depreciation expense,
largely a result of network upgrades, partially offset the increase in
operating income.
Directory and Information Services During the three- and six-month periods,
operating income related to domestic Yellow Pages directory advertising
increased 5.3 percent, to $140, and 5.7 percent, to $277, respectively.
Revenue increases and cost savings associated with headcount reductions were
partially offset by increased printing, paper and sales support costs. These
cost increases were primarily associated with an increase in the volume and
complexity of advertisements sold. Operating losses associated with ongoing
product development activities, which include development costs for internet
content services, are included in domestic directory and information services
operating income. Such operating losses decreased by $10 and $22, during the
three- and six-month periods, respectively, primarily as a result of
discontinuing various product development activities in 1996.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Other. During the three-month period, other operating loss increased $3, to
$34, primarily due to a shift in the timing of billing U S WEST corporate
costs to the Media Group. The increased costs were partially offset by staff
reductions at international headquarters. During the six-month period, other
operating losses decreased $10, to $48, primarily attributable to cost savings
related to international staff reductions.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Three Six Six
Month Months Months Months
Ended Ended Increase Increase Ended Ended Increase Increase
June 30, June 30, (Decrease) (Decrease) June 30, June 30, (Decrease) (Decrease)
1997 1996 Dollars Percent 1997 1996 Dollars Percent
Interest expense $ 266 $ 136 $ 130 95.6 $ 544 $ 271 $ 273 -
Equity losses in
unconsolidated ventures 153 77 76 98.7 318 143 175 -
Gains on sales of investments 44 - 44 - 95 - 95 -
Gains on sales of rural
telephone exchanges 29 49 (20) (40.8) 47 49 (2) (4.1)
Guaranteed minority interest
expense 22 12 10 83.3 44 24 20 83.3
Other expense 24 23 1 4.3 50 46 4 8.7
</TABLE>
Interest expense increased $130 and $273 during the three- and six-month
periods, respectively, primarily as a result of the Continental Merger. U S
WEST assumed Continental debt totaling $6,525 (at market value) and incurred
debt of $1,150 to finance the cash portion of the Merger consideration.
Equity losses increased $76 and $175 for the three- and six-month periods,
respectively, due to greater losses from international ventures and from the
domestic investment in PrimeCo. The increase in international losses relates
to: (1) expansion of the network and financing activities at Telewest
Communications, plc ("Telewest"), (2) costs associated with the significant
increase in customers and network coverage at One 2 One, and (3) the
amortization of license fees related to the wireless investment in India.
Domestically, PrimeCo launched service in November 1996, and losses associated
with this venture have increased as a result of start-up and other costs.
Media Group expects equity losses will continue to be significant as venture
expansion activities continue.
During the second quarter of 1997, Media Group sold its shares of Time Warner,
Inc. acquired in the Continental Merger, for proceeds of $220 and a pretax
gain of $44. In addition, during the first quarter of 1997, Media Group sold
its 5 percent interest in a wireless venture in France for proceeds of $82,
and a pretax gain of $51.
During the six-month period ended June 30, 1997, the Communications Group sold
selected rural telephone exchanges in Iowa, South Dakota, Nebraska and Idaho
for a pretax gain of $47 and an after tax gain of $29. Certain Iowa, South
Dakota and Idaho rural telephone exchanges were sold
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
during second-quarter 1997 for a pretax gain of $29 and an after tax gain of
$18. The 1996 gains were a result of sales in North and South Dakota.
Guaranteed minority interest expense increased $10 and $20 for the three- and
six-month periods, respectively. The increases were a result of the October
1996 issuance of Company-obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely Company-guaranteed debentures ("Preferred
Securities") totaling $480.
The slight increases in other expense are primarily due to foreign currency
losses and additional interest expense associated with the Communication
Group's interstate sharing liabilities and state regulatory liabilities.
These increases were largely offset by a 1996 pretax charge of $31 associated
with the sale of Media Group's cable television interests in Norway, Sweden
and Hungary.
Income Tax Provision
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, Percent June 30, June 30, Percent
1997 1996 Change 1997 1996 Change
Provision for income taxes $ 180 $ 206 (12.6) $ 350 $ 398 (12.1)
Effective tax rate - - - 42.9 39.5 -
</TABLE>
The increase in the effective tax rate is primarily a result of lower pretax
earnings and additional goodwill amortization associated with the Continental
Merger.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended Six Months Ended
June 30, June 30,
1997 1996
Communications Group $ 2,002 $ 1,429
Media Group 576 202
----------------- -----------------
Total cash provided by operating activities $ 2,578 $ 1,631
================= =================
</TABLE>
Cash provided by operating activities increased $947 in the first half of
1997, compared with 1996, primarily due to growth in Communications Group
operations. The increase in Communications Group's operating cash flow
reflects continued cost control efforts, lower tax payments and restructuring
expenditures, and a decrease in the cash funding of postretirement benefits
<PAGE>
10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
during 1997. Operating cash flow at the Media Group increased primarily due
to the Continental Merger and growth in operations from the domestic cellular
business. Partially offsetting the increase was higher financing costs
resulting from greater debt levels associated with the Continental Merger.
Investing Activities
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Six Month
Ended Ended
June 30, June 30,
1997 1996
Communications Group $ (809) $ (1,162)
Media Group (1,427) (363)
------------ -----------
Total cash (used for) investing activities $ (2,236) $ (1,525)
============ ===========
</TABLE>
Investing activities at the Communications Group consists primarily of capital
expenditures of $841 for the first six months of 1997. The majority of the
1997 expenditures were for access line growth, continued improvement of the
telecommunications network and for interconnection costs related to the
Telecommunications Act. The decline in cash used for investing activities is
primarily due to lower capital expenditures as a result of timing and tighter
control efforts over spending. The Communications Group anticipates capital
expenditures will accelerate during the remainder of 1997 and will include
expenditures for wireless personal communications services, interconnection
requirements related to the Telecommunications Act and interLATA long-distance
service.
Investing activities of the Media Group include capital expenditures of $717
for the first six months of 1997. The majority of expenditures in 1997 were
devoted to upgrading the domestic cable network and expanding the domestic
cellular network. Media Group also invested $44 in international ventures
during 1997, primarily capital contributions to a wireless venture in India.
Other investing activities include an investment in Continental of $1,150
which represents payment of the cash portion of the Merger consideration.
During 1997, Media Group received proceeds totaling $625 related to asset
sales as follows: (a) $220 from the sale of Time Warner, Inc. shares acquired
in the Continental Merger, (b) $178 from the sale of 6,075,000 shares of
Teleport Communications Group stock, (c) $121 from the sale of Thomson
Directories, (d) partial proceeds of $29 from the sale of Media Group's 5
percent interest in a wireless venture in France, (e) $50 from the capital
assets segment, which is held for sale, and (f) $27 from other miscellaneous
sales.
<PAGE>
10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
In July 1997, Media Group entered into an agreement to purchase up to the
remaining 50 percent of Fintelco, S.A., ("Fintelco"), a cable and
telecommunications venture with approximately 660,000 cable subscribers
located in Argentina. This additional interest could bring Media Group
ownership in Fintelco up to 100 percent. Closing is contingent upon various
regulatory approvals, which are expected during the third quarter of 1997.
Financing Activities
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended Six Months Ended
June 30, June 30,
1997 1996
Communications Group $ (1,184) $ (384)
Media Group 885 213
------------------ ------------------
Total cash (used for) financing activities $ (299) $ (171)
================== ==================
</TABLE>
Total debt at June 30, 1997 was $15,578, an increase of $227 compared with
December 31, 1996. The Company incurred additional debt in 1997 to finance
the cash portion of the Continental Merger consideration which totaled $1,150.
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 debt incurred in conjunction with the Continental Merger.
Increases in debt at the Media Group were partially offset by a decrease in
debt of $713 at the Communications Group. The Communications Group's debt
decrease was partially driven by lower capital expenditures and increased
operating cash flows.
In connection with the recent regulatory rulings (See "Contingencies"), U S
WEST Communication's senior unsecured debt rating is under review by Moody's.
The review may result in a downgrading.
During the second quarter of 1997, U S WEST called a 10 5/8 percent senior
subordinated note, due June 15, 2002. The debt had a recorded value of $110,
including a premium of $10. This extinguishment resulted in a pretax gain of
$5, ($3 after tax).
On June 30, 1997, Media Group acquired cable systems serving 40,000
subscribers in the state of Michigan for cash of $25 and approximately $50 of
Preferred Stock issued by U S WEST. The Preferred Stock is redeemable at U S
WEST's option starting five years from the acquisition date, or upon
dissolution of Media Group. The stockholders have the right to elect cash
upon redemption, or to convert their Preferred Stock into Media Group common
stock. (See Note E - Series E Preferred Stock Subject to Mandatory Redemption
- - to the Consolidated Financial Statements.)
<PAGE>
10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
On July 30, 1997, U S WEST announced that it will call its Liquid Yield Option
Notes effective August 29, 1997. At June 30, 1997, the notes had a carrying
value of $565.
Excluding debt associated with the capital assets segment, the Company's
percentage of debt to total capital at June 30, 1997 was 55.0 percent compared
with 54.8 percent at December 31, 1996. 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 59.8
percent at June 30, 1997, compared with 59.5 percent at December 31, 1996.
The percentage of debt to total capital has increased as a result of higher
debt associated with the Continental Merger.
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.
CONTINGENCIES
For a discussion of contingencies at the Communications Group, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Contingencies."
REGULATORY ENVIRONMENT
For a discussion of Communications Group's regulatory environment, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - "Regulatory Environment."
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS
GROUP
OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Dollars in millions (except per share amounts) 1997 1996 1997 1996
Operating revenues:
Local service $ 1,151 $ 1,179 $ 2,382 $ 2,324
Interstate access service 678 626 1,365 1,248
Intrastate access service 200 189 400 379
Long-distance network services 240 278 490 568
Other services 274 228 493 446
---------- --------- ---------- ----------
Total operating revenues 2,543 2,500 5,130 4,965
Operating expenses:
Employee-related expenses 904 921 1,768 1,788
Other operating expenses 391 387 836 775
Taxes other than income taxes 98 100 205 197
Depreciation and amortization 530 518 1,057 1,035
---------- --------- ---------- ----------
Total operating expenses 1,923 1,926 3,866 3,795
---------- --------- ---------- ----------
Income from operations 620 574 1,264 1,170
Interest expense 100 110 203 221
Gains on sales of rural telephone exchanges 29 49 47 49
Other income (expense) - net (19) 4 (41) (12)
---------- --------- ---------- ----------
Income before income taxes and cumulative
effect of change in accounting principle 530 517 1,067 986
Provision for income taxes 198 193 396 368
---------- --------- ---------- ----------
Income before cumulative effect of change
in accounting principle 332 324 671 618
Cumulative effect of change in accounting
principle - net of tax - - - 34
---------- --------- ---------- ----------
NET INCOME $ 332 $ 324 $ 671 $ 652
========== ========= ========== ==========
EARNINGS PER COMMON SHARE:
Income before cumulative effect of
change in accounting principle $ 0.69 $ 0.68 $ 1.39 $ 1.30
Cumulative effect of change in
accounting principle - - - 0.07
---------- --------- ---------- ----------
EARNINGS PER COMMON SHARE $ 0.69 $ 0.68 $ 1.39 $ 1.37
========== ========= ========== ==========
DIVIDENDS PER COMMON SHARE $ 0.535 $ 0.535 $ 1.07 $ 1.07
========== ========= ========== ==========
AVERAGE COMMON SHARES
OUTSTANDING (thousands) 482,542 476,803 481,945 475,929
========== ========= ========== ==========
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Dollars in millions 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 89 $ 80
Accounts and notes receivable - net 1,605 1,622
Inventories and supplies 182 144
Deferred tax asset 197 171
Prepaid and other 73 65
--------- -------------
Total current assets 2,146 2,082
--------- -------------
Gross property, plant and equipment 32,787 32,645
Less accumulated depreciation 19,082 18,639
--------- -------------
Property, plant and equipment - net 13,705 14,006
Other assets 910 827
--------- -------------
Total assets $ 16,761 $ 16,915
========= =============
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP
(Unaudited), continued
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Dollars in millions 1997 1996
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 166 $ 834
Accounts payable 1,029 989
Employee compensation 301 342
Dividends payable 258 257
Advanced billing and customer deposits 278 250
Other 1,091 795
--------- -------------
Total current liabilities 3,123 3,467
--------- -------------
Long-term debt 5,619 5,664
Postretirement and other postemployment
benefit obligations 2,393 2,387
Deferred income taxes 766 749
Deferred credits and other 710 731
Contingencies (See Note D to the Combined
Financial Statements)
Communications Group equity 4,150 3,917
--------- -------------
Total liabilities and equity $ 16,761 $ 16,915
========= =============
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP
CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Six Months
Ended Ended
June 30, June 30,
Dollars in millions 1997 1996
OPERATING ACTIVITIES
Net income $ 671 $ 652
Adjustments to net income:
Depreciation and amortization 1,057 1,035
Gains on sales of rural telephone exchanges (47) (49)
Cumulative effect of change in accounting principle - (34)
Deferred income taxes and amortization
of investment tax credits (17) (3)
Changes in operating assets and liabilities:
Restructuring payments (45) (74)
Postretirement medical and life costs, net
of cash fundings 3 (30)
Accounts receivable 17 57
Inventories, supplies and other current assets (58) (35)
Accounts payable and accrued liabilities 336 (62)
Other adjustments - net 85 (28)
------------ ------------
Cash provided by operating activities 2,002 1,429
------------ ------------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (841) (1,266)
Proceeds from sales of rural telephone exchanges 28 111
Proceeds from (payments on) disposals of property,
plant, and equipment 4 (7)
------------ ------------
Cash (used for) investing activities (809) (1,162)
------------ ------------
FINANCING ACTIVITIES
Net (repayments of) proceeds from short-term debt (662) 260
Repayments of long-term debt (85) (253)
Dividends paid on common stock (475) (467)
Proceeds from issuance of common stock 38 76
------------ ------------
Cash (used for) financing activities (1,184) (384)
------------ ------------
CASH AND CASH EQUIVALENTS
Increase (decrease) 9 (117)
Beginning balance 80 172
------------ ------------
Ending balance $ 89 $ 55
============ ============
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 1997 and 1996
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation. The Combined Financial Statements have been prepared
by U S WEST, Inc. ("U S WEST" or the "Company") pursuant to the interim
reporting rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally accompanying
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted pursuant to such SEC rules
and regulations. In the opinion of U S WEST's management, the Combined
Financial Statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial information
set forth therein. It is suggested that these Combined Financial Statements
be read in conjunction with the 1996 U S WEST Consolidated Financial
Statements, the U S WEST Communications Group Combined Financial Statements
and the U S WEST Media Group Combined Financial Statements and notes thereto
included in U S WEST's proxy statement mailed to all shareowners on April 7,
1997.
Financial Instruments. Synthetic instrument accounting is used for interest
rate and foreign currency swaps if the index, maturity, and amount of the
instrument match the terms of the underlying debt. Net interest accrued is
recognized over the life of the instruments as an adjustment to interest
expense and is a component of cash provided by operating activities. Any gain
or loss on the termination of an instrument, which qualifies for synthetic
instrument accounting, would be deferred and amortized over the remaining life
of the original instrument.
Hedge accounting is used for forward contracts which qualify as hedges of
future debt issues. To qualify for hedge accounting, the contracts must have
a high inverse correlation to the exposure being hedged, and reduce the risk
or volatility associated with changes in interest rates. Qualified contracts
are carried at market value with gains and losses recorded with the related
debt and amortized as yield adjustments. Any gain or loss on the termination
of a contract, which qualifies for hedge accounting, would be deferred and
accounted for with the related transaction. U S WEST does not use derivative
financial instruments for trading purposes.
New Accounting Standards. In fourth-quarter 1997, U S WEST will adopt
Statement of Financial Accounting Standards ("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 is not expected to have a
material impact on Communications Group's earnings per share.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies (continued)
In 1998, U S WEST will adopt SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 requires that the components of and the total
amount for comprehensive income be displayed in the financial statements.
Comprehensive income includes net income and all changes in equity during a
period that arise from nonowner sources, such as foreign currency items and
unrealized gains and losses on certain investments in equity securities.
Among other things, SFAS No. 131 requires detailed operating segment
information of an enterprise on an annual and interim period basis. The
effects of adopting both SFAS No. 130 and 131 are being evaluated.
B. Dex Transfer
In May 1997, U S WEST announced its intention to transfer its domestic
directory business from the Media Group to the Communications Group (the "Dex
Transfer"). Under the terms of the Dex Transfer, $3.9 billion of U S WEST debt
will be reallocated from the Media Group to the Communications Group and the
Communications Group will issue shares of Communications Group common stock to
Media Group shareowners totaling $850. Contingent upon receiving favorable
federal income tax treatment, the Company intends to pursue the Dex Transfer.
C. Rural Telephone Exchanges Held for Sale
In conjunction with its rural telephone exchange sales program, U S WEST
Communications, Inc. ("U S WEST Communications") sold certain rural telephone
exchanges for pretax gains of $29 and $47, during the three- and six-month
periods ended June 30, 1997, respectively. The carrying value of the remaining
rural telephone exchanges held for sale approximates $75 at June 30, 1997.
The remaining rural telephone exchanges held for sale are expected to be
disposed of in the latter half of 1997 and first-quarter 1998. In accordance
with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," the Company has stopped depreciating the
exchanges held for sale.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
D. Contingencies
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely U S WEST Communications' alternative form
of regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communication's earnings. In May 1997, the OPUC ordered U S WEST
Communications to reduce its annual revenues by $97, effective May 1,
1997, and to issue a one-time refund, including interest, of approximately
$102 to reflect the revenue reduction for the period May 1, 1996 through April
30, 1997. The one-time refund is for interim rates which became subject to
refund when U S WEST Communications' AFOR plan was terminated on May 1, 1996.
U S WEST Communications filed an appeal of the order and asked for an
immediate stay of the refund with the Oregon Circuit Court for the County of
Marion ("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court
granted U S WEST Communications' request for a stay, pending a full review of
the OPUC's order. The Oregon Circuit Court is scheduled to hear arguments on
the appeal in December 1997.
The one-time refund and cumulative amount of revenues collected subject to
refund, including interest, as of June 30, 1997, totals approximately $121.
In 1996, the Washington State Utilities and Transportation Commission ("WUTC")
acted on U S WEST Communications' 1995 rate request. U S WEST
Communications had sought to increase revenues by raising rates primarily for
basic residential services over a four-year period. Instead of granting U S
WEST Communications' request, the WUTC ordered $91.5 in annual net revenue
reductions, effective May 1, 1996.
Based on the WUTC 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. The Court declined to change the WUTC order. 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.
Oral arguments were heard in June 1997. U S WEST Communications is waiting a
decision by the State Supreme Court.
<PAGE>
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
D. Contingencies (continued)
Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund. The cumulative amount of revenues collected subject to
refund as of June 30, 1997, including interest, is approximately $135.
In another proceeding, the Utah Supreme Court 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 potential exposure, including interest, at June
30, 1997, is approximately $160.
The Communications Group has accrued $113 at June 30, 1997, which represents
its estimated liability for state regulatory proceedings. It is possible that
the ultimate liability could exceed the recorded liability by an amount up to
$300. The Communications Group continues to monitor and evaluate the risks
associated with its state regulatory environment, and will adjust estimates as
new information becomes available.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts)
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH
1996
Following are details of the Communications Group's reported net income and
earnings per common share ("earnings per share"), normalized to exclude the
effects of certain nonoperating items.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three Increase Increase Six Six Increase
Months Months (Decrease) (Decrease) Months Months (Decrease)
Ended Ended Ended Ended
June 30, June 30, June 30, June 30
Net Income: 1997 1996 Dollars Percent 1997 1996 Dollars
Reported net income $ 332 $ 324 $ 8 2.5 $ 671 $ 652 $ 19
Adjustments to reported net income:
Gains on sales of rural
telephone exchanges (18) (30) 12 (40.0) (29) (30) 1
Cumulative effect of change in
accounting principle (1)<F1> - - - - - (34) 34
Current year effect of change
in accounting - (5) 5 - - (10) 10
---------- ---------- ----------- ---------- ---------- --------- -----------
principle (1)<F>
Normalized income $ 314 $ 289 $ 25 8.7 $ 642 $ 578 $ 64
========== ========== =========== ========== ========== ========= ===========
<S> <C>
Increase
(Decrease)
Net Income: Percent
Reported net income 2.9
Adjustments to reported net income:
Gains on sales of rural
telephone exchanges (3.3)
Cumulative effect of change in
accounting principle (1)<F1> -
Current year effect of change
in accounting -
----------
principle (1)<F>
Normalized income 11.1
==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Three Increase Increase Six Six Increase
Months Months (Decrease) (Decrease) Months Months (Decrease)
Ended Ended Ended Ended
June 30, June 30, June 30, June 30
Earnings per Share: 1997 1996 Dollars Percent 1997 1996 Dollars
Reported earnings per share $ 0.69 $ 0.68 $ 0.01 1.5 $ 1.39 $ 1.37 $ 0.02
Adjustments to reported
earnings per share:
Gains on sales of rural
telephone exchanges (0.04) (0.06) 0.02 (33.3) (0.06) (0.06) -
Cumulative effect of change in
accounting principle (1)<F1> - - - - - (0.07) 0.07
Current year effect of change
in accounting - (0.01) 0.01 - - (0.02) 0.02
---------- ---------- ----------- ---------- ---------- --------- -----------
principle (1)<F1>
Normalized earnings per share $ 0.65 $ 0.61 $ 0.04 6.6 $ 1.33 $ 1.22 $ 0.11
========== ========== =========== ========== ========== ========= ===========
<S> <C>
Increase
(Decrease)
Earnings per Share: Percent
Reported earnings per share 1.5
Adjustments to reported
earnings per share:
Gains on sales of rural
telephone exchanges -
Cumulative effect of change in
accounting principle (1)<F1> -
Current year effect of change
in accounting -
----------
principle (1)<F1>
Normalized earnings per share 9.0
==========
<FN>
<F1>
(1) 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."
</FN>
</TABLE>
The Communications Group's normalized income increased $25, or 8.7 percent, to
$314, and $64, or 11.1 percent to $642, for the three- and six-month periods
ended June 30, 1997, respectively. Normalized earnings per share were $0.65,
an increase of $0.04, or 6.6 percent, and $1.33, an increase of $0.11, or 9.0
percent for the three- and six-month periods, respectively. Earnings before
interest, taxes, depreciation, amortization and other ("EBITDA") increased 5.3
percent, to $1,150, and $2,321 for the three- and six-month periods,
respectively. EBITDA excludes gains on sales of certain rural telephone
exchanges.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts),
continued
The Communications Group believes EBITDA is an important indicator of the
operational performance of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of the
performance of the Communications Group's business or as an alternative to
cash flows from operating activities as a measure of liquidity, in each case
determined in accordance with GAAP.
The increases are primarily due to higher demand for services and continued
cost control efforts which accelerated in the latter half of 1996. These
increases were partially offset by an accrual to recognize U S WEST
Communication's estimated state regulatory liabilities. (See "Contingencies")
The Communications Group anticipates net income growth will continue to be
partially offset by increased costs related to growth initiatives and
interconnection requirements, and the impacts of access reform and price cap
regulation. (See "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 1996 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.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Operating Revenues
An analysis of operating revenues follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lower Increase Increase
Price (Higher) (Decrease) (Decrease)
1997 1996 Demand Changes Refunds Other Dollars Percent
Local service
Second quarter $1,151 $1,179 $ 97 $ (4) $ 8 $ (129) $ (28) (2.4)
Six months 2,382 2,324 198 (14) 17 (143) 58 2.5
Interstate access
Second quarter 678 626 74 (5) (7) (10) 52 8.3
Six months 1,365 1,248 138 (10) 3 (14) 117 9.4
Intrastate access
Second quarter 200 189 16 3 - (8) 11 5.8
Six months 400 379 25 5 - (9) 21 5.5
Long-distance network
Second quarter 240 278 (25) (4) - (9) (38) (13.7)
Six months 490 568 (47) (5) - (26) (78) (13.7)
Other services
Second quarter 274 228 - - - 46 46 20.2
Six months 493 446 - - - 47 47 10.5
------ ------ -------- --------- --------- ------- ----------- ----------
Total revenues
Second quarter 2,543 2,500 162 (10) 1 (110) 43 1.7
Six months $5,130 $4,965 $ 314 $ (24) $ 20 $ (145) $ 165 3.3
====== ====== ======== ========= ========= ======= =========== ==========
</TABLE>
Local Services Revenues. Local service revenues decreased $28, or 2.4
percent, during the three-month period ended June 30, 1997. The decrease is
largely the result of an $84 accrual to recognize U S WEST Communications'
estimated state regulatory liabilities. (See "Contingencies") Also
contributing to the decrease was a $30 reclassification of public telephone
revenues to other services revenues. The reclassification was in conjunction
with the Federal Communications Commission's ("FCC") payphone orders, which
took effect April 15, 1997, as mandated by the Telecommunications Act of 1996
(the "Telecommunications Act"). Lower wireless interconnection access prices,
also mandated by the Telecommunications Act, reduced local service revenues by
$11.
Partially offsetting these decreases was access line growth and increased
demand for new product and service offerings, and existing central office
features. Total reported access lines increased 616,000, or 4.1 percent,
during the past 12 months, of which 249,000 was attributable to second lines.
Second line installations increased 26.7 percent. Access lines grew 686,000,
or 4.6 percent, when adjusted for sales of approximately 70,000 rural
telephone access lines during the past twelve months.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Local service revenues increased $58, or 2.5 percent, during the six-month
period primarily as a result of access line growth and increased demand for
new product and service offerings, and existing central office features.
Partially offsetting the increase is a $91 accrual to recognize U S WEST
Communication's estimated state regulatory liabilities. Lower wireless
interconnection access prices and the reclassification of public telephone
revenues, both mandated by the Telecommunications Act, further reduced local
service revenues for the six-month period by $27 and $30, respectively.
Excluding the non-recurring effects of the regulatory accrual and the public
telephone revenues reclassification, local service revenues increased 6.4
percent and 6.8 percent, during the three- and six-month periods ended June
30, 1997, respectively. (See "Contingencies")
Interstate Access Revenues. Higher interstate access revenues resulted from
increased demand for private line services and access line growth. Also
contributing were increases of 6.1 and 6.3 percent in billed interstate
access minutes of use for the three- and six-month periods, respectively. The
increases were partially offset by the effects of price reductions and
accruals of $14 and $22 for refunds to interexchange carriers, during the
three- and six-month periods, respectively. The refunds relate to a one-time
$22 exogenous cost adjustment ordered by the FCC as a condition of granting U
S WEST Communications' waiver from price cap sharing rules for the first half
of 1997. (See "Regulatory Environment") True-ups of $18 to the 1996 price cap
sharing accruals partially offset the one-time $22 exogenous cost adjustment
in the six-month period.
The Communications Group anticipates future interstate access revenue growth
will be negatively impacted by the FCC's recent orders to restructure the
access charge system and its current price cap plan. (See "Regulatory
Environment")
Intrastate Access Revenues. Intrastate access revenues increased largely as
a result of increases of 12.5 and 10.5 percent in billed intrastate minutes of
use for the three- and six-month periods, respectively, and increased demand
for private line services.
Long-distance Network Service Revenues. Long-distance network service
revenues decreased 13.7 percent for the three- and six-month periods primarily
due to the effects of competition and the implementation of multiple toll
carrier plans ("MTCPs") in Iowa and Nebraska in 1996, and in Iowa, Oregon and
Washington in first-quarter 1997. The MTCPs essentially allow independent
telephone companies to act as toll carriers. During the three- and six-month
periods ended June 30, 1997, the MTCPs reduced long-distance revenues by
$12 and $29, which was offset by increased intrastate access revenues of $1
and $3, and decreased other operating expenses (i.e., access expense) of
$9 and $23, respectively.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Excluding the effects of the MTCPs, long-distance network service revenues
decreased by 9.4 and 8.6 percent for the three- and six-month periods,
respectively. Erosion of long-distance network service revenues will continue
due to the loss of exclusivity of 1+ dialing in Minnesota and Arizona,
effective in February and April 1996, respectively, and continued competitive
dial-around activity in other states within the Communications Group's 14
state region. The Communications Group is responding to competitive losses
through competitive pricing of intraLATA long-distance services and increased
promotional efforts to retain customers.
Other Services Revenues. Other services revenues increased largely due to the
second-quarter 1997 $30 reclassification of public telephone revenues from
local service revenues. Also contributing to the increase was interim
compensation revenue from interexchange carriers as a result of the FCC's
payphone orders which took effect April 15, 1997. The amount of interim
compensation may change as a result of the District of Columbia Court of
Appeals recent review and remand of the FCC's payphone orders. Increases in
voice messaging, inside wire maintenance and billing and collection services
revenues were almost entirely offset by a reduction in contract revenues due
to the completion of a large federal government telephony project in 1996.
Future revenues at U S WEST Communications may be affected by pending
regulatory actions in federal and local regulatory jurisdictions.
Costs and Expenses
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three Three Increase Increase Six Six Increase Increase
Months Months (Decrease) (Decrease) Months Months (Decrease) (Decrease)
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
1997 1996 Dollars Percent 1997 1996 Dollars Percent
Employee-related expenses $ 904 $ 921 (17) (1.8) $ 1,768 $ 1,788 (20) (1.1)
Other operating expenses 391 387 4 1.0 836 775 61 7.9
Taxes other than income taxes 98 100 (2) (2.0) 205 197 8 4.1
Depreciation and amortization 530 518 12 2.3 1,057 1,035 22 2.1
Interest expense 100 110 (10) (9.1) 203 221 (18) (8.1)
Gains on sales of rural telephone
exchanges 29 49 (20) (40.8) 47 49 (2) (4.1)
Other income (expense) - net (19) 4 (23) - (41) (12) 29 -
</TABLE>
Employee-Related Expenses. Employee-related expenses decreased $17, or 1.8
percent, and $20, or 1.1 percent, for the three- and six-month periods,
respectively. The decreases are primarily due to lower salaries and wages,
overtime, and conference and travel expenses. Salaries and wages decreased
primarily as a result of employee reductions totaling 4,051 during the last
twelve months. However, this decrease was largely offset by the effects of
inflation-driven wage increases. The reduction in overtime, and conference and
travel expenses is primarily the result of continued cost control efforts
which accelerated in the latter half of 1996. Partially offsetting the
decreases were higher contract labor costs and an increase in the
postretirement benefits accrual.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
The increase in contract labor is primarily due to additional costs for system
development work and the launch of new products and services. The contract
labor increase during the six-month period also includes marketing and sales
efforts associated with a first-quarter 1997 promotion of caller
identification.
Other Operating Expenses. The increase in other operating expenses of $4, or
1.0 percent, during the three-month period, was partially attributed to
additional repair costs associated with flooding in North Dakota. Also
contributing to the increase was a reserve adjustment associated with billing
and collection activities performed for interexchange carriers, increased
professional fees and costs related to growth initiatives. The increases were
partially offset by lower materials and supplies as a result of continued cost
control efforts and lower costs due to the completion of a large federal
government telephony project in 1996. Reduced access expense (primarily
related to the implementation of the MTCPs in 1996 and 1997) also decreased
operating expenses.
During the six-month period, other operating expenses increased $61, or 7.9
percent. The increase was predominantly a result of higher advertising costs,
of which approximately $30 is attributable to an advertising promotion of
caller identification in first-quarter 1997, and a reserve adjustment
associated with billing and collection activities performed for interexchange
carriers. Also contributing to the increase was additional network software
purchases, increased professional fees and repair costs associated with
flooding in North Dakota. Costs related to the growth initiatives also
contributed to the increase. Partially offsetting the increases were lower
materials and supplies as a result of continued cost control efforts and lower
costs due to the completion of a large federal government telephony project in
1996. Reduced access expense (primarily related to the implementation of the
MTCPs in 1996 and 1997) also decreased operating expenses.
Taxes Other Than Income Taxes. Taxes other than income taxes decreased $2, or
2.0 percent, and increased $8, or 4.1 percent, for the three- and six-month
periods, respectively. Decreased property taxes due to favorable tax
valuations and mill levies, as compared with 1996, were partially offset for
the three-month period, and more than offset for the six-month period, by
increased use and gross receipt taxes.
Depreciation and Amortization. Increased depreciation and amortization expense
was attributable to the effects of a higher depreciable asset base partially
offset by lower depreciation rates for certain classes of plant.
Interest Expense. Interest expense decreased $10, or 9.1 percent, and $18, or
8.1 percent, for the three- and six-month periods, respectively, primarily
due to lower average debt levels and interest rates as compared to 1996.
Partially offsetting the decrease in interest expense was a decrease in the
amount of interest capitalized resulting from a lower average balance of
telecommunications plant under construction.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Gains on Sales of Rural Telephone Exchanges. During the six-month period
ended June 30, 1997, the Communications Group sold selected rural telephone
exchanges in Iowa, South Dakota, Nebraska and Idaho for a pretax gain of $47
and an after tax gain of $29. Certain Iowa, South Dakota and Idaho rural
telephone exchanges were sold during second-quarter 1997 for a pretax gain of
$29 and an after tax gain of $18. The 1996 gains were a result of sales in
North and South Dakota.
Other Income (Expense). Other expense increased primarily due to additional
interest expense associated with the Communications Group's interstate sharing
liabilities and state regulatory liabilities.
Provision for Income Taxes
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, Percent June 30, June 30, Percent
1997 1996 Change 1997 1996 Change
Provision for income taxes $ 198 $ 193 2.6 $ 396 $ 368 7.6
Effective tax rate - - - 37.1 37.3 -
</TABLE>
The increase in the provision for income taxes resulted primarily from higher
pretax earnings and lower amortization of the investment tax credit.
Restructuring Charge
During the six-month period ended June 30, 1997, the restructuring reserve
decreased $45 to a balance of $78. Reserve usage is primarily a result of
expenditures for 380 employee separations during the first half of 1997 and
systems development costs. The restructuring plan is expected to be
substantially complete by the end of 1997. Management continues to evaluate
the remaining reserve balance and employee separations.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash provided by operations increased $573, to $2,002, in the first half of
1997 compared with 1996. The increase in operating cash flow is primarily due
to business growth and continued cost control efforts. Lower tax payments,
along with a decrease in the cash funding of postretirement benefits and lower
restructuring expenditures, also contributed to the increase.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Investing Activities
Communications Group capital expenditures were $841 during the first six
months of 1997. The majority of the 1997 expenditures were for access line
growth, continued improvement of the telecommunications network and for
interconnection costs related to the Telecommunications Act. The decline of
$425 in capital expenditures as compared with 1996 is primarily due to timing
and tighter control efforts over spending. The Communications Group
anticipates capital expenditures will accelerate during the remainder of 1997
and will include expenditures for wireless personal communications service
("PCS"), interconnection requirements related to the Telecommunications Act
and interLATA long-distance service.
In January 1997, the Company purchased PCS licenses in the FCC's block auction
of D and E spectrum. The licenses were granted to the Company in June 1997.
The purchase price of approximately $57 was paid in July 1997.
Financing Activities
During the first half of 1997, debt decreased $713 and the percentage of debt
to total capital decreased from 62.4 at December 31, 1996, to 58.2 percent, at
June 30, 1997. The decrease in the percentage of debt to total capital is
primarily a result of lower debt levels, partially driven by lower capital
expenditures and increased operating cash flows.
In connection with the recent regulatory rulings (See "Contingencies"), U S
WEST Communication's senior unsecured debt rating is under review by Moody's.
The review may result in a downgrading.
Under the terms of the Dex Transfer, $3.9 billion of U S WEST debt will be
reallocated from the Media Group to the Communications Group and the
Communications Group will issue shares of Communications Group common stock to
Media Group shareowners totaling $850. Contingent upon receiving favorable
federal income tax treatment, the Company intends to pursue the Dex Transfer.
On July 30, 1997, U S WEST announced that it will call its Liquid Yield Option
Notes effective August 29, 1997. At June 30, 1997, the notes had a carrying
value of $300.
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 interest, 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.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
CONTINGENCIES
At U S WEST Communications, Inc. there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely U S WEST Communications' alternative form
of regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communication's earnings. In May 1997, the OPUC ordered U S WEST
Communications to reduce its annual revenues by $97, effective May 1,
1997, and to issue a one-time refund, including interest, of approximately
$102 to reflect the revenue reduction for the period May 1, 1996 through April
30, 1997. The one-time refund is for interim rates which became subject to
refund when U S WEST Communications' AFOR plan was terminated on May 1, 1996.
U S WEST Communications filed an appeal of the order and asked for an
immediate stay of the refund with the Oregon Circuit Court for the County of
Marion ("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court
granted U S WEST Communications' request for a stay, pending a full review of
the OPUC's order. The Oregon Circuit Court is scheduled to hear arguments on
the appeal in December 1997.
The one-time refund and cumulative amount of revenues collected subject to
refund, including interest, as of June 30, 1997, totals approximately $121.
In 1996, the Washington State Utilities and Transportation Commission ("WUTC")
acted on U S WEST Communications' 1995 rate request. U S WEST
Communications had sought to increase revenues by raising rates primarily for
basic residential services over a four-year period. Instead of granting U S
WEST Communications' request, the WUTC ordered $91.5 in annual net revenue
reductions, effective May 1, 1996.
Based on the WUTC 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. The Court declined to change the WUTC order. 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.
Oral arguments were heard in June 1997. U S WEST Communications is waiting a
decision by the State Supreme Court.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund. The cumulative amount of revenues collected subject to
refund as of June 30, 1997, including interest, is approximately $135.
In another proceeding, the Utah Supreme Court 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 potential exposure, including interest, at June
30, 1997, is approximately $160.
The Communications Group has accrued $113 at June 30, 1997, which represents
its estimated liability for state regulatory proceedings. It is possible that
the ultimate liability could exceed the recorded liability by an amount up to
$300. The Communications Group continues to monitor and evaluate the risks
associated with its state regulatory environment, and will adjust estimates as
new information becomes available.
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. Among other things, 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 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 would enable the states and the FCC
to begin implementing the local competition provisions of the
Telecommunications Act. Among other things, the FCC Order 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.
<page
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
On July 18, 1997, the Eighth Circuit Court of Appeals ("Eighth Circuit")
vacated significant portions of the FCC Order. Most significantly, the Eighth
Circuit ruled that jurisdiction over local interconnection prices rests with
the states, not the FCC. The effect of the Eighth Circuit's decision is to
have interconnection and network unbundled element pricing be resolved through
negotiations or state PUC arbitration proceedings. Some of the FCC's
unbundling rules, as well as its "pick and choose" provision, were also
vacated by the Eighth Circuit Court.
On May 7, 1997, the FCC announced three decisions that will establish rules to
implement the Universal Service provision of the Telecommunications Act of
1996 (the "Universal Service Order"), as well as rules to restructure the
access charge system (the "Access Reform Order") and the FCC's current price
cap plan (the "Price Cap Order").
UNIVERSAL SERVICE
Under the Universal Service Order, all providers of interstate
telecommunications services will contribute to universal service funding,
which will be based on retail telecommunications revenues. The Universal
Service Order deferred defining a new explicit mechanism to support high-cost
service in areas served by non-rural telephone companies such as U S WEST
Communications until January 1, 1999. Until the explicit mechanism is put in
place, the existing universal service support mechanisms were left intact,
except to the extent modified by the FCC's Access Reform and Price Cap Orders
discussed below.
The FCC's Universal Service Order also includes the establishment of two
separate funds to help connect eligible schools and libraries, and rural
health care providers, to the global telecommunications network. These funds
are capped at $2.25 billion and $400, respectively.
On July 17, 1997, U S WEST filed a petition with the FCC for reconsideration
and clarification of certain issues in the Universal Service Order. Among
other things, the Company requested the FCC to reconsider: 1) establishing a
national fund to ensure high-cost support is sufficient, and 2) assessing
contributions as explicit end-user surcharges. Appeals of the Universal
Service Order have been filed by various other companies.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
FEDERAL ACCESS REFORM
The FCC has ordered a substantial restructuring of interstate access pricing.
A significant portion of the pricing that has been charged using
minutes-of-use pricing will now be charged using a combination of
minutes-of-use rates, presubscribed interexchange carrier charges ("PICCs")
and subscriber line charges ("SLCs"). Although an increase in the SLC to
multi-line business users occurred on July 1, 1997, the bulk of the mandated
pricing changes will occur on January 1, 1998. Additional mandated pricing
changes will also occur on January 1, 1998 through 2001. The net effect of
these changes will be to decrease minutes-of-use charges by over 60 percent
and inrease flat-rate charges (i.e. PICCs and SLCs). The Access Reform Order
generally removes non-traffic sensitive costs from minutes-of-use access
charges. The FCC concluded these non-traffic sensitive costs should be
generally recovered through flat-rate charges against interexchange carriers,
multi-line business users and additional residential lines. The Access Reform
Order also continued in place the current rules by which incumbent local
exchange carriers ("LECs") may not assess interstate access charges on
information service providers and purchasers of unbundled network elements.
The FCC will separately address issues surrounding information service
providers' usage of the public switched network in a related notice of
inquiry. The impacts of access reform will occur over a number of years and
cannot be evaluated until the FCC resolves all remaining issues. Generally,
however, the Access Reform Order will reduce the revenues the Company derives
from interstate access charges. Competition from new entrant LECs will also
affect the Company's access revenues.
U S WEST has appealed the Access Reform Order. U S WEST's primary challenge
is that the FCC acted unlawfully by exempting purchasers of unbundled network
elements from payment of interstate access charges.
PRICE CAP ORDER
The FCC's Price Cap Order requires LECs that are subject to price cap
regulation to increase their price cap index productivity factor to 6.5
percent. The order eliminates the lower productivity factor options (i.e.,
4.0 percent and 4.7 percent) that required sharing of earnings above a
specified level and will require LECs to set their 1997 price cap index
assuming that the 6.5 percent factor had been in effect at the time of the
1996 tariff filing.
Under the FCC's previous price cap plan, U S WEST Communications had elected
the lowest productivity factor, 4.0 percent, in its 1996 annual interstate
tariff filing. As a result, U S WEST Communications remained subject to the
sharing requirements for the first half of 1997. In May 1997, U S WEST
Communications requested a waiver of the price cap sharing rules for the first
half of 1997. On June 26, 1997, the FCC granted the waiver, resulting in U S
WEST Communications making a one-time exogenous cost adjustment of $22. The
adjustment is reflected in the 1997 second-quarter interstate access revenues
results (See "Operating Revenues"). The $22 adjustment was reflected in lower
interstate access rates over twelve months beginning July 1, 1997.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
As mandated by the Price Cap Order, the price cap index in U S WEST
Communications' 1997 interstate access tariff filing was established assuming
that the 6.5 percent productivity factor had been in effect at the time of the
1996 tariff filing. The access rate reductions have an on-going revenue
impact of approximately $165 which will be reflected through lower interstate
rates over twelve months beginning July 1, 1997.
On June 23, 1997, U S WEST petitioned the Tenth Circuit Court of Appeals
("Tenth Circuit") for a review of the Access Reform Order and Price Cap Order.
Among other things, the petition requested the Tenth Circuit to review the
use of a 6.5 percent productivity factor and the retroactive application of
the 6.5 percent productivity factor to July 1, 1996 when determining the price
cap index for the 1997 price cap filing. Through the federal court,
multi-district litigation forum selection process, the Access Reform Order
will be reviewed by the Eighth Circuit. The Tenth Circuit has now transferred
review of the Price Cap Order to the District of Columbia Court of Appeals.
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF OPERATIONS U S WEST MEDIA GROUP
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
Dollars in millions (except per share amounts) 1997 1996 1997 1996
Sales and other revenues:
Cable and telecommunications $ 589 $ 59 $ 1,145 $ 116
Wireless communications 363 290 698 554
Directory and information services 319 304 628 592
Other 6 5 13 9
---------- ---------- ---------- ----------
Total sales and other revenues 1,277 658 2,484 1,271
Operating expenses:
Cost of sales and other revenues 430 206 836 405
Selling, general and administrative expenses 360 238 680 456
Depreciation and amortization 300 70 603 137
---------- ---------- ---------- ----------
Total operating expenses 1,090 514 2,119 998
---------- ---------- ---------- ----------
Income from operations 187 144 365 273
Interest expense 166 26 341 50
Equity losses in unconsolidated ventures 153 77 318 143
Gains on sales of investments 44 - 95 -
Guaranteed minority interest expense 22 12 44 24
Other expense - net 5 27 9 34
---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item (115) 2 (252) 22
Provision (benefit) for income taxes (18) 13 (46) 30
---------- ---------- ---------- ----------
Loss before extraordinary item (97) (11) (206) (8)
Extraordinary item:
Early extinguishment of debt, net of tax 3 - 3 -
---------- ---------- ---------- ----------
NET LOSS $ (94) $ (11) $ (203) $ (8)
========== ========== ========== ==========
Dividends on preferred stock 12 1 25 2
---------- ---------- ---------- ----------
LOSS AVAILABLE FOR
COMMON STOCK $ (106) $ (12) $ (228) $ (10)
========== ========== ========== ==========
LOSS PER COMMON SHARE $ (0.17) $ (0.03) $ (0.38) $ (0.02)
========== ========== ========== ==========
AVERAGE COMMON SHARES
OUTSTANDING (thousands) 606,446 473,593 606,486 473,298
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST
MEDIA GROUP
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Dollars in millions 1997 1996
ASSETS
Current assets:
Cash and cash equivalents $ 155 $ 121
Accounts and notes receivable - net 514 508
Deferred directory costs 252 259
Receivable from Communications Group 96 92
Marketable securities - 58
Other 107 101
--------- -------------
Total current assets 1,124 1,139
--------- -------------
Gross property, plant and equipment 5,759 5,111
Accumulated depreciation 1,178 836
--------- -------------
Property, plant and equipment - net 4,581 4,275
Investment in Time Warner Entertainment 2,483 2,477
Net investment in international ventures 1,322 1,548
Intangible assets - net 12,461 12,595
Net investment in assets held for sale 416 409
Other assets 1,340 1,618
--------- -------------
Total assets $ 23,727 $ 24,061
========= =============
</TABLE>
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST
MEDIA GROUP
(Unaudited), Continued
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Dollars in millions 1997 1996
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 1,277 $ 217
Due to Continental Cablevision shareowners - 1,150
Accounts payable 320 425
Deferred revenue and customer deposits 127 129
Other 925 795
--------- -------------
Total current liabilities 2,649 2,716
--------- -------------
Long-term debt 8,516 8,636
Deferred income taxes 3,577 3,600
Deferred credits and other 389 346
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
Company-guaranteed debentures 1,080 1,080
Preferred stock subject to mandatory redemption 100 51
Media Group equity 7,416 7,632
--------- -------------
Total liabilities and equity $ 23,727 $ 24,061
========= =============
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
COMBINED STATEMENTS OF CASH FLOWS U S WEST MEDIA GROUP
(Unaudited)
Dollars in millions
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended June 30, 1997 1996
OPERATING ACTIVITIES
Net loss $ (203) $ (8)
Adjustments to net loss:
Depreciation and amortization 603 137
Equity losses in unconsolidated ventures 318 143
Gains on sales of investments (95) -
Deferred income taxes (69) (47)
Provision for uncollectibles 44 30
Changes in operating assets and liabilities:
Accounts and notes receivable (30) (48)
Deferred directory costs and other (34) (10)
Accounts payable and accrued liabilities 51 (11)
Other adjustments - net (9) 16
-------- ------
Cash provided by operating activities 576 202
-------- ------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (717) (243)
Payment to Continental Cablevision shareowners (1,150) -
Investment in international ventures (44) (139)
Proceeds from sale of Time Warner, Inc. shares 220 -
Proceeds from sales of investments 355 -
Cash from net investment in assets held for sale 50 93
Other - net (141) (74)
-------- ------
Cash (used for) investing activities (1,427) (363)
-------- ------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt - net (3,052) 80
Proceeds from issuance of long-term debt 4,110 330
Repayments of long-term debt (108) (223)
Dividends paid on preferred stock (23) (2)
Proceeds from issuance of common stock 11 28
Purchases of treasury stock (53) -
-------- ------
Cash provided by financing activities 885 213
-------- ------
CASH AND CASH EQUIVALENTS
Increase 34 52
Beginning balance 121 20
-------- ------
Ending balance $ 155 $ 72
======== ======
</TABLE>
See Notes to Combined Financial Statements.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 1997 and 1996
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation. The Combined Financial Statements have been prepared
by U S WEST, Inc. ("U S WEST" or the "Company") pursuant to the interim
reporting rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally accompanying
financial statements prepared in accordance with generally accepted accounting
principles ("GAAP") have been condensed or omitted pursuant to such SEC rules
and regulations. In the opinion of U S WEST's management, the Combined
Financial Statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial information
set forth therein. It is suggested that these Combined Financial Statements
be read in conjunction with the 1996 U S WEST Consolidated Financial
Statements, the U S WEST Media Group Combined Financial Statements and the U S
WEST Communications Group Combined Financial Statements and notes thereto
included in U S WEST's proxy statement mailed to all shareowners on April 7,
1997.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
Financial Instruments. Synthetic instrument accounting is used for interest
rate swaps and interest rate caps if the index, maturity, and amount of the
instrument match the terms of the underlying debt. Net interest accrued is
recognized over the life of the instruments as an adjustment to interest
expense and is a component of cash provided by operating activities. Any gain
or loss on the termination of an instrument, which qualifies for synthetic
instrument accounting, would be deferred and amortized over the remaining life
of the original instrument.
Hedge accounting is used for foreign currency forward and zero-cost
combination contracts which qualify for and are designated as hedges of firm
equity investment commitments and for options and forward contracts which
qualify as hedges of future debt issues. To qualify for hedge accounting, the
contracts must have a high inverse correlation to the exposure being hedged,
and reduce the risk or volatility associated with changes in foreign exchange
or interest rates. Qualified contracts are carried at market value with gains
and losses recorded in equity until sale of the investment or are associated
with the related debt and amortized as yield adjustments. Any gain or loss on
the termination of a contract, which qualifies for hedge accounting,. would be
deferred and accounted for with the related transaction.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies (continued)
Market value accounting is used for derivative contracts which do not qualify
for synthetic instrument or hedge accounting. Market value accounting is also
used for foreign exchange contracts designated as hedges of foreign
denominated receivables and payables. These contracts are carried at market
value in other assets or liabilities with gains and losses recorded as other
income (expense). U S WEST does not use derivative financial instruments for
trading purposes.
New Accounting Standards. In fourth-quarter 1997, U S WEST will adopt
Statement of Financial Accounting Standards ("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 is not expected to have a
material impact on Media Group earnings per share.
In 1998, U S WEST will adopt SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 requires that the components of and the total
amount for comprehensive income be displayed in the financial statements.
Comprehensive income includes net income and all changes in equity during a
period that arise from nonowner sources, such as foreign currency items and
unrealized gains and losses on certain investments in equity securities.
Among other things, SFAS No. 131 requires detailed operating segment
information of an enterprise on an annual and interim period basis. The
effects of adopting both SFAS No. 130 and 131 are being evaluated.
B. AirTouch Transaction
During 1994, U S WEST entered into a definitive agreement with AirTouch
Communications, Inc. ("AirTouch") to combine their domestic cellular
properties into a partnership in a multi-phased transaction (the "AirTouch
Joint Venture"). During Phase I, which commenced on November 1, 1995, the
cellular properties are owned separately. A wireless management company has
been formed and is providing services to both companies, as requested, on a
contract basis.
In February 1997, the King County Superior Court in Washington state ruled
that a subsidiary of Media Group violated the terms of its partnership
agreement with its minority partners in the Seattle cellular partnership by
entering into the AirTouch Joint Venture. The Company currently is complying
with the Court's order which requires the Company to issue a right of first
refusal to the minority partners with respect to the subsidiary's limited
partnership interest. The Court has also authorized the limited partners to
take legally appropriate steps by August 15, 1997, to secure
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
B. AirTouch Transaction (continued)
unanimous agreement for a substitute for the Company as the general partner.
The Company retains its right to appeal unfavorable rulings before
transferring any partnership interest in the Seattle cellular partnership.
Similar litigation has been filed in other jurisdictions regarding other
cellular partnerships by the same minority partner that brought the Seattle
litigation. The Company is also seeking declaratory relief from the Delaware
Chancery Court. The Company believes it will ultimately be successful in all
litigation asserting that the Company's entering into the AirTouch Joint
Venture violated its partnership agreements with its minority partners.
In May 1997, Media Group and AirTouch entered into a definitive agreement to
merge Media Group's domestic cellular business and its interest in PrimeCo
Personal Communications ("PrimeCo") into AirTouch (the "AirTouch Merger").
Completing the AirTouch Merger, on a tax-free basis depended among other
things, upon the final status of the "Morris Trust" provision of the recent
tax legislation. Since the enacted legislation eliminated the "Morris Trust"
provision and did not provide transitional relief for the AirTouch Merger, the
Company will continue with the original AirTouch Joint Venture transaction.
Media Group and AirTouch have agreed not to proceed to Phase II of the
AirTouch Joint Venture before May 5, 1998. In Phase II of the AirTouch Joint
Venture, the partners will combine those domestic properties for which
authorizations and partnership approvals have been obtained. Media Group has
the right under Phase III of the AirTouch Joint Venture agreement to convert
its joint venture interest into AirTouch stock.
C. Dex Transfer
In May 1997, U S WEST announced its intention to transfer its domestic
directory business from the Media Group to the Communications Group (the "Dex
Transfer"). Under the terms of the Dex Transfer, $3.9 billion of U S WEST
debt will be reallocated from the Media Group to the Communications Group and
the Communications Group will issue shares of Communications Group common
stock to Media Group shareowners totaling $850. Contingent upon receiving
favorable federal income tax treatment, the Company intends to pursue the Dex
Transfer.
D. Asset Sales and Restructurings
Marketable Securities and Investments. During the second quarter of 1997,
Media Group sold an additional 2 million shares of Teleport Communications
Group, Inc. ("TCG") for proceeds of $58, bringing the total number of TCG
shares sold in 1997 to 6,075,000 for total proceeds of $178. In connection
with the November 15, 1996 merger of Continental Cablevision, Inc. into a
wholly owned subsidiary of U S WEST (the "Continental Merger"), Media Group
is required by a consent decree with the United States Department of Justice
to dispose of its interest in TCG by
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
D. Asset Sales and Restructurings (continued)
December 31, 1998. The share sales have reduced Media Group's interest in TCG
from 11 percent at December 31, 1996, to approximately 7 percent at June 30,
1997. Also during the second quarter of 1997, Media Group sold its shares of
Time Warner, Inc., acquired in the Continental Merger, for proceeds of $220
and a pretax gain of $44.
During the first quarter of 1997, Media Group reached a settlement to transfer
its investment in Optus Vision, an Australian cable and telecommunications
venture acquired in the Continental Merger, to Optus Communications Pty Ltd,
an Australian telecommunications carrier. Upon satisfaction of various
pre-conditions, Media Group will receive convertible notes which can be
converted to shares of Optus Communications upon public offering of its
shares. The settlement released the Company from litigation and future
claims.
Each of the partners of PRIMESTAR Partners L.P., including Media Group, have
entered into an agreement whereby each Partner's direct broadcast satellite
customers and certain assets will be contributed to a newly formed company,
PRIMESTAR, Inc. In exchange, each Partner, including Media Group, will
receive a combination of cash and stock in PRIMESTAR, Inc. The transaction is
subject to various approvals and is expected to close in early 1998. In a
related transaction, an agreement has been entered into whereby the satellite
assets controlled by News Corp. and its partner MCI Communications Corporation
will be purchased by PRIMESTAR, Inc. in exchange for nonvoting convertible
securities. The transaction is subject to regulatory and other approvals.
Cable Systems. As a result of the Continental Merger, Media Group must
dispose of its wholly owned cable systems located within the telephone service
areas of U S WEST Communications, Inc. Media Group has reached definitive
agreements to sell its cable systems in Minnesota and Idaho. The Minnesota
systems are being sold for proceeds of approximately $600 and serve 290,000
subscribers. The Idaho systems are being sold for approximately $26 and serve
16,000 subscribers. In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
Media Group has stopped depreciation and amortization related to these assets.
In each case, the sale proceeds approximate the carrying value of the cable
systems. These systems contributed $6 and $7 in operating income during the
three- and six-month periods ended June 30, 1997, respectively. The cable
system sales are subject to federal and local regulatory approvals, including
the transfer of franchises, and are expected to close in early 1998.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions, except per share amounts)
(Unaudited)
D. Asset Sales and Restructurings (continued)
International Directories. On June 4, 1997, Media Group sold Thomson
Directories, its directory operation in the United Kingdom, for $121. Also,
in July 1997, Media Group entered into an agreement to sell U S WEST Polska,
its directory operation in Poland. The sale is awaiting approval from
Poland's Office of Competition and Consumer Protection. These transactions
will result in the disposition of Media Group's wholly owned international
directory operations.
E. Series E Preferred Stock Subject to Mandatory Redemption
On June 30, 1997, Media Group acquired cable systems serving 40,000
subscribers in the state of Michigan for cash of $25 and 994,082 shares of
nonvoting, Series E Convertible Preferred Stock (the "Preferred Stock") issued
by U S WEST. Dividends are payable quarterly at the annual rate of 6.34
percent. The Preferred Stock is recorded at the market value of $50.00 per
share at June 30, 1997, which is equal to its liquidation value. Upon
redemption, the preferred stockholders may elect to receive cash or convert
their Preferred Stock into Media Group common stock. Cash redemption is equal
to the Preferred Stock's liquidation value of $50.00 per share, plus accrued
dividends. The number of shares of Media Group common stock to be received
upon conversion is $47.50 per share divided by the then current market price
of Media Group common stock. The conversion rate is subject to adjustment by
U S WEST under certain circumstances.
The Preferred Stock is redeemable as follows: (a) U S WEST may call for
redemption all or any part of the Preferred Stock beginning on June 30, 2002;
(b) on a yearly basis beginning August 1, 2007, and continuing through August
1, 2016, U S WEST will redeem 49,704 shares of Preferred Stock, and on June
30, 2017, all of the remaining outstanding shares of Preferred Stock; or (c)
all of the outstanding Preferred Stock shall be redeemed upon the occurrence
of certain events, including the dissolution or sale of Media Group.
The Preferred Stock ranks senior to all classes of U S WEST common stock, is
subordinated to any senior debt and ranks on equal terms with all other
preferred securities.
F. Subsequent Events
In July 1997, Media Group entered into an agreement to purchase up to the
remaining 50 percent of Fintelco, S.A., ("Fintelco"), a cable and
telecommunications venture with approximately 660,000 cable subscribers
located in Argentina. This additional interest could bring Media Group's
ownership in Fintelco up to 100 percent. Closing is contingent upon various
regulatory approvals, which are expected during the third quarter of 1997.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
F. Subsequent Events (continued)
On August 6, 1997, Media Group announced it will relocate the corporate
offices of its domestic cable operations, MediaOne, Inc., from Boston to
Denver. Approximately 150 employees will be asked to relocate to Denver. The
move is designed to improve operations through better alignment and focus, and
will occur in phases between September 1997 and June 1998. In addition,
several changes in the senior management of MediaOne were announced. The
Media Group anticipates incurring a pretax charge of approximately $30 in
third-quarter 1997 for costs related to the move and management changes.
G. Net Investment in Assets Held for Sale
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 "net investment in
assets held for sale." The net realizable value of the assets is being
evaluated on an ongoing basis with adjustments to the existing reserve, if
any, being charged to continuing operations. No such adjustment has been
required. Prior to January 1, 1995, the entire capital assets segment was
accounted for as discontinued operations in accordance with Accounting
Principles Board Opinion No. 30.
<PAGE>
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
G. Net Investment in Assets Held for Sale (continued)
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
Dollars in millions 1997 1996
ASSETS
Cash and cash equivalents $ 22 $ 21
Finance receivables - net 820 869
Investment in real estate - net of valuation allowance 184 182
Bonds, at market value 145 146
Investment in FSA 339 326
Other assets 173 165
--------- -------------
Total assets $ 1,683 $ 1,709
========= =============
LIABILITIES
Debt $ 442 $ 481
Deferred income taxes 681 671
Accounts payable, accrued liabilities and other 133 137
Minority interests 11 11
--------- -------------
Total liabilities 1,267 1,300
--------- -------------
Net investment in assets held for sale $ 416 $ 409
========= =============
</TABLE>
Building sales and operating revenues of the capital assets segment were $21
and $78 for the three- and six-month periods ended June 30, 1997,
respectively, and $21 and $51 for the three- and six-month periods ended June
30, 1996, respectively.
Revenues of U S WEST Financial Services, Inc., a member of the capital assets
segment, were $6 and $11 for the three- and six-month periods ended June 30,
1997, respectively, and $7 and $14 for the three- and six-month periods ended
June 30, 1996, respectively. Selected financial data for U S WEST Financial
Services follows:
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, December 31,
1997 1996
Net finance receivables $ 861 $ 859
Total assets 1,066 1,058
Total debt 246 236
Total liabilities 996 998
Equity 70 60
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
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. Pro forma discussions give effect to the Continental Merger as
though it had occurred as of January 1, 1996. A discussion of the Media
Group's operations on a proportionate basis follows the GAAP discussion.
RESULTS OF OPERATIONS - THREE AND SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH
1996
Sales and Other Revenues
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Three Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ 585 $ 59 - $ 533 9.8
International 4 - - - -
------ ----- -------- ---------- ----------
589 59 - 533 10.5
Wireless communications:
Domestic:
Cellular service 327 267 22.5 267 22.5
Cellular equipment 36 23 56.5 23 56.5
------ ----- -------- ---------- ----------
363 290 25.2 290 25.2
Directory and information services:
Domestic 296 279 6.1 279 6.1
International 23 25 (8.0) 25 (8.0)
------ ----- -------- ---------- ----------
319 304 4.9 304 4.9
Other 6 5 20.0 5 20.0
------ ----- -------- ---------- ----------
Sales and other revenues $1,277 $ 658 94.1 $ 1,132 12.8
====== ===== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Six Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $1,137 $ 116 - $ 1,052 8.1
International 8 - - - -
------ ------ ------- ---------- ---------
1,145 116 - 1,052 8.8
Wireless communications:
Domestic:
Cellular service 630 506 24.5 506 24.5
Cellular equipment 68 48 41.7 48 41.7
------ ------ ------- ---------- ---------
698 554 26.0 554 26.0
Directory and information services:
Domestic 583 550 6.0 550 6.0
International 45 42 7.1 42 7.1
------ ------ ------- ---------- ---------
628 592 6.1 592 6.1
Other 13 9 44.4 9 44.4
------ ------ ------- ---------- ---------
Sales and other revenues $2,484 $1,271 95.4 $ 2,207 12.6
====== ====== ======= ========== =========
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Media Group sales and other revenues increased 94.1 percent, to $1,277, and
95.4 percent, to $2,484, for the three- and six-month periods ended June 30,
1997, respectively. On a pro forma basis, Media Group sales and other
revenues increased 12.8 percent and 12.6 percent, for the three- and six-month
periods ended June 30, 1997, respectively. The increases were primarily a
result of growth in cellular service revenue and domestic cable and
telecommunications revenue.
Cable and Telecommunications On a pro forma basis, cable and
telecommunications revenue increased 9.8 percent, to $585, and 8.1 percent, to
$1,137, for the three- and six-month periods ended June 30, 1997,
respectively. The increases resulted primarily from price increases of
approximately 6 to 8 percent, the addition of new channels and basic
subscriber increases of 1.8 percent, on a same property basis. Increases in
pay-per-view and direct broadcast satellite ("DBS") service revenues also
contributed to the increase in revenue. DBS service revenues increased
primarily as a result of a 53.4 percent increase in DBS customers in 1997
compared with 1996.
Results for 1997 international cable and telecommunications revenues reflect
the consolidation of Kabel Plus a.s. ("Kabel Plus"), Media Group's cable
operation in the Czech Republic, effective the third quarter of 1996.
Wireless Communications Cellular service revenues increased 22.5 percent, to
$327, and 24.5 percent, to $630, for the three- and six-month periods ended
June 30, 1997, respectively. These increases are a result of a 33 percent
increase in subscribers during the last twelve months, partially offset by an
8.8 percent drop in average revenue per subscriber to $48.00 per month. The
increase in subscribers relates to continued growth in demand for wireless
services.
Cellular equipment revenues increased 56.5 percent, to $36, and 41.7 percent,
to $68, for the three- and six-month periods ended June 30, 1997,
respectively. These increases are primarily a result of an increase in unit
sales associated with a 68 percent increase in gross customer additions in the
first six months of 1997, partially offset by a decrease in selling price per
unit.
In May 1997, Media Group and AirTouch entered into a definitive agreement to
merge Media Group's domestic cellular business and its interest in PrimeCo
into AirTouch. Completing the AirTouch Merger, on a tax-free basis depended
among other things, upon the final status of the "Morris Trust" provision of
the tax legislation. Since the enacted legislation eliminated the "Morris
Trust" provision and did not provide transitional relief for the AirTouch
Merger, the Company will continue with the original AirTouch Joint Venture
transaction. See Note B - AirTouch Transaction - to the U S WEST Media Group
Combined Financial Statements.
Directory and Information Services Revenues related to Yellow Pages directory
advertising represent 98 percent of domestic directory and information
services. Yellow Pages directory advertising revenues increased 6.6 percent,
to $291, and 6.9 percent, to $575, during the three-
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
and six-month periods ended June 30, 1997, respectively. The increases are
largely a result of a 7.4 percent increase in revenue per local advertiser
primarily resulting from price increases of 4.6percent and an increase in
volume and complexity of advertisements sold. These increases are offset by
decreased revenue associated with exited product lines which were nonstrategic
to the directory business. Revenues related to interactive and other services
comprise the remaining domestic directory and information services revenues
and totaled $5 and $8 for the three- and six-month periods ended June 30,
1997, respectively.
In May 1997, U S WEST announced its intention to transfer its domestic
directory business from the Media Group to the Communications Group. See Note
C - Dex Transfer - to the U S WEST Media Group Combined Financial Statements.
On June 4, 1997, Media Group sold Thomson Directories, its directory operation
in the United Kingdom, for $121. Also, in July 1997, Media Group entered into
an agreement to sell U S WEST Polska, its directory operation in Poland. The
sale is awaiting approval from Poland's Office of Competition and Consumer
Protection. These transactions will result in the disposition of Media
Group's wholly owned international directory operations.
Operating Income (Loss)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Three Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ - $ 4 - $ (5) -
International (3) - - - -
------ ------ -------- ----------- ----------
(3) 4 - (5) (40.0)
Wireless communications:
Domestic 100 59 69.5 59 69.5
International (6) - - - -
------ ------ -------- ----------- ----------
94 59 59.3 59 59.3
Directory and information services:
Domestic 132 115 14.8 115 14.8
International (2) (3) (33.3) (3) (33.3)
------ ------ -------- ----------- ----------
130 112 16.1 112 16.1
Other (see Note 1) (34) (31) 9.7 (31) 9.7
------ ------ -------- ----------- ----------
Operating income $ 187 $ 144 29.9 $ 135 38.5
====== ====== ======== =========== ==========
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Operating Income (Loss) (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma
Percent Pro forma Percent
Six Months Ended June 30, 1997 1996 Change 1996 Change
Cable and telecommunications:
Domestic $ (19) $ 8 - $ (18) 5.6
International (7) - - - -
------ ------ -------- ----------- ----------
(26) 8 - (18) 44.4
Wireless communications:
Domestic 195 109 78.9 109 78.9
International (9) - - - -
------ ------ -------- ----------- ----------
186 109 70.6 109 70.6
Directory and information services:
Domestic 262 225 16.4 225 16.4
International (9) (11) (18.2) (11) (18.2)
------ ------ -------- ----------- ----------
253 214 18.2 214 18.2
------ ------ -------- ----------- ----------
Other (see Note 1)<F1> (48) (58) (17.2) (58) (17.2)
------ ------ -------- ----------- ----------
Operating income $ 365 $ 273 33.7 $ 247 47.8
====== ====== ======== =========== ==========
<FN>
<F1>
Note 1 - Primarily includes headquarters expenses for shared services and divisional
expenses associated with equity investments.
</TABLE>
During the three- and six-month periods ended June 30, 1997, Media Group
operating income increased 29.9 percent and 33.7 percent, to $187 and $365,
respectively. On a pro forma basis, operating income increased 38.5 percent
and 47.8 percent, for the three- and six-month periods ended June 30, 1997,
respectively. The increases were primarily due to strong growth in domestic
wireless communications operations.
Media Group EBITDA more than doubled in 1997, to $487 and $968, for the three-
and six-month periods ended June 30, 1997, respectively, due primarily to the
Continental Merger. On a pro forma basis, Media Group EBITDA increased 16.2
percent and 19.4 percent, for the three- and six-month periods ended June 30,
1997, respectively, due primarily to domestic wireless operations. The Media
Group considers EBITDA an important indicator of the operational strength and
performance of its businesses. EBITDA, however, should not be considered an
alternative to operating or net income as an indicator of the performance of
the Media Group's businesses, or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with GAAP.
Cable and Telecommunications On a pro forma basis, cable and
telecommunications operating loss decreased $2, to $3, and increased $8, to
$26, for the three- and six-month periods ended June 30, 1997, respectively.
International cable and telecommunications results contributed operating
losses of $3 and $7, for the three- and six-month periods ended June 30, 1997,
respectively, due to the third-quarter 1996 consolidation of Kabel Plus.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
The domestic cable and telecommunications operating loss decreased $5 for the
three-month period ended June 30, 1997, compared with 1996, on a pro forma
basis. The decrease in the operating loss was a result of an $8 increase in
EBITDA, to $237, offset by a $3 increase in depreciation and amortization
expense. For the six-month period ended June 30, 1997, domestic cable and
telecommunications operating loss was virtually unchanged compared with 1996,
on a pro forma basis. The $12 increase in EBITDA, to $460, was more than
offset by a $13 increase in depreciation and amortization expense. The
increases in EBITDA are primarily a result of higher revenues associated with
price increases of 6 to 8 percent combined with subscriber growth of 1.8
percent, on a same property basis. The revenue increases were partially
offset by higher programming fees, primarily a result of rate increases and
secondarily a result of subscriber growth and special events, and costs
associated with changing the domestic cable brand name to "MediaOne". Media
Group expects to incur additional costs related to the brand name change
during the remainder of 1997, as well as for the deployment of new products
and services.
On August 6, 1997, Media Group announced it will relocate the corporate
offices of its domestic cable operations, MediaOne, Inc., from Boston to
Denver. Approximately 150 employees will be asked to relocate to Denver. The
move is designed to improve operations through better alignment and focus, and
will occur in phases between September 1997 and June 1998. In addition,
several changes in the senior management of MediaOne were announced. The
Media Group anticipates incurring a pretax charge of approximately $30 in
third-quarter 1997 for costs related to the move and management changes.
Wireless Communications Domestic wireless communications operating income
increased 69.5 percent, to $100, and 78.9 percent, to $195, for the three- and
six-month periods ended June 30, 1997, respectively. These increases are a
result of revenue increases associated with the rapidly expanding subscriber
base combined with efficiency gains. On a per subscriber basis, the 1997
decline in revenue of 8.8 percent has been more than offset by the 21.9
percent decrease in the costs to acquire and support customers. Domestic
cellular EBITDA increased 51.0 percent, to $145, and 56.7 percent, to $282,
for the same periods. The efficiencies have contributed to an increase in
1997 domestic cellular service EBITDA margin to 44.3 percent and 44.8 percent
for the three- and six-month periods, respectively, compared with 35.8 percent
and 35.5 percent in 1996.
Domestic cellular depreciation increased 25.0 percent, to $45, and 24.3
percent, to $87, respectively, for the three- and six-month periods ended June
30, 1997. These increases are largely a result of network upgrades.
International wireless communications operating losses of $6 and $9 for the
three- and six-month periods ended June 30, 1997, respectively, reflects the
third-quarter 1996 consolidation of Russian Telecommunications Development
Corporation, a Russian venture, which holds wireless investments.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Directory and Information Services During the three- and six-month periods
ended June 30, 1997, operating income related to domestic Yellow Pages
directory advertising increased 5.3 percent, to $140, and 5.7 percent, to
$277, respectively. Revenue increases and cost savings associated with
headcount reductions were partially offset by increased printing, paper and
sales support costs. These cost increases were primarily associated with an
increase in the volume and complexity of advertisements sold.
Operating losses associated with ongoing product development activities, which
include development costs for internet content services, are included in
domestic directory and information services operating income. Such operating
losses decreased $10, to $8, and decreased $22, to $15, for the three- and
six-month periods ended June 30, 1997, respectively. The reduction in these
operating losses is primarily the result of discontinuing various product
development activities in 1996.
EBITDA related to domestic Yellow Pages directory advertising service
increased 8.8 percent, to $149, and 9.3 percent, to $295, for the three- and
six-month periods ended June 30, 1997, respectively. The EBITDA margin for
both the three- and six-month periods ended June 30, 1997 was 51 percent
compared to 50 percent for same periods in 1996.
Other During the three-month period ended June 30, 1997, other operating loss
increased $3, to $34. The increase was due primarily to a shift in the timing
of billing U S WEST corporate costs to the Media Group. The increased costs
were partially offset by staff reductions at international headquarters of $5.
During the six-month period ended June 30, 1997, other operating losses
decreased $10, to $48. The decrease is primarily attributable to cost savings
of $11 related to international staff reductions.
Interest Expense and Other
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Proforma
Percent Proforma Percent
Three Months Ended June 30, 1997 1996 Change 1996 Change
Interest expense $ 166 $ 26 - $ 170 (2.4)
Equity losses in unconsolidated ventures 153 77 98.7 91 68.1
Gains on sales of investments 44 - - - -
Guaranteed minority interest expense 22 12 83.3 12 83.3
Other expense - net 5 27 (81.5) 29 (82.8)
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Interest Expense and Other (continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Proforma
Percent Proforma Percent
Six Months Ended June 30, 1997 1996 Change 1996 Change
Interest expense $ 341 $ 50 - $ 340 0.3
Equity losses in unconsolidated ventures 318 143 - 166 91.6
Gains on sales of investments 95 - - - -
Guaranteed minority interest expense 44 24 83.3 24 83.3
Other expense - net 9 34 (73.5) 40 (77.5)
</TABLE>
Interest expense increased $140 and $291 during the three- and six-month
periods ended June 30, 1997, respectively, primarily as a result of the
Continental Merger. U S WEST assumed Continental debt totaling $6,525 (at
market value) and incurred debt of $1,150 to finance the cash portion of the
Continental Merger consideration.
Equity losses increased $76 and $175 for the three- and six-month periods
ended June 30, 1997, respectively, due to greater losses from international
ventures and from the domestic investment in PrimeCo. The increase in
international losses relates to: (1) expansion of the network and financing
activities at Telewest Communications, plc ("Telewest"), (2) costs associated
with the significant increase in customers and network coverage at One 2 One,
and (3) the amortization of license fees related to the wireless investment in
India. Domestically, PrimeCo launched service in November 1996, and losses
associated with this venture have increased as a result of start-up and other
costs. Media Group expects equity losses will continue to be significant as
venture expansion activities continue.
During the second quarter of 1997, Media Group sold its shares of Time Warner,
Inc. acquired in the Continental Merger, for proceeds of $220 and a pretax
gain of $44. In addition, during the first quarter of 1997, Media Group sold
its 5 percent interest in a wireless venture in France for proceeds of $82,
and a pretax gain of $51.
Guaranteed minority interest expense increased $10 and $20 for the three- and
six-month periods ended June 30, 1997, respectively. The increases were a
result of the October 1996 issuance of Company-obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
Company-guaranteed debentures ("Preferred Securities") totaling $480.
Other expense decreased $22, to $5, and $25, to $9, for the three- and
six-month periods ended June 30, 1997, respectively. The decrease is
primarily a result of a second-quarter 1996 pretax charge of $31 associated
with the sale of the Media Group's cable television interests in Norway,
Sweden and Hungary. This decrease was partially offset by increased foreign
currency losses in the second quarter of 1997.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts),
continued
Income Tax Provision (Benefit)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma Pro forma
Three Months Ended June 30, 1997 1996 (Decrease) 1996 (Decrease)
Income tax provision (benefit) $ (18) $ 13 $ (31) $ (48) $ (30)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Pro forma Pro forma
Six Months Ended June 30, 1997 1996 (Decrease) 1996 (Decrease)
Income tax provision (benefit) $ (46) $ 30 $ (76) $ (93) $ (47)
Effective tax rate 18.3 136.4 - 28.8 -
</TABLE>
The decrease in the effective tax rate is primarily a result of a shift from
pretax earnings to pretax losses and additional goodwill amortization
associated with the Continental Merger.
Net Loss
Media Group net loss increased to $94, or $0.17 per share, for the three-month
period ended June 30, 1997, and to $203, or $0.38 per share, for the six-month
period ended June 30, 1997. Excluding the after tax effects of the gains on
sales of investments totaling $25 ($0.04 per share) during the second quarter
of 1997, and $31 ($0.05 per share) during the first quarter of 1997, Media
Group net loss increased $108 and $251 for the three- and six-month periods
ended June 30, 1997, respectively. The Continental Merger contributed
approximately $73 of the loss during the three-month period ended June 30,
1997, and $183 during the six-month period ended June 30, 1997. The
Continental Merger resulted in significant increases in interest and
depreciation and amortization charges. The remaining increase in net loss is
due to greater losses from unconsolidated ventures, partially offset by an
increase in earnings from domestic cellular and directories operations.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities of the Media Group increased $374 in the
first six months of 1997, compared with 1996. The Continental Merger and
growth in operations from the domestic cellular business contributed to the
increase. Also contributing were decreased tax payments during 1997.
Partially offsetting the increase were higher financing costs resulting from
greater debt levels associated with the Continental Merger.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Investing Activities
Media Group capital expenditures were $717 for the first six months of 1997.
The majority of expenditures in 1997 were devoted to upgrading the domestic
cable network and expanding the domestic cellular network. Media Group also
invested $44 in international ventures during 1997, primarily capital
contributions to a wireless venture in India. Other investing activities
include an investment in Continental of $1,150 which represents payment of the
cash portion of the Continental Merger consideration.
During 1997, Media Group received proceeds totaling $625 related to asset
sales as follows: (a) $220 from the sale of Time Warner, Inc. shares acquired
in the Continental Merger, (b) $178 from the sale of 6,075,000 shares of
Teleport Communications Group stock, (c) $121 from the sale of Thomson
Directories, (d) partial proceeds of $29 from the sale of Media Group's 5
percent interest in a wireless venture in France, (e) $50 from the capital
assets segment, which is held for sale, and (f) $27 from other miscellaneous
sales.
In July 1997, Media Group entered into an agreement to purchase up to the
remaining 50 percent of Fintelco, a cable and telecommunications venture with
approximately 660,000 cable subscribers located in Argentina. This additional
interest could bring Media Group ownership in Fintelco up to 100 percent.
Closing is contingent upon various regulatory approvals, which are expected
during the third quarter of 1997.
Financing Activities
Media Group debt at June 30, 1997 was $9,793, an increase of $940 compared
with December 31, 1996. In 1997, Media Group incurred additional debt to
finance the cash portion of the Continental Merger consideration which totaled
$1,150. 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 debt incurred in conjunction with the
Continental Merger.
During the second quarter of 1997, U S WEST called a 10 5/8 percent senior
subordinated note, due June 15, 2002. The debt had a recorded value of $110,
including a premium of $10. This extinguishment resulted in a pretax gain of
$5, ($3 after tax).
On June 30, 1997, Media Group acquired cable systems serving 40,000
subscribers in the state of Michigan for cash of $25 and approximately $50 of
Preferred Stock issued by U S WEST. The Preferred Stock is redeemable at U S
WEST's option starting five years from the acquisition date, or upon
dissolution of Media Group. The stockholders have the right to elect cash
upon redemption, or to convert their Preferred Stock into Media Group common
stock. (See Note E - Series E Preferred Stock Subject to Mandatory Redemption
- - to the U S WEST Media Group Combined Financial Statements.)
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
On July 30, 1997, U S WEST announced that it will call its Liquid Yield Option
Notes effective August 29, 1997. At June 30, 1997, the notes had a carrying
value of $265.
Excluding debt associated with the capital assets segment, the Media Group's
percentage of debt to total capital at June 30, 1997, was 53.3 percent
compared with 50.3 percent at December 31, 1996. 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 60.6 percent at June 30, 1997, compared with 57.8 percent at
December 31, 1996. The percentage of debt to total capital has increased as a
result of higher debt associated with the Continental Merger.
Under the terms of the Dex Transfer, $3.9 billion of U S WEST debt will be
reallocated from the Media Group to the Communications Group and the
Communications Group will issue shares of Communications Group common stock to
Media Group shareowners totaling $850. Contingent upon receiving favorable
federal income tax treatment, the Company intends to pursue the Dex Transfer.
Due to the significant capital requirements associated with the domestic cable
upgrade, Media Group expects that cash from operations will not be adequate to
fund expected cash requirements in the next several years. Additional
financing will come primarily from new debt.
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 Media Group. There is no assurance that any such discussions will
result in the consummation of any such transaction.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Selected Proportionate Data
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. The table does not reflect
financial data of the capital assets segment, which had net assets of $416 and
$409 at June 30, 1997 and December 31, 1996, respectively. The financial
information included below departs materially from GAAP because it aggregates
the revenues and operating income of entities not controlled by the Media
Group with those of the consolidated operations of the Media Group.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Pro forma Percent
Six Months Ended June 30, 1997 1996 Change
(1)<F1>
REVENUES
Cable and telecommunications:
Domestic (2) $2,496 $ 2,351 6.2
International 226 165 37.0
Wireless communications:
Domestic 652 501 30.1
International 324 187 73.3
Directory and information services:
Domestic 584 550 6.2
International 76 77 (1.3)
Corporate and other 7 6 16.7
------- ----------- --------
Total revenues $4,365 $ 3,837 13.8
======= =========== ========
EBITDA (3)<F3>
Cable and telecommunications:
Domestic (2)<F2> $ 792 $ 741 6.9
International 20 (5) -
Wireless communications:
Domestic 212 147 44.2
International (3) - -
Directory and information services:
Domestic 277 241 14.9
International 2 - -
Corporate and other (23) (25) (8.0)
------- ----------- --------
Total EBITDA $1,277 $ 1,099 16.2
======= =========== ========
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Selected Proportionate Data, continued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Pro forma Percent
Six Months Ended June 30, 1997 1996 Change
(1)<F1>
OPERATING INCOME
Cable and telecommunications:
Domestic (2) $ 119 $ 97 22.7
International (78) (66) 18.2
Wireless communications:
Domestic 115 81 42.0
International (93) (41) -
Directory and information services:
Domestic 257 226 13.7
International (6) (7) (14.3)
Corporate and other (28) (30) (6.7)
------ ----------- --------
Total operating income $ 286 $ 260 10.0
====== =========== ========
NET INCOME (LOSS)
Cable and telecommunications:
Domestic (2) $(207) $ (230) (10.0)
International (120) (106) 13.2
Wireless communications:
Domestic 48 42 14.3
International (66) (42) 57.1
Directory and information services:
Domestic 154 134 14.9
International (8) (12) (33.3)
Corporate and other (4) (16) (75.0)
------ ----------- --------
Total net loss $(203) $ (230) (11.7)
====== =========== ========
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Selected Proportionate Data, continued
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Six Months Ended June 30, Pro forma Percent
(in thousands) 1997 1996 Change
(1)<F1>
SUBSCRIBERS/ADVERTISERS:
Cable and telecommunications:
Domestic (2) 7,674 7,362 4.2
International 1,199 919 30.5
Wireless communications:
Domestic 2,119 1,557 36.1
International 760 370 105.4
Directory and information services:
Domestic 482 481 0.2
International 88 274 (67.9)
------ --------- --------
Total subscribers/advertisers 12,322 10,963 12.4
====== ========= ========
<FN>
<F1>
(1) 1996 pro forma proportionate results reflect the following for the six
months: (i) Media Group historical proportionate results; (ii) the
Continental Merger; (iii) Continental's acquisition of the remaining interest
in Meredith/New Heritage; (iv) the reclassification of the Teleport
Communications Group investment to equity method; and (v) Continental's cable
investments in Argentina and Singapore.
<F2>
(2) The proportionate results are based on the Media Group's 25.51 percent pro
rata priority and residual equity interests in reported Time Warner
Entertainment Company L.P. ("TWE") results. The reported TWE results are
prepared in accordance with GAAP and have not been adjusted to report TWE
results on a proportionate basis.
<F3>
(3) Proportionate EBITDA represents the Media Group's equity interest in the
entities multiplied by the entity's EBITDA. As such, proportionate EBITDA
does not represent cash available to the Media Group.
</FN>
</TABLE>
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
PROPORTIONATE RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 COMPARED
WITH 1996
Proportionate Media Group revenues increased 13.8 percent, to $4.4 billion,
EBITDA increased 16.2 percent, to $1.3 billion, and subscribers/advertisers
increased 12.4 percent, to 12.3 million. Strong growth in domestic and
international wireless and cable and telecommunications operations contributed
to the increase in proportionate revenue and growth in subscribers. Strong
growth in domestic wireless and cable contributed to the increase in
proportionate EBITDA.
Cable and Telecommunications During the first six months of 1997,
proportionate revenues for the domestic cable and telecommunications
operations increased 6.2 percent, to $2.5 billion. This is a result of
increases in subscribers and revenue per subscriber mainly due to price
increases. Proportionate EBITDA increased 6.9 percent, to $792. Proportionate
EBITDA related to TWE operations increased 13.3 percent. TWE's results
benefited from improved operations and gains realized by asset sales.
During the first six months of 1997, international cable and
telecommunications proportionate revenues increased 37.0 percent, to $226, and
proportionate EBITDA increased $25, to $20. Customer growth at Telewest and
new investments in Malaysia and Indonesia contributed to the increase in
proportionate revenue. A reduction in Media Group international staff costs
as well as improved operations at Telewest and Malaysia contributed to the
increase in proportionate EBITDA.
Proportionate international cable subscribers total approximately 1.2 million
at June 30, 1997, a 12 percent increase, on a comparable basis. Telewest's
cable television subscribers increased 31 percent compared to last year.
Wireless Communications During the first six months of 1997, domestic
wireless proportionate revenues increased 30.1 percent, to $652, and
proportionate EBITDA increased 44.2 percent, to $212. Excluding losses
generated by the start-up of PrimeCo Personal Communications L.P., domestic
cellular proportionate EBITDA increased 58.4 percent. The increase in EBITDA
is a result of revenue increases associated with the strong domestic cellular
subscriber growth combined with efficiency gains.
<PAGE>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
During the first six months of 1997, proportionate revenues for the
international wireless operations increased 73.3 percent, to $324, and
proportionate EBITDA decreased $3 to ($3). The increase in proportionate
revenue is the result of the international wireless subscriber base more than
doubling to 760,000. EBITDA losses increased primarily as a result of costs
associated with increasing the subscriber base at One 2 One, a personal
communications services venture in the United Kingdom, and start-up costs
associated with providing digital wireless services in Poland.
Directory and Information Services Proportionate revenues for domestic
directory and information services increased 6.2 percent, to $584, and
proportionate EBITDA increased 14.9 percent, to $277. The increases are due to
price and volume increases, reduction in new product development activities
and employee reductions. Proportionate EBITDA of $277 was reduced by start-up
losses associated with internet content and other product development
activities of $11.
On June 4, 1997, Media Group sold its directory operation in the United
Kingdom, Thomson Directories. In July 1997, Media Group entered into an
agreement to sell its directory operation in Poland. These two operations
comprise the majority of international directories results.
<PAGE>
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. 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
At the Company's annual meeting of shareholders on June 6, 1997, shareholders
voted as follows for the purpose of electing three individuals as directors of
the Company:
<TABLE>
<CAPTION>
<S> <C> <C>
Directors Votes in Favor Votes Withheld
- ----------------- -------------- --------------
CLASS III
- -----------------
Allan D. Gilmour 673,620,126 20,097,093
Frank Popoff 673,643,182 20,074,037
Jerry O. Williams 673,621,484 20,095,735
</TABLE>
Arthur Andersen LLP was confirmed as the Company's independent auditors with
680,823,708 votes in favor, 8,288,423 votes against and 4,605,088 votes
abstaining.
The shareholders voted as follows to approve to amend the U S WEST
Communications Group Long-Term Incentive Plan:
<TABLE>
<CAPTION>
<S> <C> <C>
In Favor Against Abstained
- ----------- ---------- ----------
624,621,235 56,316,308 12,779,676
</TABLE>
The shareholders voted as follows to amend the U S WEST 1994 Stock Plan:
<TABLE>
<CAPTION>
<S> <C> <C>
In Favor Against Abstained
- ----------- ---------- ----------
622,975,100 57,539,474 13,202,645
</TABLE>
<PAGE>
Form 10-Q - Part II
Item 4. Submission of Matters to a Vote of Security Holders (continued)
The shareholders also considered and rejected the following two shareholder
proposals at the annual meeting:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Proposal In Favor Against Abstained Not Voted
- ------------------------------- ----------- ----------- ---------- ----------
Elimination of Classified Board 215,980,774 370,842,175 17,464,205 89,430,065
Initiation of Cumulative Voting 159,767,734 427,714,915 16,806,728 89,427,842
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
<TABLE>
<CAPTION>
<C> <S>
3(i)(a) Certificate of Designation for Series D Convertible Preferred Stock as filed on
November 14, 1996.
3(i)(b) Certificate of Correction for Series D Convertible Preferred Stock as filed on
December 11, 1996.
3(i)(c) Certificate of Designation for Series E Convertible Preferred Stock as filed on
June 13, 1997.
11 Statement regarding computation of earnings per share of U S WEST, Inc.
12 Statement regarding computation of earnings to fixed charges ratio of
U S WEST, Inc. and U S WEST Financial Services, Inc.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K filed during the Second Quarter of 1997
<TABLE>
<CAPTION>
<C> <S>
(i) Form 8-K report dated April 30, 1997 concerning the releases of earnings
issued on April 25, 1997 by U S WEST Communications Group and on
April 29, 1997 by U S WEST Media Group, for the first quarter ended
March 31, 1997.
</TABLE>
<PAGE>
Form 10-Q - Part II
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
<C> <S>
(ii) Form 8-K report dated May 16, 1997 concerning the definitive agreement to
merge the domestic cellular business of Media Group and its interest in
PrimeCo Personal Communications into AirTouch Communications. In
addition, on May 16, 1997, U S WEST, Inc. issued a press release announcing
its intention to transfer its domestic directory publishing business - known as
U S WEST Dex - from its Media Group to its Communications Group in
connection with a merger of its domestic wireless interest into AirTouch
Communications.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
/S/ Michael P. Glinsky
August 13, 1997
U S WEST, Inc.
Michael P. Glinsky
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Quarter Quarter
Ended Ended
6/30/97 6/30/96
- ------------------------------------------ -------- --------
Income before income taxes and
extraordinary item $ 415 $ 519
Interest expense (net of amounts
capitalized) 266 136
Interest factor on rentals (1/3) 24 25
Equity losses in unconsolidated
ventures (less than 50% owned) 112 42
Guaranteed minority interest expense 22 12
-------- --------
Earnings $ 839 $ 734
Interest expense $ 275 $ 157
Interest factor on rentals (1/3) 24 25
Guaranteed minority interest expense 22 12
Preferred stock dividends (pre-tax
equivalent) 22 1
-------- --------
Fixed charges $ 343 $ 195
Ratio of earnings to combined fixed
charges and preferred stock dividends 2.45 3.76
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
(Dollars in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Year- Year-
to-Date to-Date
6/30/97 6/30/96
- ------------------------------------------ -------- --------
Income before income taxes, extra-
ordinary item and cumulative effect
of change in accounting principle $ 815 $1,008
Interest expense (net of amounts
capitalized) 544 271
Interest factor on rentals (1/3) 49 47
Equity losses in unconsolidated
ventures (less than 50% owned) 217 67
Guaranteed minority interest expense 44 24
-------- --------
Earnings $1,669 $1,417
Interest expense $ 563 $ 316
Interest factor on rentals (1/3) 49 47
Guaranteed minority interest expense 44 24
Preferred stock dividends (pre-tax
equivalent) 44 3
-------- --------
Fixed charges $ 700 $ 390
Ratio of earnings to combined fixed
charges and preferred stock dividends 2.38 3.63
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Quarter Quarter
Ended Ended
6/30/97 6/30/96
- ------------------------------------------ -------- --------
Income before income taxes and
extraordinary item $ 415 $ 519
Interest expense (net of amounts
capitalized) 266 136
Interest factor on rentals (1/3) 24 25
Equity losses in unconsolidated
ventures (less than 50% owned) 112 42
Guaranteed minority interest expense 22 12
-------- --------
Earnings $ 839 $ 734
Interest expense $ 275 $ 157
Interest factor on rentals (1/3) 24 25
Guaranteed minority interest expense 22 12
-------- --------
Fixed charges $ 321 $ 194
Ratio of earnings to fixed charges 2.61 3.78
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12
U S WEST, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
<S> <C> <C>
Year- Year-
to-Date t0-Date
6/30/97 6/30/96
- ------------------------------------------ -------- --------
Income before income taxes, extra-
ordinary item and cumulative effect
of change in accounting principle $ 815 $1,008
Interest expense (net of amounts
capitalized) 544 271
Interest factor on rentals (1/3) 49 47
Equity losses in unconsolidated
ventures (less than 50% owned) 217 67
Guaranteed minority interest expense 44 24
-------- --------
Earnings $1,669 $1,417
Interest expense $ 563 $ 316
Interest factor on rentals (1/3) 49 47
Guaranteed minority interest expense 44 24
-------- --------
Fixed charges $ 656 $ 387
Ratio of earnings to fixed charges 2.54 3.66
- ------------------------------------------ -------- --------
</TABLE>
<PAGE>
EXHIBIT 12
U S WEST Financial Services, Inc.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Quarter Quarter
Ended Ended
6/30/97 6/30/96
- ------------------------------------------ -------- --------
Income before income taxes $ 2,791 $ 7,423
Interest expense 5,516 5,333
Interest factor on rentals (1/3) 22 14
-------- --------
Earnings $ 8,329 $12,770
Interest expense $ 5,516 $ 5,333
Interest factor on rentals (1/3) 22 14
-------- --------
Fixed charges $ 5,538 $ 5,347
Ratio of earnings to fixed charges 1.50 2.39
- ------------------------------------------ -------- --------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Year- Year-
to-Date to-Date
6/30/97 6/30/96
- ------------------------------------------ -------- --------
Income before income taxes $ 9,462 $ 8,723
Interest expense 10,940 10,711
Interest factor on rentals (1/3) 43 31
-------- --------
Earnings $20,445 $19,465
Interest expense $10,940 $10,711
Interest factor on rentals (1/3) 43 31
-------- --------
Fixed charges $10,983 $10,742
Ratio of earnings to fixed charges 1.86 1.81
- ------------------------------------------ -------- --------
</TABLE>
A Termination Agreement and Guarantee was entered into on June 24, 1994
between U S WEST, Inc. and 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 financial 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.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000732718
<NAME> U S WEST, INC.
<MULTIPLIER> 1,000,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 244 244
<SECURITIES> 0 0
<RECEIVABLES> 2,104 2,104
<ALLOWANCES> 0 0
<INVENTORY> 218 218
<CURRENT-ASSETS> 3,159 3,159
<PP&E> 38,547 38,547
<DEPRECIATION> 20,261 20,261
<TOTAL-ASSETS> 40,366 40,366
<CURRENT-LIABILITIES> 5,661 5,661
<BONDS> 14,135 14,135
1,180 1,180
921 921
<COMMON> 10,776 10,776
<OTHER-SE> (131) (131)
<TOTAL-LIABILITY-AND-EQUITY> 40,366 40,366
<SALES> 3,787 7,553
<TOTAL-REVENUES> 3,787 7,553
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 2,980 5,924
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 266 544
<INCOME-PRETAX> 415 815
<INCOME-TAX> 180 350
<INCOME-CONTINUING> 235 465
<DISCONTINUED> 0 0
<EXTRAORDINARY> 3 3
<CHANGES> 0 0
<NET-INCOME> 238 468
<EPS-PRIMARY> 0.69 1.39
<EPS-DILUTED> 0.69 1.39
</TABLE>
<PAGE>
EXHIBIT 3(i)(a)
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF SERIES D CONVERTIBLE
PREFERRED STOCK
OF
U S WEST, INC.
---------------------
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
---------------------
U S WEST, INC., a corporation organized and existing by virtue of
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that the following resolution was duly adopted by action of the
Board of Directors of the Corporation at a meeting duly held on November 8,
1996.
RESOLVED that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation by the provisions of Section
3 of Article V of the Restated Certificate of Incorporation of the Corporation
(the "Certificate of Incorporation"), and Section 151(g) of the General
Corporation Law of the State of Delaware, such Board of Directors hereby
creates, from the authorized shares of Preferred Stock, par value $1.00 per
share (the "Preferred Stock"), of the Corporation authorized to be issued
pursuant to the Certificate of Incorporation, a series of Preferred Stock, and
hereby fixes the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, of the shares of such series as follows:
The series of Preferred Stock hereby established shall consist of
20,000,000 shares designated as Series D Convertible Preferred Stock. The
rights, preferences and limitations of such series shall be as follows:
<PAGE>
1. Definitions. Unless otherwise defined herein, terms used herein
shall have the meanings assigned to them in Section 2.6 of Article V of the
Certificate of Incorporation and the following terms shall have the indicated
meanings:
1.1 "Board of Directors" shall mean the Board of Directors of
the Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take such
action.
1.2 "Capital Stock" shall mean any and all shares of corporate
stock of a Person (however designated and whether representing rights to vote,
rights to participate in dividends or distributions upon liquidation or
otherwise with respect to the Corporation, or any division or subsidiary
thereof, or any joint venture, partnership, corporation or other entity).
1.3 "Certificate" shall mean the certificate of the voting
powers, designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, of
Series D Convertible Preferred Stock filed with respect to this resolution with
the Secretary of State of the State of Delaware pursuant to Section 151 of the
General Corporation Law of the State of Delaware.
1.4 "Closing Price" shall mean the last reported sale price of
the Media Stock (or such other class or series of common stock into which shares
of this Series are then convertible), regular way, as shown on the Composite
Tape of the NYSE, or, in case no such sale takes place on such day, the average
of the closing bid and asked prices on the NYSE, or, if the Media Stock (or such
other class or series of common stock) is not listed or admitted to trading on
the NYSE, on the principal national securities exchange on which such stock is
listed or admitted to trading, or, if it is not listed or admitted to trading on
any national securities exchange, the last reported sale price of the Media
Stock (or such other class or series of common stock), or, in case no such sale
takes place on such day, the average of the closing bid and asked prices, in
either case as reported by Nasdaq.
2
<PAGE>
1.5 "Communications Stock" shall mean the class of U S WEST
Communications Group Common Stock, par value $.01 per share, of the Corporation
or any other class of stock resulting from (x) successive changes or
reclassifications of such stock consisting solely of changes in par value, or
from par value to no par value or (y) a subdivision or combination, and in any
such case including any shares thereof authorized after the date of the
Certificate, together with any associated rights to purchase other securities of
the Corporation which are at the time represented by the certificates
representing such shares.
1.6 "Conversion Date" shall have the meaning set forth in
Section 3.5.
1.7 "Conversion Price" shall have the meaning set forth in
Section 3.1 hereof.
1.8 "Conversion Rate" shall have the meaning set forth in
Section 3.1 hereof.
1.9 "Converting Holder" shall have the meaning set forth in
Section 3.5 hereof.
1.10 "Current Market Price" on any applicable record date,
Conversion Date or Redemption Date referred to in Section 3 or Section 4 shall
mean the average of the daily Closing Prices per share of Media Stock (or such
other class or series of common stock into which shares of this Series are then
convertible) for the ten (10) consecutive Trading Days ending on the third
Trading Day immediately preceding such record date, Conversion Date or
Redemption Date.
1.11 "Dividend Payment Date" shall have the meaning set forth
in Section 2.1 hereof.
1.12 "Effective Time" shall mean the effective time of the
Merger.
1.13 "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder.
1.14 "Exchange Rate" for each share of this Series called for
exchange shall be a number of shares of Media Stock (or such other class or
series of common stock
3
<PAGE>
into which shares of this Series are then convertible) equal to the quotient of
(x) the sum of (I) the Liquidation Value plus (II) the amount of accrued and
unpaid dividends on such share of Series D Stock to the Redemption Date divided
by (y) the product of (I) .95 multiplied by (II) the Current Market Price on the
Redemption Date.
1.15 "Extraordinary Cash Distributions" shall mean, with
respect to any consecutive 12-month period, all cash dividends and cash
distributions on the outstanding shares of Media Stock during such period (other
than cash dividends or cash distributions for which a prior adjustment to the
Conversion Rate was previously made) to the extent such cash dividends and cash
distributions exceed, on a per share of Media Stock basis, 10% of the average
daily Closing Price of the Media Stock over such period.
1.16 "Junior Stock" shall mean the Media Stock, the
Communications Stock and the shares of any other class or series of stock of the
Corporation which, by the terms of the Certificate of Incorporation or of the
instrument by which the Board of Directors, acting pursuant to authority granted
in the Certificate of Incorporation, shall fix the relative rights, preferences
and limitations thereof, shall be junior to the Series D Stock in respect of the
right to receive dividends or to participate in any distribution of assets other
than by way of dividends.
1.17 "Liquidation Value" shall have the meaning set forth in
Section 6.2 hereof.
1.18 "Media Group Disposition Redemption" shall have the
meaning set forth in Section 4.1 hereof.
1.19 "Media Group Disposition Dividend" shall have the meaning
set forth in Section 4.1 hereof.
1.20 "Media Group Special Dividend" shall have the meaning set
forth in Section 4.1 hereof.
1.21 "Media Group Special Events" shall have the meaning set
forth in Section 4.1 hereof.
1.22 "Media Group Subsidiary Redemption" shall have the
meaning set forth in Section 4.1 hereof.
4
<PAGE>
1.23 "Media Stock" shall mean the class of U S WEST Media
Group Common Stock, par value $.01 per share, of the Corporation or any other
class of stock resulting from (x) successive changes or reclassifications of
such stock consisting solely of changes in par value, or from par value to no
par value or (y) a subdivision or combination, and in any such case including
any shares thereof authorized after the date of the Certificate, together with
any associated rights to purchase other securities of the Corporation which are
at the time represented by the certificates representing such shares.
1.24 "Media Group Tender or Exchange Offer" shall have the
meaning set forth in Section 4.1 hereof.
1.25 "Merger" shall mean either (i) the merger of Continental
Cablevision, Inc., a Delaware corporation, with and into Continental
Cablevision, Inc. or (ii) the merger of Continental Merger Corporation, a
Delaware corporation, with and into the Corporation, pursuant to the terms of
the Merger Agreement.
1.26 "Merger Agreement" shall mean the Agreement and Plan of
Merger, dated as of February 27, 1996, as amended and restated as of June 27,
1996 and as further amended as of October 7, 1996, among the Corporation,
Continental Merger Corporation, a Delaware corporation, and Continental
Cablevision, Inc., a Delaware corporation.
1.27 "Nasdaq" shall mean the Nasdaq National Market.
1.28 "NYSE" shall mean the New York Stock Exchange, Inc.
1.29 "Parity Stock" shall mean the Series A Stock, the Series
B Stock, the Series C Stock and the shares of any other class or series of stock
of the Corporation (other than Junior Stock) which, by the terms of the
Certificate of Incorporation or of the instrument by which the Board of
Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall fix the relative rights, preferences and limitations
thereof, shall, in the event that the stated dividends thereon are not paid in
full, be entitled to share ratably with the Series D Stock in the payment of
dividends, including accumulations, if any, in accordance with the sums which
would be payable on
5
<PAGE>
such shares if all dividends were declared and paid in full, or shall, in the
event that the amounts payable thereon on liquidation are not paid in full, be
entitled to share ratably with the Series D Stock in any distribution of assets
other than by way of dividends in accordance with the sums which would be
payable in such distribution if all sums payable were discharged in full;
provided, however, that the term "Parity Stock" shall be deemed to refer (i) in
Section 6 hereof, to any stock which is Parity Stock in respect of the
distribution of assets; and (ii) in Sections 5.1 and 5.2 hereof, to any stock
which is Parity Stock in respect of either dividend rights or the distribution
of assets and which, pursuant to the Certificate of Incorporation or any
instrument in which the Board of Directors, acting pursuant to authority granted
in the Certificate of Incorporation, shall so designate, is entitled to vote
with the holders of Series D Stock.
1.30 "Person" shall mean an individual, corporation, limited
liability company, partnership, joint venture, association, trust,
unincorporated organization or other entity.
1.31 "Preferred Stock" shall mean the class of Preferred
Stock, par value $1.00 per share, of the Corporation authorized at the date of
the Certificate, including any shares thereof authorized after the date of the
Certificate.
1.32 "Record Date" shall have the meaning set forth in Section
2.1 hereof.
1.33 "Redemption Date" shall mean the date on which the
Corporation shall effect the redemption or exchange of all or any part of the
outstanding shares of this Series pursuant to Section 4.1.
1.34 "Redemption Price" for each share of this Series called
for redemption shall be equal to the sum of (x) the Liquidation Value plus (y)
an amount equal to the accrued and unpaid dividends on such share of Series D
Stock to the Redemption Date.
1.35 "Redemption Rescission Event" shall mean the occurrence
of (a) any general suspension of trading in, or limitation on prices for,
securities on the principal national securities exchange on which shares of
Media Stock
6
<PAGE>
(or such other class or series of common stock into which shares of this Series
are then convertible) are registered and listed for trading (or, if shares of
Media Stock (or such other class or series of common stock) are not registered
and listed for trading on any such exchange, in the over-the-counter market) for
more than six-and-one-half (6 1/2) consecutive trading hours, (b) any decline in
either the Dow Jones Industrial Average or the Standard & Poor's Index of 500
Industrial Companies (or any successor index published by Dow Jones & Company,
Inc. or Standard & Poor's Corporation) by either (i) an amount in excess of 10%,
measured from the close of business on any Trading Day to the close of business
on the next succeeding Trading Day during the period commencing on the Trading
Day preceding the day notice of any redemption or exchange of shares of this
Series is given (or, if such notice is given after the close of business on a
Trading Day, commencing on such Trading Day) and ending at the Redemption Date
or (ii) an amount in excess of 15% (or, if the time and date fixed for
redemption or exchange is more than 15 days following the date on which notice
of redemption or exchange is given, 20%), measured from the close of business on
the Trading Day preceding the day notice of such redemption or exchange is given
(or, if such notice is given after the close of business on a Trading Day, from
such Trading Day) to the close of business on any Trading Day on or prior to the
Redemption Date, (c) a declaration of a banking moratorium or any suspension of
payments in respect of banks by Federal or state authorities in the United
States or (d) the commencement of a war or armed hostilities or other national
or international calamity directly or indirectly involving the United States
which in the reasonable judgment of the Corporation could have a material
adverse effect on the market for the Media Stock (or such other class or series
of common stock into which shares of this Series are then convertible).
1.36 "Rescission Date" shall have the meaning set forth in
Section 4.5 hereof.
1.37 "Senior Stock" shall mean the shares of any class or
series of stock of the Corporation which, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall fix the
relative rights, preferences and limitations thereof, shall be senior to the
Series D Stock in respect of
7
<PAGE>
the right to receive dividends or to participate in any distribution of assets
other than by way of dividends.
1.38 "Series A Stock" shall mean the series of Preferred Stock
authorized and designated as Series A Junior Participating Cumulative Preferred
Stock at the date of the Certificate, including any shares thereof authorized
and designated after the date of the Certificate.
1.39 "Series B Stock" shall mean the series of Preferred Stock
authorized and designated as Series B Junior Participating Cumulative Preferred
Stock at the date of the Certificate, including any shares thereof authorized
and designated after the date of the Certificate.
1.40 "Series C Stock" shall mean the series of Preferred Stock
authorized and designated as Series C Cumulative Redeemable Preferred Stock at
the date of the Certificate, including any shares thereof authorized and
designated after the date of the Certificate.
1.41 "Series D Stock" and "this Series" shall mean the series
of Preferred Stock authorized and designated as the Series D Convertible
Preferred Stock, including any shares thereof authorized and designated after
the date of the Certificate.
1.42 "Surrendered Shares" shall have the meaning set forth in
Section 3.5 hereof.
1.43 "Trading Day" shall mean, so long as the Media Stock (or
such other class or series of common stock into which shares of this Series are
then convertible) is listed or admitted to trading on the NYSE, a day on which
the NYSE is open for the transaction of business, or, if the Media Stock (or
such other class or series of common stock) is not listed or admitted to trading
on the NYSE, a day on which the principal national securities exchange on which
the Media Stock (or such other class or series of common stock) is listed is
open for the transaction of business, or, if the Media Stock (or such other
class or series of common stock) is not so listed or admitted for trading on any
national securities exchange, a day on which Nasdaq is open for the transaction
of business.
8
<PAGE>
2. Dividends.
2.1 The holders of the outstanding Series D Stock shall be
entitled to receive dividends, as and when declared by the Board of Directors
out of funds legally available therefor, and any dividends declared by the Board
of Directors out of funds legally available therefor in accordance with Section
3.6(d). Each dividend shall be at the annual rate equal to _.___% per share of
Series D Stock (which is equivalent to $0.____ quarterly and $_.____ annually
per share). All dividends shall be payable in cash on or about the first day of
February, May, August and November in each year, beginning on the first such
date that is more than 15 days after the Effective Time, as fixed by the Board
of Directors, or such other dates as are fixed by the Board of Directors (each a
"Dividend Payment Date"), to the holders of record of Series D Stock at the
close of business on or about the 15th day of the month next preceding such
first day of February, May, August and November, as the case may be, as fixed by
the Board of Directors, or such other dates as are fixed by the Board of
Directors (each a "Record Date"). Such dividends shall accrue on each share
cumulatively on a daily basis, whether or not there are unrestricted funds
legally available for the payment of such dividends and whether or not earned or
declared, from and after the day immediately succeeding the Effective Time and
any such dividends that become payable for any partial dividend period shall be
computed on the basis of the actual days elapsed in such period. All dividends
that accrue in accordance with the foregoing provisions shall be cumulative from
and after the day immediately succeeding the Effective Time. The per share
dividend amount payable to each holder of record of Series D Stock on any
Dividend Payment Date shall be rounded to the nearest cent. The dividend rate
per share of this Series shall be appropriately adjusted from time to time to
reflect any split or combination of the shares of this Series.
2.2 Except as hereinafter provided in this Section 2.2 and
except for redemptions by the Corporation pursuant to Sections 4.1(b), 4.1(c) or
4.1(d), unless all dividends on the outstanding shares of Series D Stock and any
Parity Stock that shall have accrued through any prior Dividend Payment Date
shall have been paid, or declared and funds set apart for payment thereof, no
dividend or other distribution (payable other than in shares of Junior Stock)
shall be paid to the holders of Junior Stock or Parity
9
<PAGE>
Stock, and no shares of Series D Stock, Parity Stock or Junior Stock shall be
purchased, redeemed or otherwise acquired by the Corporation or any of its
subsidiaries (except by conversion into or exchange for Junior Stock), nor shall
any monies be paid or made available for a purchase, redemption or sinking fund
for the purchase or redemption of any Series D Stock, Junior Stock or Parity
Stock. When dividends are not paid in full upon the shares of this Series and
any Parity Stock, all dividends declared upon shares of this Series and all
Parity Stock shall be declared pro rata so that the amount of dividends declared
per share on this Series and all such Parity Stock shall in all cases bear to
each other the same ratio that accrued dividends per share on the shares of this
Series and all such Parity Stock bear to each other. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on this Series which may be in arrears.
3. Conversion Rights.
3.1 (a) Subject to Section 3.1(b), each holder of a share of
this Series shall have the right at any time to convert such share into a number
of shares of Media Stock equal to 1.905 shares of Media Stock for each share of
this Series, subject to adjustment as provided in this Section 3 (such rate, as
so adjusted from time to time, is herein called the "Conversion Rate"; and the
"Conversion Price" at any time shall mean the Liquidation Value per share
divided by the Conversion Rate in effect at such time (rounded to the nearest
one hundredth of a cent)).
(b) The right of a holder of a share of this Series called for
redemption or exchange pursuant to Sections 4.1(a) or 4.1(c) to convert such
share into Media Stock (or such other class or series of common stock into which
shares of this Series are then convertible) pursuant to Section 3.1(a) shall
terminate at the close of business on the Redemption Date unless the Corporation
defaults in the payment of the Redemption Price or Exchange Rate or, in the case
of a redemption or exchange pursuant to Section 4.1(a), the Corporation
exercises its right to rescind such redemption or exchange pursuant to Section
4.5, in which case such right of conversion shall not terminate at the close of
business on such date. The right of a holder of a share of this Series called
for redemption pursuant to Section 4.1(b): (i) in connection with a Media Group
10
<PAGE>
Subsidiary Redemption, a Media Group Tender or Exchange Offer or a Media Group
Disposition Redemption involving a Disposition of all (not merely substantially
all) of the properties and assets attributed to the Media Group, to convert such
share into Media Stock pursuant to Section 3.1(a) shall terminate at the close
of business on the Redemption Date; (ii) in connection with a Media Group
Disposition Dividend or Media Group Special Dividend, to convert such share into
Media Stock pursuant to Section 3.1(a) shall terminate at the close of business
on the record date for determining holders entitled to receive such dividend;
and (iii) in connection with a Media Group Disposition Redemption involving a
Disposition of substantially all (but not all) of the properties and assets
attributed to the Media Group, to convert such share into Media Stock shall
terminate at the close of business on the date on which shares of Media Stock
are selected to be redeemed in such Media Group Disposition Redemption, unless,
in any of the foregoing cases, the Corporation defaults in the payment of the
Redemption Price or the conditions to such redemption set forth in the last
sentence of Section 4.1(b) shall not have been satisfied, in which event such
right of conversion shall not terminate at the close of business on such date.
In the event the Corporation converts all of the outstanding shares of Media
Stock into shares of Communications Stock (or, if the Communications Stock is
not Publicly Traded at such time and shares of any other class or series of
common stock of the Corporation (other than Media Stock) are then Publicly
Traded, of such other class or series of common stock as has the largest Market
Capitalization), the right of a holder of a share of this Series called for
redemption pursuant to Section 4.1(d) in connection with an event substantially
similar to a Media Group Special Event to convert such share into Communications
Stock (or such other class or series of common stock) shall terminate on a date
comparable to the date specified in the preceding sentence with respect to a
Media Group Special Event substantially similar to such event.
3.2 If any shares of this Series are surrendered for
conversion subsequent to the Record Date preceding a Dividend Payment Date but
on or prior to such Dividend Payment Date (except shares called for redemption
or exchange on a Redemption Date between such Record Date and Dividend Payment
Date and with respect to which such redemption or exchange has not been
rescinded), the
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registered holder of such shares at the close of business on such Record Date
shall be entitled to receive the dividend, if any, payable on such shares on
such Dividend Payment Date notwithstanding the conversion thereof. Except as
provided in this Section 3.2, no adjustments in respect of payments of dividends
on shares surrendered for conversion or any dividend on the Media Stock issued
upon conversion shall be made upon the conversion of any shares of this Series.
3.3 The Corporation may, but shall not be required to, in
connection with any conversion of shares of this Series, issue a fraction of a
share of Media Stock, and if the Corporation shall determine not to issue any
such fraction, the Corporation shall, subject to Section 3.6(g), make a cash
payment (rounded to the nearest cent) equal to such fraction multiplied by the
Closing Price of the Media Stock on the last Trading Day prior to the date of
conversion.
3.4 Any holder of shares of this Series electing to convert
such shares into Media Stock shall surrender the certificate or certificates for
such shares at the office of the transfer agent or agents therefor (or at such
other place in the United States as the Corporation may designate by notice to
the holders of shares of this Series) during regular business hours, duly
endorsed to the Corporation or in blank, or accompanied by instruments of
transfer to the Corporation or in blank, or in form satisfactory to the
Corporation, and shall give written notice to the Corporation at such office
that such holder elects to convert such shares of this Series. The Corporation
shall, as soon as practicable and in any event within five Trading Days (subject
to Section 3.6(g)) after such surrender of certificates for shares of this
Series, accompanied by the written notice above prescribed issue and deliver at
such office to the holder for whose account such shares were surrendered, or to
his nominee, (i) certificates representing the number of shares of Media Stock
to which such holder is entitled upon such conversion and (ii) if less than the
full number of shares of this Series represented by such certificate or
certificates is being converted, a new certificate of like tenor representing
the shares of this Series not converted.
3.5 Conversion shall be deemed to have been made immediately
prior to the close of business as of the date that certificates for the shares
of this Series to be
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converted, and the written notice prescribed in Section 3.4, are received by the
transfer agent or agents for this Series (such date being referred to herein as
the "Conversion Date"). The Person entitled to receive the Media Stock issuable
upon such conversion shall be treated for all purposes as the record holder of
such Media Stock as of the close of business on the Conversion Date and such
conversion shall be at the Conversion Rate in effect on such date.
Notwithstanding anything to the contrary contained herein, in the event the
Corporation shall have rescinded a redemption or exchange of shares of this
Series pursuant to Section 4.5, any holder of shares of this Series that shall
have surrendered shares of this Series for conversion following the day on which
notice of the redemption or exchange shall have been given but prior to the
later of (a) the close of business on the Trading Day next succeeding the date
on which public announcement of the rescission of such redemption or exchange
shall have been made and (b) the date which is three Trading Days following the
mailing of the notice of rescission required by Section 4.5 (a "Converting
Holder") may rescind the conversion of such shares surrendered for conversion by
(i) properly completing a form prescribed by the Corporation and mailed to
holders of shares of this Series (including Converting Holders) with the
Corporation's notice of rescission, which form shall provide for the
certification by any Converting Holder rescinding a conversion on behalf of any
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
shares of this Series that the beneficial ownership (within the meaning of such
Rule) of such shares shall not have changed from the date on which such shares
were surrendered for conversion to the date of such certification and (ii)
delivering such form to the Corporation no later than the close of business on
that date which is fifteen (15) Trading Days following the date of the mailing
of the Corporation's notice of rescission. The delivery of such form by a
Converting Holder shall be accompanied by (x) any certificates representing
shares of Media Stock issued to such Converting Holder upon a conversion of
shares of this Series that shall be rescinded by the proper delivery of such
form (the "Surrendered Shares"), (y) any securities, evidences of indebtedness
or assets (other than cash) distributed by the Corporation to such Converting
Holder by reason of such Converting Holder's being a record holder of the
Surrendered Shares and (z) payment in New York Clearing House funds or other
funds acceptable to the Corporation of an amount equal to the sum of (I) any
cash such Converting
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Holder may have received in lieu of the issuance of fractional shares upon
conversion and (II) any cash paid or payable by the Corporation to such
Converting Holder by reason of such Converting Holder being a record holder of
the Surrendered Shares. Upon receipt by the Corporation of any such form
properly completed by a Converting Holder and any certificates, securities,
evidences of indebtedness, assets or cash payments required to be returned or
made by such Converting Holder to the Corporation as set forth above, the
Corporation shall instruct the transfer agent or agents for shares of Media
Stock and shares of this Series to cancel any certificates representing the
Surrendered Shares (which Surrendered Shares shall be deposited in the treasury
of the Corporation) and reissue certificates representing shares of this Series
to such Converting Holder (which shares of this Series shall, notwithstanding
their surrender for conversion, be deemed to have been outstanding at all
times). The Corporation shall, as promptly as practicable, and in no event more
than five (5) Trading Days, following the receipt of any such properly completed
form and any such certificates, securities, evidences of indebtedness, assets or
cash payments required to be so returned or made, pay to the Converting Holder
or as otherwise directed by such Converting Holder any dividend or other payment
made on such shares of this Series during the period from the time such shares
shall have been surrendered for conversion to the rescission of such conversion.
All questions as to the validity, form, eligibility (including time of receipt)
and acceptance of any form submitted to the Corporation to rescind the
conversion of shares of this Series, including questions as to the proper
completion or execution of any such form or any certification contained therein,
shall be resolved by the Corporation, whose good faith determination shall be
final and binding. The Corporation shall not be required to deliver certificates
for shares of Media Stock while the stock transfer books for such stock or for
this Series are duly closed for any purpose (but not for a period in excess of
two Trading Days) or during any period commencing at a Redemption Rescission
Event and ending at either (i) the time and date at which the Corporation's
right of rescission shall expire pursuant to Section 4.5 if the Corporation
shall not have exercised such right or (ii) the close of business on that day
which is fifteen (15) Trading Days following the date of the mailing of a notice
of rescission pursuant to Section 4.5 if the Corporation shall have exercised
such right of rescission, but certificates for shares of Media Stock shall
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be delivered as soon as practicable after the opening of such books or the
expiration of such period.
3.6 The Conversion Rate shall be adjusted from time to time as
follows for events occurring after the Effective Time:
(a) In case the Corporation shall, at any time or from time to
time, (i) pay a dividend or make a distribution in shares of Media Stock,
(ii) combine the outstanding shares of Media Stock into a smaller number
of shares, or (iii) subdivide or reclassify the outstanding shares of
Media Stock, then the Conversion Rate in effect immediately before such
action shall be adjusted so that immediately following such event the
holders of the Series D Stock shall be entitled to receive upon conversion
thereof the kind and amount of shares of capital stock of the Corporation
which they would have owned or been entitled to receive upon or by reason
of such event if such shares of Series D Stock had been converted
immediately before the record date (or, if no record date, the effective
date) for such event. An adjustment made pursuant to this Section 3.6(a)
shall become effective immediately after the opening of business on the
day next following the record date in the case of a dividend or
distribution and shall become effective immediately after the opening of
business on the day next following the effective date in the case of a
subdivision, combination or reclassification. For the purposes of this
Section 3.6(a), if holders of Media Stock are entitled to elect the kind
or amount of securities receivable upon the payment of any such divided,
subdivision, combination or reclassification, each holder of Series D
Stock shall be deemed to have failed to exercise any such right of
election (provided that if the kind or amount of securities receivable
upon such dividend, distribution, subdivision, combination or
reclassification is not the same for each nonelecting share, then the kind
and amount of securities receivable upon such dividend, distribution,
subdivision, combination or reclassification for each nonelecting share
shall be deemed to be the kind and amount so receivable per share by a
plurality of the nonelecting shares).
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(b) If the Corporation shall issue rights, warrants or options
to all holders of Media Stock entitling them (for a period not exceeding
45 days from the record date referred to below) to subscribe for or
purchase shares of Media Stock at a price per share less than the Current
Market Price (determined as of the record date for the determination of
stockholders entitled to receive such rights, warrants or options), then,
in any such event, the Conversion Rate shall be adjusted by multiplying
the Conversion Rate in effect immediately prior to the opening of business
on such record date by a fraction, the numerator of which shall be the
number of shares of Media Stock outstanding on such record date plus the
maximum number of additional shares of Media Stock offered for
subscription pursuant to such rights, warrants or options, and the
denominator of which shall be the number of shares of Media Stock
outstanding on such record date plus the maximum number of additional
shares of Media Stock which the aggregate offering price of the maximum
number of shares of Media Stock so offered for subscription or purchase
pursuant to such rights, warrants or options would purchase at such
Current Market Price (determined by multiplying such maximum number of
shares by the exercise price of such rights, warrants or options (plus any
other consideration received by the Corporation upon the issuance or
exercise of such rights, warrants or options) and dividing the product so
obtained by such Current Market Price). Such adjustment shall become
effective at the opening of business on the day next following the record
date for the determination of stockholders entitled to receive such
rights, warrants or options. To the extent that shares of Media Stock are
not delivered after the expiration of such rights, warrants or options,
the Conversion Rate shall be readjusted to the Conversion Rate which would
then be in effect had the adjustments made upon the record date for the
determination of stockholders entitled to receive such rights, warrants or
options been made upon the basis of delivery of only the number of shares
of Media Stock actually delivered and the amount actually paid therefor.
In determining whether any rights, warrants or options entitle the holders
to subscribe for or purchase shares of Media Stock at a price per share
less than such Current Market Price, there shall be taken into account any
consideration received by the
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Corporation upon issuance and upon exercise of such rights, warrants or
options. The value of such consideration, if other than cash, shall be
determined by the good faith business judgment of the Board of Directors,
whose determination shall be conclusive.
(c) If the Corporation shall pay a dividend or make a
distribution to all holders of outstanding shares of Media Stock, of
capital stock, cash, evidences of its indebtedness or other assets of the
Corporation (but excluding (x) any cash dividends or distributions (other
than Extraordinary Cash Distributions) and (y) dividends or distributions
referred to in Section 3.6(a)), then the Conversion Rate shall be adjusted
by multiplying the Conversion Rate in effect immediately prior to the
opening of business on the record date for the determination of
stockholders entitled to receive such dividend or distribution by a
fraction, the numerator of which shall be the Current Market Price
(determined as of such record date), and the denominator of which shall be
such Current Market Price less either (A) the fair market value (as
determined by the good faith business judgment of the Board of Directors,
whose determination shall be conclusive), as of such record date, of the
portion of the capital stock, assets or evidences of indebtedness to be so
distributed applicable to one share of Media Stock or (B), if applicable,
the amount of the Extraordinary Cash Distribution to be distributed per
share of Media Stock. The adjustment pursuant to the foregoing provisions
of this Section 3.6(c) shall become effective at the opening of business
on the day next following the record date for the determination of
stockholders entitled to receive such dividend or distribution.
(d) In lieu of making an adjustment to the Conversion Rate
pursuant to Sections 3.6(a), 3.6(b) or 3.6(c) above for a dividend or
distribution or an issue of rights, warrants or options, the Corporation
may distribute out of funds legally available therefor to the holders of
shares of this Series, or reserve for distribution out of funds legally
available therefor with each share of Media Stock delivered to a person
converting a share of this Series pursuant to this Section 3, such
dividend or distribution or such rights, warrants or options; provided,
however, that in
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the case of such a reservation, on the date, if any, on which a person
converting a share of this Series would no longer be entitled to receive
such dividend or distribution or receive or exercise such rights, warrants
or options, such dividend or distribution shall be deemed to have
occurred, or such rights, warrants or options shall be deemed to have
issued, and the Conversion Rate shall be adjusted as provided in Section
3.6(a), 3.6(b) or 3.6(c), as the case may be (with such termination date
being the relevant date of determination for purposes of determining the
Current Market Price).
(e) The Corporation shall be entitled to make such additional
increases in the Conversion Rate, in addition to the adjustments required
by subsections 3.6(a) through 3.6(c), as shall be determined by the Board
of Directors to be necessary in order that any dividend or distribution in
Media Stock, any subdivision, reclassification or combination of shares of
Media Stock or any issuance of rights or warrants referred to above, shall
not be taxable to the holders of Media Stock for United States Federal
income tax purposes.
(f) To the extent permitted by applicable law, the Corporation
may from time to time increase the Conversion Rate by any amount for any
period of time if the period is at least 20 Trading Days, the increase is
irrevocable during such period and the Board of Directors shall have made
a determination that such increase would be in the best interests of the
Corporation, which determination shall be conclusive.
(g) In any case in which this Section 3.6 shall require that
any adjustment be made effective as of or immediately following a record
date, the Corporation may elect to defer (but only for five (5) Trading
Days following the occurrence of the event which necessitates the filing
of the statement referred to in Section 3.9(a)) issuing to the holder of
any shares of this Series converted after such record date (i) the shares
of Media Stock and other capital stock of the Corporation issuable upon
such conversion over and above the shares of Media Stock and other capital
stock of the Corporation issuable upon such conversion on the basis of the
Conversion Rate prior to adjustment
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and (ii) paying to such holder any amount in cash in lieu of any fraction
thereof pursuant to Section 3.3; provided, however, that the Corporation
shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(h) All calculations under this Section 3 shall be made to the
nearest cent, one-hundredth of a share or, in the case of the Conversion
Rate, one hundred-thousandth. Notwithstanding any other provision of this
Section 3, the Corporation shall not be required to make any adjustment of
the Conversion Rate unless such adjustment would require an increase or
decrease of at least 1.00000% of such Conversion Rate. Any lesser
adjustment shall be carried forward and shall be made at the time of and
together with the next subsequent adjustment which, together with any
adjustment or adjustments so carried forward, shall amount to an increase
or decrease of at least 1.00000% in such rate. Any adjustments under this
Section 3 shall be made successively whenever an event requiring such an
adjustment occurs.
(i) If the Corporation shall take a record of the holders of
Media Stock for the purpose of entitling them to receive a dividend or
other distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment in the Conversion
Rate then in effect shall be required by reason of the taking of such
record.
(j) Subject to Section 3.6(e) hereof, no adjustment shall be
made pursuant to this Section 3.6 with respect to any share of Series D
Stock that is converted prior to the time such adjustment otherwise would
be made.
3.7 In case of (a) any consolidation or merger to which the
Corporation is a party, other than a merger or consolidation in which the
Corporation is the surviving or continuing corporation and which does not result
in any reclassification of, or change (other than a change in par value or from
par value to no par value or
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from no par value to par value, or as a result of a subdivision or combination)
in, outstanding shares of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible) or (b) any sale or
conveyance of all or substantially all of the property and assets of the
Corporation, then lawful provision shall be made as part of the terms of such
transaction whereby the holder of each share of Series D Stock which is not
converted into the right to receive stock or other securities and property in
connection with such transaction shall have the right thereafter, during the
period such share shall be convertible, to convert such share into the kind and
amount of shares of stock or other securities and property receivable upon such
consolidation, merger, sale or conveyance by a holder of the number of shares of
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) into which such shares of this Series could
have been converted immediately prior to such consolidation, merger, sale or
conveyance, subject to adjustment which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 3. If holders of
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) are entitled to elect the kind or amount of
securities or other property receivable upon such consolidation, merger, sale or
conveyance, all adjustments made pursuant to this Section 3.7 shall be based
upon (i) the election, if any, made in writing to the Secretary of the
Corporation by the record holder of the largest number of shares of Series D
Stock prior to the earlier of (x) the last date on which a holder of Media Stock
(or such other class or series of common stock) may make such an election and
(y) the date which is five (5) Trading Days prior to the record date for
determining the holders of Media Stock (or such other class or series of common
stock) entitled to participate in the transaction (or if no such record date is
established, the effective date of such transaction) or (ii) if no such election
is timely made, an assumption that each holder of Shares of this Series failed
to exercise such rights of election (provided that if the kind or amount of
securities or other property receivable upon such consolidation, merger, sale or
conveyance is not the same for each nonelecting share, then the kind and amount
of securities or other property receivable upon such consolidation, merger, sale
or conveyance for each nonelecting share shall be deemed to be the kind and
amount so receivable per share by
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a plurality of the nonelecting shares). Concurrently with the mailing to holders
of Media Stock (or such other class or series of common stock) of any document
pursuant to which such holders may make an election regarding the kind or amount
of securities or other property that will be receivable by such holder in any
transaction described in clause (a) or (b) of the first sentence of this Section
3.7, the Corporation shall mail a copy thereof to the holders of shares of the
Series D Stock. The Corporation shall not enter into any of the transactions
referred to in clauses (a) or (b) of the first sentence of this Section 3.7
unless, prior to the consummation thereof, effective provision shall be made in
a certificate or articles of incorporation or other constituent document or
written instrument of the Corporation or the entity surviving the consolidation
or merger, if other than the Corporation, or the entity acquiring the
Corporation's assets, unless, in either case, such entity is a direct or
indirect subsidiary of another entity, in which case such provision shall be
made in the certificate or articles of incorporation or other constituent
document or written instrument of such other entity (any such entity or other
entity being the "Surviving Entity") so as to assume the obligation to deliver
to each holder of shares of Series D Stock such stock or other securities and
property and otherwise give effect to the provisions set forth in this Section
3.7. The provisions of this Section 3.7 shall apply similarly to successive
consolidations, mergers, sales or conveyances.
3.8 After the date, if any, on which all outstanding shares of
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) are converted into or exchanged for shares of
another class or series of common stock of the Corporation, each share of this
Series shall thereafter be convertible into or exchangeable for the number of
shares of such other class or series of common stock receivable upon such
conversion or exchange by a holder of that number of shares or fraction thereof
of Media Stock (or such other class or series of common stock into which shares
of this Series are then convertible) into which one share of this Series was
convertible immediately prior to such conversion or exchange. From and after any
such conversion or exchange, Conversion Rate adjustments as nearly equivalent as
may be practicable to the adjustments pursuant to Sections 3.6 and 3.7 which,
prior to such exchange, were made in respect of Media Stock (or such other class
or
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series of common stock into which shares of this Series are then convertible)
shall instead be made pursuant to such Sections 3.6 and 3.7 in respect of shares
of such other class or series of common stock.
3.9 (a) Whenever the Conversion Rate is adjusted as provided
in this Section 3, the Corporation (or, in the case of Section 3.7, the
Corporation or the Surviving Entity, as the case may be, shall forthwith place
on file with its transfer agent or agents for this Series a statement signed by
a duly authorized officer of the Corporation or the Surviving Entity, as the
case may be, stating the adjusted Conversion Rate determined as provided herein.
Such statements shall set forth in reasonable detail such facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Promptly after the adjustment of the Conversion Rate, the Corporation or the
Surviving Entity, as the case may be, shall mail a notice thereof to each holder
of shares of this Series. Whenever the Conversion Rate is increased pursuant to
Section 3.6(f), such notice shall be mailed to each holder of shares of this
Series as promptly as possible after the Corporation shall have determined to
effect such increase and, in any event, at least 15 Trading Days prior to the
date such increased Conversion Rate takes effect, and such notice shall state
such increased Conversion Rate and the period during which it will be in effect.
Where appropriate, the notice required by this Section 3.9(a) may be given in
advance and included as part of the notice required pursuant to Section 3.9(b)
or 3.9(c).
(b) Subject to the provisions of Section 3.9(c), if: (i) the
Corporation takes any action that would require an adjustment of the Conversion
Rate pursuant to Sections 3.6 through 3.8; (ii) there shall be any consolidation
or merger to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required, or the sale or transfer of all or
substantially all of the assets of the Corporation; or (iii) there shall occur
the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, then the Corporation shall, as promptly as possible, but at least
10 Trading Days prior to the record date or other date set for definitive action
if there shall be no record date, cause notice to be filed with the transfer
agent or agents for this Series and given to each record holder of outstanding
shares of this Series stating the action or event for which
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such notice is being given and the record date for and the anticipated effective
date of such action or event. Failure to give or receive such notice or any
defect therein shall not affect the legality or validity of the related
transaction.
(c) If the Corporation intends to convert all of the
outstanding shares of Media Stock into shares of Communications Stock (or, if
the Communications Stock is not Publicly Traded at such time and shares of any
other class or series of common stock of the Corporation (other than Media
Stock) are then Publicly Traded, of such other class or series of common stock
as has the largest Market Capitalization) (as provided in Section 2.4 of Article
V of the Certificate of Incorporation), then the Corporation shall, not later
than the 35th Trading Day and not earlier than the 45th Trading Day prior to the
date of such conversion, cause notice to be filed with the transfer agent or
agents for this Series and given to each record holder of shares of this Series,
setting forth: (1) a statement that all outstanding shares of Media Stock shall
be converted; (2) the date of such conversion; (3) the per share number of
shares of Communications Stock (or such other class or series of common stock)
to be received with respect to each share of Media Stock, including details as
to the calculation thereof; (4) the place or places where certificates for
shares of Media Stock, properly endorsed or assigned for transfer (unless the
Corporation shall waive such requirement), are to be surrendered for delivery of
certificates for shares of Communications Stock (or such other class or series
of common stock); (5) the number of shares of Media Stock outstanding and the
number of shares of Media Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof, including the number of outstanding shares
of this Series and the Conversion Price; (6) a statement to the effect that,
subject to Section 2.4.5(I) of Article V of the Certificate of Incorporation,
dividends on shares of such Media Stock shall cease to be paid as of the date of
such conversion; (7) that a holder of shares of this Series shall be entitled to
receive shares of Communications Stock (or such other class or series of common
stock) pursuant to such conversion if such holder converts shares of this Series
on or prior to the date of such conversion; and (8) a statement as to what such
holder will be entitled to receive pursuant to the terms of Section 3.8 if such
holder thereafter
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properly converts shares of this Series. In addition, from and after any
conversion of Media Stock effected in accordance with Section 2.4 of Article V
of the Certificate of Incorporation, if (x) a class or series of common stock of
the Corporation exists in addition to the class or series of common stock into
which the Media Stock was converted and (y) the Corporation intends to convert
the class or series of common stock into which the Media Stock was converted
into another such class or series of common stock of the Corporation, then the
Corporation shall give notice comparable to the notice described in the
preceding sentence of its intention to effect such a conversion. In the event of
any conflict between the notice provisions of this Section 3.9(c) and Section
3.9(b), the notice provisions of this Section 3.9(c) shall govern.
3.10 There shall be no adjustment of the Conversion Rate in
case of the issuance of any stock of the Corporation in a reorganization,
acquisition or other similar transaction except as specifically set forth in
this Section 3. If any action or transaction would require adjustment of any
Conversion Rate established hereunder pursuant to more than one paragraph of
this Section 3, only the adjustment which would result in the largest increase
of such Conversion Rate shall be made.
3.11 The Corporation shall at all times reserve and keep
available, free from preemptive rights, out of its authorized but unissued
stock, for the purpose of effecting the conversion of the shares of this Series,
such number of its duly authorized shares of Media Stock (or, if applicable, any
other shares of Capital Stock of the Corporation) as shall from time to time be
sufficient to effect the conversion of all outstanding shares of this Series
into such Media Stock (or such other shares of Capital Stock) at any time;
provided, however, that nothing contained herein shall preclude the Corporation
from satisfying its obligations in respect of the conversion of the shares by
delivery of purchased shares of Media Stock (or such other shares of Capital
Stock) that are held in the treasury of the Corporation. All shares of Media
Stock (or such other shares of Capital Stock of the Corporation) which shall be
deliverable upon conversion of the shares of this Series shall be duly and
validly issued, fully paid and nonassessable. For purposes of this Section 3,
the number of shares of Media Stock or any other class or series of common stock
of the Corporation at any time outstanding
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shall not include any shares of Media Stock or such other class or series of
common stock then owned or held by or for the account of Corporation or any
subsidiary of the Corporation.
3.12 If any shares of Media Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
which would be issuable upon conversion of shares of this Series hereunder
require registration with or approval of any governmental authority before such
shares may be issued upon conversion, the Corporation will in good faith and as
expeditiously as possible cause such shares to be duly registered or approved,
as the case may be. The Corporation will endeavor to list the shares of (or
depositary shares representing fractional interests in) Media Stock (or such
other class or series of common stock into which shares of this Series are then
convertible) required to be delivered upon conversion of shares of this Series
prior to such delivery upon the principal national securities exchange upon
which the outstanding Media Stock (or such other class or series of common
stock) is listed at the time of such delivery.
3.13 The Corporation shall pay any and all issue, stamp,
documentation, transfer or other taxes that may be payable in respect of any
issue or delivery of shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) on
conversion of shares of this Series pursuant hereto. The Corporation shall not,
however, be required to pay any tax which is payable in respect of any transfer
involved in the issue or delivery of Media Stock (or such other class or series
of common stock) in a name other than that in which the shares of this Series so
converted were registered, and no such issue or delivery shall be made unless
and until the Person requesting such issue has paid to the Corporation the
amount of such tax, or has established, to the satisfaction of the Corporation,
that such tax has been paid.
4. Redemption or Exchange.
4.1 (a) Except as provided in Section 4.1(b), the shares of
this Series shall not be redeemable by the Corporation prior to the third
anniversary of the Effective Time. The Corporation may, at its sole option,
subject to Section 2.2 hereof, from time to time on and after the third
anniversary of the Effective Time and prior
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to the fifth anniversary of the Effective Time, exchange shares of Media Stock
(or such other class or series of common stock into which shares of this Series
are then convertible) for all or any part of the outstanding shares of this
Series at the Exchange Rate; provided, however, that such an exchange may only
be effected if the Closing Price shall be greater than the product of (x) the
Conversion Price multiplied by (y) 1.35, on 20 of the 30 Trading Days
immediately prior to the date of the notice delivered by the Corporation
pursuant to Section 4.3(a) to holders of shares of this Series to be exchanged.
The Corporation may, at its sole option, subject to Section 2.2 hereof, from
time to time on and after the fifth anniversary of the Effective Time, at its
election either: (i) redeem, out of funds legally available therefor, all or any
part of the outstanding shares of this Series at the Redemption Price; (ii)
exchange shares of Media Stock (or such other class or series of common stock
into which shares of this Series are then convertible) for all or any part of
the outstanding shares of this Series at the Exchange Rate; or (iii) effect a
combination of the options described in the foregoing clauses (i) and (ii) (in
which event each holder of shares of this Series which are selected for
redemption and exchange pursuant to Section 4.2 shall receive the same
proportion of cash and shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) (except for
cash paid in lieu of fractional shares) paid to other holders of shares of this
Series selected for redemption and exchange).
(b) The Corporation shall redeem, out of funds legally
available therefor, all of the outstanding shares of this Series, at the
Redemption Price, if any of the following events with respect to the Media Group
occur (such events being collectively referred to herein as the "Media Group
Special Events"):
(i) (A) the Corporation redeems all of the outstanding shares
of Media Stock in exchange for shares of common stock of the Media Group
Subsidiaries as provided in Section 2.4.3 of Article V of the Certificate
of Incorporation (the "Media Group Subsidiary Redemption") or (B)
following a Disposition of all or substantially all of the properties and
assets attributed to the Media Group, the Corporation either (1) pays a
dividend on the Media Stock in an amount equal to the product of the
Outstanding Media
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Fraction multiplied by the Fair Value of the Net Proceeds of such
Disposition as provided in Section 2.4.1(A)(1)(a) of Article V of the
Certificate of Incorporation (the "Media Group Disposition Dividend"), or
(2) redeems shares of Media Stock for an amount equal to the product of
the Outstanding Media Fraction multiplied by the Fair Value of the Net
Proceeds of such Disposition as provided in Section 2.4.1(A)(1)(b) of
Article V of the Certificate of Incorporation (the "Media Group
Disposition Redemption"); or
(ii) the Corporation pays a dividend on, or the Corporation or
any of its subsidiaries consummates a tender offer or exchange offer for,
shares of Media Stock and the aggregate amount of such dividend or the
consideration paid in such tender offer or exchange offer is an amount
equal to the Fair Value of all or substantially all of the properties and
assets attributed to the Media Group (the "Media Group Special Dividend"
or the "Media Group Tender or Exchange Offer", respectively); provided,
however, that the calculation of the Fair Value of all or substantially
all of the properties and assets attributed to the Media Group shall be
made without giving effect to any money borrowed by the Corporation or any
of its subsidiaries in connection with such dividend or tender offer or
exchange offer, as the case may be.
The Redemption Date for shares of this Series to be redeemed by the Corporation
pursuant to this Section 4.1(b) shall be, if the applicable Media Group Special
Event is (I) the Media Group Subsidiary Redemption, the date of such exchange,
(II) the Media Group Disposition Dividend or the Media Group Special Dividend,
the date of payment of such dividend, (III) the Media Group Disposition
Redemption, the date of such redemption or (IV) the Media Group Tender or
Exchange Offer, the date such tender offer or exchange offer is consummated.
Notwithstanding anything to the contrary contained in this Section 4.1(b), any
redemption pursuant to this Section 4.1(b) shall be conditioned upon the actual
redemption of Media Stock for shares of common stock of the Media Group
Subsidiaries, payment of the Media Group Disposition Dividend or the amount due
as a result of the Media Group Disposition Redemption (in each case in the
required kind of capital stock, cash, securities and/or other property), payment
of the Media Group Special Dividend
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or the consummation of the Media Group Tender or Exchange Offer, as the case
may be.
(c) The Corporation shall, on the twentieth anniversary of the
Effective Time, at its election either: (i) redeem, out of funds legally
available therefor, all of the outstanding shares of this Series at the
Redemption Price; (ii) exchange shares of Media Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
for all of the outstanding shares of this Series at the Exchange Rate; or (iii)
effect a combination of the options described in the foregoing clauses (i) and
(ii) (in which event each holder of shares of this Series shall receive the same
proportion of cash and shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) (except for
cash paid in lieu of fractional shares) paid to other holders of shares of this
Series).
(d) The Corporation shall redeem, out of funds legally
available therefore, all of the outstanding shares of this Series at the
Redemption Price, if (i) the Corporation converts all of the outstanding shares
of Media Stock into shares of Communications Stock (or, if the Communications
Stock is not Publicly Traded at such time and shares of any other class or
series of common stock of the Corporation (other than Media Stock) are then
Publicly Traded, of such other class or series of common stock as has the
largest Market Capitalization) as provided in Section 2.4 of Article V of the
Certificate of Incorporation and (ii) at any time following such conversion (A)
an event substantially similar to any Media Group Special Event occurs in
respect to the Communications Stock (or such other class or series of common
stock) and (B) at the time of such event shares of another class or series of
common stock of the Corporation (other then Communications Stock or such other
class or series of common stock) are then Publicly Traded. The Redemption Date
for, and the conditions to, any such redemption shall be determined in a manner
consistent with the Redemption Date and conditions set forth in Section 4.1(b)
for a redemption resulting from a substantially similar Media Group Special
Event.
(e) The Corporation shall be entitled to effect an exchange of
shares of Media Stock (or such other class or series of common stock into which
shares of this Series are then convertible) for shares of Series D Stock
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pursuant to Section 4.1(a) or 4.1(c) only to the extent Media Stock (or such
other class or series of common stock) shall be available for issuance
(including delivery of previously issued shares of Media Stock (or such other
class or series) held in the Corporation's treasury on the Redemption Date). The
Corporation may, but shall not be required to, in connection with any exchange
of shares of this Series pursuant to Section 4.1(a) or 4.1(c), issue a fraction
of a share of Media Stock (or such other class or series of common stock into
which shares of this Series are then convertible), and if the Corporation shall
determine not to issue any such fraction, the Corporation shall make a cash
payment (rounded to the nearest cent) equal to such fraction multiplied by the
Closing Price of the Media Stock (or such other class or series of common stock)
on the last Trading Day prior to the Redemption Date.
4.2 In the event that fewer than all of the outstanding shares
of this Series are to be redeemed and/or exchanged pursuant to Section 4.1(a),
subject to clause (iii) of the third sentence of Section 4.1(a), the aggregate
number of shares of this Series held by each holder which will be redeemed
and/or exchanged shall be determined by the Corporation by lot or pro rata or by
any other method as may be determined by the Board of Directors in its sole
discretion to be equitable, and the certificate of the Corporation's Secretary
or an Assistant Secretary filed with the transfer agent or transfer agents for
this Series in respect of such determination by the Board of Directors shall be
conclusive.
4.3 (a) If the Corporation determines to redeem and/or
exchange shares of this Series pursuant to Section 4.1(a) or 4.1(c), the
Corporation shall, not later than the 15th Trading Day nor earlier than the 60th
Trading Day prior to the Redemption Date, cause notice to be filed with the
transfer agent or agents for this Series and to be given to each record holder
of the shares to be redeemed and/or exchanged, setting forth: (1) the Redemption
Date; (2) in the case of a redemption or exchange pursuant to Section 4.1(c),
that all shares of this Series outstanding on the Redemption Date shall be
redeemed and/or exchanged by the Corporation; (3) in the case of a redemption or
exchange pursuant to Section 4.1(a), the total number of shares of this Series
to be redeemed and/or exchanged and, if fewer than all the shares held by such
holder are to be redeemed and/or exchanged, the aggregate number of such shares
which
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will be redeemed and/or exchanged; (4) the Redemption Price and/or the manner in
which the Exchange Rate will be calculated prior to the Redemption Date; (5)
that, if applicable, the Corporation shall determine on or prior to the second
Trading Day preceding the Redemption Date the percentage of such holder's shares
to be redeemed and the percentage of such holder's shares to be exchanged; (6)
that shares of this Series called for redemption or exchange may be converted at
any time prior to the Redemption Date (unless the Corporation (i) shall, in the
case of a redemption, default in payment of the Redemption Price or, in the case
of an exchange, fail to exchange the shares of this Series for the applicable
number of shares of Media Stock or (ii) shall, in the case of a redemption
pursuant to Section 4.1(a), exercise its right to rescind such redemption or
exchange pursuant to Section 4.5, in which case such right of conversion shall
not terminate at such time and date); (7) the applicable Conversion Price; (8)
the place or places where certificates for such shares are to be surrendered for
payment of the Redemption Price and/or the Exchange Rate, as the case may be;
and (9) that dividends on the shares to be redeemed and/or exchanged will cease
to accrue on the Redemption Date. Promptly, following the Redemption Date, the
Corporation shall cause notice to be filed with the transfer agent or agents for
this Series and to be given to each record holder of the shares to be redeemed
and/or exchanged setting forth the percentage of such holder's shares which the
Corporation has elected to redeem and the percentage of such holder's shares
which the Corporation has elected to exchange.
(b) If the Corporation determines to effect a Media Group
Subsidiary Redemption, the Corporation shall, not later than the 30th Trading
Day and not earlier than the 45th Trading Day prior to the Redemption Date,
cause notice to be filed with the transfer agent or agents for this Series and
given to each record holder of shares of this Series, setting forth: (1) the
Redemption Date (which, pursuant to the penultimate sentence of Section 4.1(b),
shall be the same as the date specified in clause (8) below); (2) that all
shares of this Series outstanding on the Redemption Date shall be redeemed by
the Corporation; (3) the Redemption Price; (4) that the redemption of the shares
of this Series shall be conditioned upon the consummation of the Media Group
Subsidiary Redemption; (5) the place or places where certificates for shares of
this Series, properly endorsed or assigned for transfer
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(unless the Corporation waives such requirement), are to be surrendered for
payment of the Redemption Price; (6) that dividends on the shares to be redeemed
will cease to accrue on the Redemption Date; (7) a statement that all shares of
Media Stock outstanding on the date of the Media Group Subsidiary Redemption
shall be redeemed in exchange for shares of common stock of the Media Group
Subsidiaries; (8) the date of such Media Group Subsidiary Redemption; (9) the
Outstanding Media Fraction on the date of such notice; (10) the place or places
where certificates for shares of Media Stock, properly endorsed or assigned for
transfer (unless the Corporation shall waive such requirement), are to be
surrendered for delivery of certificates for shares of the Media Group
Subsidiaries; (11) a statement to the effect that, subject to Section 2.4.5(I)
of Article V of the Certificate of Incorporation, dividends on the Media Stock
shall cease to be paid as of the Redemption Date; (12) the number of shares of
Media Stock outstanding and the number of shares of Media Stock into or for
which outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price; and
(13) that a holder of shares of this Series shall be entitled to receive shares
of common stock of the Media Group Subsidiaries upon the Media Group Subsidiary
Redemption in lieu of the Redemption Price only if such holder converts such
shares of this Series on or prior to the Redemption Date.
(c) If the Corporation determines to effect a Media Group
Disposition Dividend, the Corporation shall, not later than the 30th Trading Day
following the consummation of the Disposition by the Corporation of all or
substantially all of the properties and assets attributed to the Media Group,
cause notice to be filed with the transfer agent or agents for this Series and
given to each record holder of shares of this Series, setting forth: (1) the
anticipated Redemption Date (which, pursuant to the penultimate sentence of
Section 4.1(b), shall be the same as the date specified in clause (8) below);
(2) that all shares of this Series outstanding on the Redemption Date shall be
redeemed by the Corporation; (3) the Redemption Price; (4) that the redemption
of the shares of this Series shall be conditioned upon the payment of the Media
Group Disposition Dividend; (5) the place or places where certificates for
shares of this Series, properly endorsed or
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assigned for transfer (unless the Corporation waives such requirement), are to
be surrendered for payment of the Redemption Price; (6) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (7) the
record date for determining holders of Media Stock entitled to receive the Media
Group Disposition Dividend, which shall be not earlier than the 40th Trading Day
and not later than the 50th Trading Day following the consummation of such
Disposition; (8) the anticipated date of payment of the Media Group Disposition
Dividend (which shall not be more than 85 Trading Days following the
consummation of such Disposition); (9) the type of property to be paid as such
dividend in respect of the outstanding shares of Media Stock; (10) the Net
Proceeds of such Disposition; (11) the Outstanding Media Fraction on the date of
such notice; (12) the number of outstanding shares of Media Stock and the number
of shares of Media Stock into or for which outstanding Convertible Securities
are then convertible, exchangeable or exercisable and the conversion, exchange
or exercise price thereof, including the number of outstanding shares of this
Series and the Conversion Price in effect at such time; and (13) that a holder
of shares of this Series shall be entitled to receive such dividend in lieu of
the Redemption Price only if such holder properly converts such shares on or
prior to the record date referred to in clause (7) of this sentence and that
shares of this Series shall not be convertible after such record date.
(d) If the Corporation determines to effect a Media Group
Disposition Redemption following a Disposition of all (not merely substantially
all) of the properties and assets attributed to the Media Group (in accordance
with Section 2.4.1(A)(1)(b)(i) of Article V of the Certificate of
Incorporation), the Corporation shall, not later than the 35th Trading Day and
not earlier than the 45th Trading Day prior to the Redemption Date, cause notice
to be filed with the transfer agent or agents for this Series and given to each
record holder of shares of this Series, setting forth: (1) the Redemption Date
(which, pursuant to the penultimate sentence of Section 4.1(b), shall be the
same as the date specified in clause (8) below); (2) that all shares of this
Series outstanding on the Redemption Date shall be redeemed by the Corporation;
(3) the Redemption Price; (4) that the redemption of shares of this Series shall
be conditioned upon the consummation of the Media Group Disposition Redemption;
(5) the place or places where certificates for shares of this Series, properly
endorsed or assigned for
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transfer (unless the Corporation waives such requirement), are to be surrendered
for payment of the Redemption Price; (6) that dividends on the shares to be
redeemed will cease to accrue on the Redemption Date; (7) that all shares of
Media Stock outstanding on the date of such Media Group Disposition Redemption
shall be redeemed; (8) the date of such Media Group Disposition Redemption
(which shall not be more than 85 Trading Days following the consummation of such
Disposition); (9) the type of property in which the redemption price for the
shares of Media Stock to be redeemed is to be paid; (10) the Net Proceeds of
such Disposition; (11) the Outstanding Media Fraction on the date of such
notice; (12) the place or places where certificates for shares of Media Stock,
properly endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for delivery of cash and/or securities or
other property; (13) the number of outstanding shares of Media Stock and the
number of shares of Media Stock into or for which such outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof, including the number of outstanding shares
of this Series and the Conversion Price in effect at such time; (14) that a
holder of shares of this Series shall be entitled to participate in the Media
Group Disposition Redemption in lieu of participating in the redemption of the
shares of this Series only if such holder properly converts such shares of this
Series on or prior to the Redemption Date; and (15) that, except as otherwise
provided by Section 2.4.5(I) of Article V of the Certificate of Incorporation,
dividends on shares of Media Stock shall cease to be paid as of the Redemption
Date.
(e) If the Corporation determines to effect a Media Group
Disposition Redemption following a Disposition of substantially all (but not
all) of the properties and assets attributed to the Media Group (in accordance
with Section 2.4.1(A)(1)(b)(ii) of Article V of the Certificate of
Incorporation), the Corporation shall, not later than the 30th Trading Day
following the consummation of such Disposition, cause notice to be filed with
the transfer agent or agents for this Series and given to each record holder of
shares of this Series, setting forth: (1) the anticipated Redemption Date
(which, pursuant to the penultimate sentence of Section 4.1(b), shall be the
same as the date specified in clause (8) below); (2) that all shares of this
Series outstanding on the Redemption Date shall be redeemed by the Corporation;
(3) the Redemption Price;
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(4) that the redemption of shares of this Series shall be conditioned upon the
consummation of the Media Group Disposition Redemption; (5) the place or places
where certificates for shares of this Series, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), are to be surrendered
for payment of the Redemption Price; (6) that dividends on the shares to be
redeemed will cease to accrue on the Redemption Date; (7) a date not earlier
than the 40th Trading Day and not later than the 50th Trading Day following the
consummation of such Disposition on which shares of Media Stock shall be
selected for redemption pursuant to such Media Group Disposition Redemption; (8)
the anticipated date of such Media Group Disposition Redemption (which shall not
be more than 85 Trading Days following the consummation of such Disposition);
(9) the type of property in which the redemption price for the shares of Media
Stock to be redeemed is to be paid; (10) the Net Proceeds of such Disposition;
(11) the Outstanding Media Fraction; (12) the number of shares of Media Stock
outstanding and the number of shares of Media Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price in
effect at such time; (13) that a holder of shares of this Series shall be
eligible to participate in such selection for redemption pursuant to such Media
Group Disposition Redemption in lieu of participating in the redemption of
shares of this Series only if such holder properly converts such shares of this
Series on or prior to the date referred to in clause (7) of this sentence and
that shares of this Series shall not be convertible after such date; and (14) a
statement that the Corporation will not be required to register a transfer of
any shares of Media Stock for a period of 15 Trading Days next preceding the
date referred to in clause (7) of this sentence.
(f) If the Corporation determines to effect a Media Group
Special Dividend, the Corporation shall, not later than the 45th Trading Day and
not earlier than the 60th Trading day prior to the date of payment of such
dividend, cause notice to be filed with transfer agent or agent for this Series
and given to each record holder of shares of this Series, setting forth: (1) the
anticipated Redemption Date (which, pursuant to the penultimate sentence of
Section 4.1(b), shall be the same as the date specified
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in clause (8) below); (2) that all shares of this Series outstanding on the
Redemption Date shall be redeemed by the Corporation; (3) the Redemption Price;
(4) that the redemption of the shares of this Series shall be conditioned upon
the payment of the Media Group Special Dividend; (5) the place or places where
certificates for shares of this Series, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), are to be surrendered
for payment of the Redemption Price; (6) that dividends on the shares to be
redeemed will cease to accrue on the Redemption Date; (7) the record date for
determining holders of Media Stock entitled to receive the Media Group Special
Dividend, which shall be not earlier than the 20th Trading Day prior to the date
of payment of such dividend; (8) the anticipated date of payment of the Media
Group Special Dividend; (9) the type of property to be paid as such dividend in
respect of the outstanding shares of Media Stock; (10) the Outstanding Media
Fraction on the date of such notice; (11) the number of outstanding shares of
Media Stock and the number of shares of Media Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price in
effect at such time; and (12) that a holder of shares of this Series shall be
entitled to receive such dividend in lieu of the Redemption Price only if such
holder properly converts such shares on or prior to the record date referred to
in clause (7) of this sentence and that shares of this Series shall not be
convertible after such record date.
(g) If the Corporation or any of its subsidiaries determines
to effect a Media Group Tender or Exchange Offer, the Corporation shall, on the
date of the public announcement of such tender offer or exchange offer by the
Corporation or any of its subsidiaries but in any event not later than the 35th
Trading Day prior to such redemption, cause notice to be filed with the transfer
agent or agent for this Series and given to each record holder of shares of this
Series, setting forth: (1) the anticipated Redemption Date (which, pursuant to
the penultimate sentence of Section 4.1(b), shall be the same as the date
specified in clause (7) below); (2) that all shares of this Series outstanding
on the Redemption Date shall be redeemed by the Corporation; (3) the Redemption
Price; (4) that the redemption of shares of this Series shall be conditioned
upon the consummation of the Media Group Tender or Exchange
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Offer; (5) the place or places where certificates for shares of this Series,
properly endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for payment of the Redemption Price; (6)
that dividends on the shares to be redeemed will cease to accrue on the
Redemption Date; (7) the anticipated date of consummation of such Media Group
Tender or Exchange Offer; (8) the type of consideration to be paid by the
Corporation or its subsidiary in such Media Group Tender Offer or Exchange Offer
for shares of Media Stock; (9) the date on which such Media Group Tender or
Exchange Offer commenced, the date on which such Media Group Tender or Exchange
Offer is scheduled to expire unless extended and any other material terms
thereof (or the material terms of any amendment thereto); (10) the Outstanding
Media Fraction on the date of such notice; (11) the number of outstanding shares
of Media Stock and the number of shares of Media Stock into or for which such
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price in
effect at such time; and (12) that a holder of shares of this Series shall be
entitled to participate in the Media Group Tender or Exchange Offer in lieu of
participating in the redemption of the shares of this Series only if such holder
properly converts such shares of this Series on or prior to the Redemption Date
and then complies with the terms and conditions of the Media Group Tender or
Exchange Offer and that such holder shall be permitted to tender or exchange
shares of Media Stock upon conversion of shares of this Series by notice of
guaranteed delivery so long as physical certificates are tendered as soon as
practicable after physical receipt thereof.
(h) In the event the Corporation shall redeem shares of this
Series pursuant to Section 4.1(d), notice of such redemption shall be given by
the Corporation at a time, and such notice shall contain information, comparable
to the time or information, as the case may be, specified in Sections 4.3(b)
through (g) with respect to a notice of a redemption pursuant to Section 4.1(b)
resulting from a substantially similar Media Group Special Event.
4.4 If notice of redemption or exchange shall have been given
by the Corporation as provided in Section 4.3, from and after the Redemption
Date, dividends
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on the shares of this Series so called for redemption or exchange shall cease to
accrue, such shares shall no longer be deemed to be outstanding, and all rights
of the holders thereof as stockholders of the Corporation with respect to shares
so called for redemption or exchange (except, in the case of a redemption, the
right to receive from the Corporation the Redemption Price without interest and,
in the case of an exchange, the right to receive from the Corporation the
Exchange Rate without interest) shall cease (including any right to receive
dividends otherwise payable on any Dividend Payment Date that would have
occurred after the Redemption Date), unless (a) the Corporation, in the case of
a redemption, defaults in the payment of the Redemption Price and, in the case
of an exchange, the Corporation fails to exchange the shares of this Series for
the applicable number of shares of Media Stock, (b) in the case of a redemption
or exchange pursuant to Section 4.1(a), the Corporation exercises its right to
rescind such redemption or exchange pursuant to Section 4.5 or (c) in the case
of a redemption pursuant to Section 4.1(b) or 4.1(d), the conditions to such
redemption shall not have been satisfied, in which case such rights shall not
terminate at the close of business on such date. On or before the Redemption
Date, the Corporation shall deposit with a bank or trust company doing business
in New York, as paying agent, in the case of a redemption, money sufficient to
pay the Redemption Price on the Redemption Date, and in the case of an exchange,
certificates representing the shares of Media Stock to be exchanged on the
Redemption Date, in trust, with irrevocable instructions that such money or
shares be applied to the redemption or exchange of shares of this Series so
called for redemption or exchange. Any money or certificates so deposited with
any such paying agent which shall not be required for such redemption or
exchange because of the exercise of any right of conversion, rescission or
otherwise (including if the conditions to a redemption pursuant to Section
4.1(b) or 4.1(d) are not satisfied) shall be returned to the Corporation
forthwith. Upon surrender (in accordance with the notice of redemption or
exchange) of the certificate or certificates for any shares of this Series to be
so redeemed or exchanged (properly endorsed or assigned for transfer, if the
Corporation shall so require and the notice of redemption or exchange shall so
state), such shares shall be redeemed by the Corporation at the Redemption Price
or exchanged by the Corporation at the Exchange Rate, as applicable (unless, in
the case of a redemption or exchange pursuant to Section
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4.1(a), the Corporation shall have exercised its right to rescind such
redemption or exchange pursuant to Section 4.5 or, in the case of a redemption
pursuant to Section 4.1(b) or 4.1(d), the conditions to such redemption shall
not have been satisfied). In case fewer than all the shares represented by any
such certificate are to be redeemed or exchanged, a new certificate shall be
issued representing the unredeemed and unexchanged shares (or fractions thereof
as provided in Section 7.4), without cost to the holder thereof. Subject to
applicable escheat laws, any moneys or shares so set aside by the Corporation
and unclaimed at the end of two years from the Redemption Date shall revert to
the general funds of the Corporation, after which reversion the holders of such
shares so called for redemption or exchange shall look only to the Corporation
for the payment of the Redemption Price or the Exchange Rate, as the case may
be, without interest. Any interest accrued on any funds so deposited shall be
paid to the Corporation from time to time.
4.5 If notice of redemption or exchange pursuant to Section
4.1(a) shall have been given by the Corporation pursuant to Section 4.3(a), in
the event that a Redemption Rescission Event shall occur following the date of
such notice but at or prior to the Redemption Date, the Corporation may, at its
sole option, at any time prior to the earlier of (i) the close of business on
that day which is five (5) Trading Days following such Redemption Rescission
Event and (ii) the Redemption Date, rescind such redemption or exchange by
making a public announcement of such rescission (the date on which such public
announcement shall have been made being hereinafter referred to as the
"Rescission Date"). The Corporation shall be deemed to have made such
announcement if it shall issue a release to the Dow Jones News Service and
Reuters Information Services or any successor news wire service. From and after
the making of such announcement, the Corporation shall have no obligation to
effect such redemption or exchange or to pay the Redemption Price or Exchange
Rate therefor and all rights of holders of shares of this Series shall be
restored as if notice of redemption or exchange had not been given. The
Corporation shall give notice of any such rescission by first-class mail,
postage prepaid, mailed as promptly as practicable, but in no event later than
the close of business on that date which is five (5) Trading Days following the
Rescission Date to each record holder of shares of this Series at the close of
business on the
38
<PAGE>
Rescission Date and to any other Person or entity that was a record holder of
shares of this Series and that shall have surrendered shares of this Series for
conversion following the giving of notice of the subsequently rescinded
redemption or exchange. Each notice of rescission shall (w) state that such
redemption or exchange has been rescinded, (x) state that any Converting Holder
shall be entitled to rescind the conversion of shares of this Series surrendered
for conversion following the day on which notice of such redemption or exchange
was given but on or prior to the later of (I) the close of business on the
Trading Day next succeeding the date on which public announcement of the
rescission of such redemption or exchange shall have been made and (II) the date
which is three Trading Days following the mailing of the Corporation's notice of
rescission, (y) be accompanied by a form prescribed by the Corporation to be
used by any Converting Holder rescinding the conversion of shares so surrendered
for conversion (and instructions for the completion and delivery of such form,
including instructions with respect to payments that may be required to
accompany such delivery in accordance with Section 3.5) and (z) state that such
form must be properly completed and received by the Corporation no later than
the close of business on a date that shall be fifteen (15) Trading Days
following the date of the mailing of such notice of rescission.
5. Voting. The shares of this Series shall have no voting
rights except as required by law or as set forth below.
5.1 (a) So long as any shares of this Series remain
outstanding, unless a greater percentage shall then be required by law, the
Corporation shall not, without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of shares of this Series
representing at least a majority of the shares of this Series then outstanding
(i) authorize any Senior Stock or reclassify any Junior Stock or Parity Stock as
Senior Stock, or (ii) amend, alter or repeal any of the provisions of the
Certificate or the Certificate of Incorporation, so as in any such case to
materially and adversely affect the voting powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions of the shares of this Series; provided, however,
that an amendment which effects a split of this Series or which effects a
39
<PAGE>
combination of the shares of this Series into a fewer number of Shares shall not
be deemed to have any such material adverse effect.
(b) No vote or consent of holders of shares of this Series
shall be required for (i) the creation of any indebtedness of any kind of the
Corporation, (ii) the authorization or issuance of any class of Junior Stock
(including any class or series of common stock of the Corporation) or Parity
Stock, (iii) the authorization, designation or issuance of additional shares of
Series D Stock or (iv) subject to Section 5.1(a), the authorization or issuance
of any other shares of Preferred Stock.
5.2 (a) If and whenever at any time or times dividends payable
on shares of this Series shall have been in arrears and unpaid in an aggregate
amount equal to or exceeding the amount of dividends payable thereon for six
quarterly dividend periods, then the number of directors constituting the Board
of Directors shall be automatically increased by two and the holders of shares
of this Series, together with the holders of any shares of any Parity Stock as
to which in each case dividends are in arrears and unpaid in an aggregate amount
equal to or exceeding the amount of dividends payable thereon for six quarterly
dividend periods, shall have the exclusive right, voting separately as a class
with such other series, to elect two directors of the Corporation.
(b) Such voting right may be exercised initially either by
written consent or at a special meeting of the holders of the Preferred Stock
having such voting right, called as hereinafter provided, or at any annual
meeting of stockholders held for the purpose of electing directors, and
thereafter at each such annual meeting until such time as all dividends in
arrears on the shares of this Series shall have been paid in full and all
dividends payable on the shares of this Series on four subsequent consecutive
Dividend Payment Dates shall have been paid in full on such dates or funds shall
have been set aside for the payment thereof, at which time such voting right and
the term of the directors elected pursuant to Section 5.2(a) shall terminate.
(c) At any time when such voting right shall have vested in
holders of shares of such series of Preferred Stock described in Section 5.2(b),
and if such right shall
40
<PAGE>
not already have been exercised by written consent, a proper officer of the
Corporation may call, and, upon the written request, addressed to the Secretary
of the Corporation, of the record holders of either (i) shares representing
twenty-five percent (25%) of the voting power of the shares then outstanding of
the Series D Stock or (ii) shares representing twenty-five percent (25%) of the
voting power of shares of all series of Preferred Stock having such voting
right, shall call, a special meeting of the holders of Preferred Stock having
such voting right. Such meeting shall be held at the earliest practicable date
upon the notice required for annual meetings of stockholders at the place for
holding annual meetings of stockholders of the Corporation, or, if none, at a
place designated by the Board of Directors. Notwithstanding the provisions of
this Section 5.2(c), no such special meeting shall be called during a period
within 60 days immediately preceding the date fixed for the next annual meeting
of stockholders.
(d) At any meeting held for the purpose of electing directors
at which the holders of such Preferred Stock shall have the right to elect
directors as provided herein, the presence in person or by proxy of the holders
of shares representing more than fifty percent (50%) in voting power of the then
outstanding shares of such Preferred Stock having such right shall be required
and shall be sufficient to constitute a quorum of such class for the election of
directors by such class.
(e) Any director elected by holders of Preferred Stock
pursuant to the voting right created under this Section 5.2 shall hold office
until the next annual meeting of stockholders (unless such term has previously
terminated pursuant to Section 5.2(b)) and any vacancy in respect of any such
director shall be filled only by vote of the remaining director so elected, or
if there be no such remaining director, by the holders of such Preferred Stock
entitled to elect such director or directors by written consent or at a special
meeting called in accordance with the procedures set forth in Section 5.2(c),
or, if no special meeting is called or written consent executed, at the next
annual meeting of stockholders.
(f) In exercising the voting rights set forth in this Section
5.2, each share of this Series shall have a number of votes equal to its
Liquidation Value.
41
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6. Liquidation Rights.
6.1 Upon the dissolution, liquidation or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of this
Series shall be entitled to receive out of the assets of the Corporation
available for distribution to stockholders, in preference to the holders of, and
before any payment of distribution shall be made on, Junior Stock, the
Liquidation Value in effect at such time, plus an amount equal to all accrued
and unpaid dividends to the date of final distribution.
6.2 The Liquidation Value shall initially be equal to $50 per
share of Series D Stock. The Liquidation Value shall be subject to adjustment
from time to time to appropriately give effect to any split or combination of
the shares of this Series.
6.3 Neither the sale, exchange or other conveyance (for cash,
shares of stock, securities or other consideration) of all or substantially all
the property and assets of the Corporation nor the merger or consolidation of
the Corporation into or with any other corporation, or the merger or
consolidation of any other corporation into or with the Corporation, shall be
deemed to be a dissolution, liquidation or winding up, voluntary or involuntary,
for the purposes of this Section 6.
6.4 After the payment to the holders of the shares of this
Series of full preferential amounts provided for in this Section 6, the holders
of this Series as such shall have no right or claim to any of the remaining
assets of the Corporation.
6.5 In the event the assets of the Corporation available for
distribution to the holders of shares of this Series upon any dissolution,
liquidation or winding up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 6.1, no such distribution shall be made on account
of any shares of any Parity Stock upon such dissolution, liquidation or winding
up unless proportionate distributive amounts shall be paid on account of the
shares of this Series, ratably, in proportion to the full distributable amounts
for which holders of all Parity Stock are entitled upon such dissolution,
liquidation or winding up.
42
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7. Other Provisions.
7.1 All notices from the Corporation to the holders shall be
given by first class mail, postage prepaid, to the holders of shares of this
Series at their last address as it shall appear on the stock register. With
respect to any notice to a holder of Shares of this Series required to be
provided hereunder, neither failure to mail such notice, nor any defect therein
or in the mailing thereof, shall affect the sufficiency of the notice or the
validity of the proceedings referred to in such notice or affect the legality or
validity of any distribution, right, warrant, reclassification, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding up, or the
vote upon any such action. Any notice which was mailed in the manner herein
provided shall be conclusively presumed to have been duly given whether or not
the holder receives the notice.
7.2 All notices and other communications from a holder of
shares of this Series shall be deemed given if delivered personally or sent by
overnight courier (providing proof of delivery) to the Corporation at the
following address (or at such other address as the Corporation shall specify in
a notice pursuant to Section 7.1): U S WEST, Inc., 7800 East Orchard Road,
Englewood, Colorado 80111, Attention: General Counsel.
7.3 Any shares of this Series which have been converted,
redeemed, exchanged or otherwise acquired by the Corporation shall, after such
conversion, redemption, exchange or acquisition, as the case may be, be retired
and promptly cancelled and the Corporation shall take all appropriate action to
cause such shares to obtain the status of authorized but unissued shares of
Preferred Stock, without designation as to series, until such shares are once
more designated as part of a particular series by the Board of Directors. The
Corporation may cause a certificate setting forth a resolution adopted by the
Board of Directors that none of the authorized shares of this Series are
outstanding to be filed with the Secretary of State of the State of Delaware.
When such certificate becomes effective, all references to Series D Stock shall
be eliminated from the Certificate of Incorporation and the shares of Preferred
Stock designated hereby as Series D Stock shall have the status of authorized
and unissued shares of Preferred Stock and may be reissued as part of any new
series of Preferred
43
<PAGE>
Stock to be created by resolution or resolutions of the Board of Directors.
7.4 The shares of this Series shall be issuable in whole
shares or in any fraction of a whole share or any integral multiple of such
fraction.
7.5 The Corporation shall, to the fullest extent permitted by
law, be entitled to recognize the exclusive right of a Person registered on its
records as the holder of shares of this Series, and such record holder shall be
deemed the holder of such shares for all purposes.
7.6 All notice periods referred to in the Certificate shall
commence on the date of the mailing of the applicable notice.
7.7 Subject to applicable law, any determinations made in the
exercise of the good faith business judgment of the Board of Directors under any
provision of the Certificate shall be final and binding on all stockholders of
the Corporation, including the holders of shares of this Series.
7.8 Certificates for shares of this Series shall bear such
legends as the Corporation shall from time to time deem appropriate.
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<PAGE>
IN WITNESS WHEREOF, U S WEST, INC. has caused this certificate to
be signed this 15th day of November, 1996.
U S WEST, INC.
By: /s/ Charles M. Lillis
-----------------------------------------
Name: Charles M. Lillis
Title: Executive Vice President;
President and Chief
Executive Officer of the
U S WEST Media Group
45
<PAGE>
EXHIBIT 3(i)(b)
CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF SERIES D CONVERTIBLE
PREFERRED STOCK
OF
U S WEST, INC.
---------------------
Pursuant to Section 103(f) of the General Corporation Law
of the State of Delaware
---------------------
U S WEST, INC., a corporation organized and existing by virtue of
the General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify as follows:
FIRST: On November 14, 1996, the Corporation filed with the Office
of the Secretary of State of the State of Delaware a Certificate of the Voting
Powers, Designations, Preferences and Relative, Participating, Optional or
Special Rights, and Qualifications, Limitations or Restrictions Thereof, of
Series D Convertible Preferred Stock (the "Certificate of Designations") with
respect to the designation of 20,000,000 shares of preferred stock, par value
$1.00 per share, of the Corporation as the Series D Convertible Preferred Stock
(the "Series D Stock") of the Corporation.
SECOND: The annual rate of dividend on each share of Series D Stock,
and the calculation of the quarterly and annual per share payments to be made
thereon, in the second sentence of Section 2.1 of the Certificate of
Designations was inadvertently omitted. That sentence is hereby corrected to
read in its entirety as follows:
<PAGE>
"Each dividend shall be at the annual rate equal to 4.500% per share
of Series D Stock (which is equivalent to $0.56 quarterly and $2.25
annually per share)."
THIRD: The foregoing correction was prepared in accordance with
Section 103(f) of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, U S WEST has caused this Certificate of
Correction to be signed this 10th day of December, 1996.
U S WEST, INC.
By: /s/ Stephen E. Brilz
----------------------------------
Name: Stephen E. Brilz
Title: Assistant Secretary and
Corporate Counsel
2
-25-
<PAGE>
EXHIBIT 3(i)(c)
CERTIFICATE OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER
SPECIAL RIGHTS, AND QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS THEREOF, OF SERIES E CONVERTIBLE
PREFERRED STOCK
OF
U S WEST, INC.
_____________________
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
_____________________
U S WEST, Inc., a corporation organized and existing by virtue of the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify that the following resolution was duly adopted by action of the
Board of Directors of the Corporation at a meeting duly held on October 2,
1996.
RESOLVED that pursuant to the authority expressly granted to and vested
in the Board of Directors of the Corporation by the provisions of Section 3 of
Article V of the Restated Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), and Section 151(g) of the General Corporation
Law of the State of Delaware, such Board of Directors hereby creates, from the
authorized shares of Preferred Stock, par value $1.00 per share (the
"Preferred Stock"), of the Corporation authorized to be issued pursuant to the
Certificate of Incorporation, a series of Preferred Stock, and hereby fixes
the voting powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, of the shares of such series as follows:
The series of Preferred Stock hereby established shall consist of 1
million shares designated as Series E Convertible Preferred Stock. The
rights, preferences and limitations of such series shall be as follows:
1. Definitions. Unless otherwise defined herein, terms used herein
shall have the meanings assigned to them in Section 2.6 of Article V of the
Certificate of Incorporation and the following terms shall have the indicated
meanings:
1.1 "Board of Directors" shall mean the Board of Directors of the
Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take
such action.
1.2 "Capital Stock" shall mean any and all shares of corporate stock of
a Person (however designated and whether representing rights to vote, rights
to participate in dividends or distributions upon liquidation or otherwise
with respect to the Corporation, or any division or subsidiary thereof, or any
joint venture, partnership, corporation or other entity).
1.3 "Certificate" shall mean the certificate of the voting powers,
designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, of
Series E Convertible Preferred Stock filed with respect to this resolution
with the Secretary of State of the State of Delaware pursuant to Section 151
of the General Corporation Law of the State of Delaware.
1.4 "Closing Price" shall mean the last reported sale price of the Media
Stock (or such other class or series of common stock into which shares of this
Series are then convertible), regular way, as shown on the Composite Tape of
the NYSE, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices on the NYSE, or, if the Media Stock (or such
other class or series of common stock) is not listed or admitted to trading on
the NYSE, on the principal national securities exchange on which such stock is
listed or admitted to trading, or, if it is not listed or admitted to trading
on any national securities exchange, the last reported sale price of the Media
Stock (or such other class or series of common stock), or, in case no such
sale takes place on such day, the average of the closing bid and asked prices,
in either case as reported by Nasdaq.
1.5 "Communications Stock" shall mean the class of U S WEST
Communications Group Common Stock, par value $.01 per share, of the
Corporation or any other class of stock resulting from (a) successive changes
or reclassifications of such stock consisting solely of changes in par value,
or from par value to no par value or (b) a subdivision or combination, and in
any such case including any shares thereof authorized after the date of the
Certificate, together with any associated rights to purchase other securities
of the Corporation which are at the time represented by the certificates
representing such shares.
1.6 "Conversion Date" shall have the meaning set forth in Section 3.5.
1.7 "Conversion Price" shall have the meaning set forth in Section 3.1
hereof.
1.8 "Conversion Rate" shall have the meaning set forth in Section 3.1
hereof.
1.9 "Converting Holder" shall have the meaning set forth in Section 3.5
hereof.
1.10 "Current Market Price" on any applicable record date or Redemption
Date referred to in Section 3 or Section 4 shall mean the average of the daily
Closing Prices per share of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) for the
ten (10) consecutive Trading Days ending on the third (3rd) Trading Day
immediately preceding such record date, Conversion Date or Redemption Date.
1.11 "Dividend Payment Date" shall have the meaning set forth in Section
2.1 hereof.
1.12 "Effective Time" shall mean the effective time of the Merger.
1.13 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
1.14 "Junior Stock" shall mean the Media Stock, the Communications Stock
and the shares of any other class or series of stock of the Corporation which,
by the terms of the Certificate of Incorporation or of the instrument by which
the Board of Directors, acting pursuant to authority granted in the
Certificate of Incorporation, shall fix the relative rights, preferences and
limitations thereof, shall be junior to the Series E Stock in respect of the
right to receive dividends or to participate in any distribution of assets
other than by way of dividends.
1.15 "Liquidation Value" shall have the meaning set forth in Section 6.2
hereof.
1.16 "Media Group Disposition Redemption" shall have the meaning set
forth in Section 4.1 hereof.
1.17 "Media Group Disposition Dividend" shall have the meaning set forth
in Section 4.1 hereof.
1.18 "Media Group Special Dividend" shall have the meaning set forth in
Section 4.1 hereof.
1.19 "Media Group Special Events" shall have the meaning set forth in
Section 4.1 hereof.
1.20 "Media Group Subsidiary Redemption" shall have the meaning set
forth in Section 4.1 hereof.
1.21 "Media Stock" shall mean the class of U S WEST Media Group Common
Stock, par value $.01 per share, of the Corporation or any other class of
stock resulting from (a) successive changes or reclassifications of such stock
consisting solely of changes in par value, or from par value to no par value
or (b) a subdivision or combination, and in any such case including any shares
thereof authorized after the date of the Certificate, together with any
associated rights to purchase other securities of the Corporation which are at
the time represented by the certificates representing such shares.
1.22 "Media Group Tender or Exchange Offer" shall have the meaning set
forth in Section 4.1 hereof.
1.23 "Merger" shall mean the merger of Booth Communications of SE
Michigan, Inc., a Michigan corporation, Booth Communications of Mid-Michigan,
Inc., a Michigan corporation, and Booth Communications of Mid-Michigan Assets,
Inc., a Michigan corporation, with and into MediaOne of Michigan, Inc., a
Delaware corporation, pursuant to the terms of the Merger Agreement.
1.24 "Merger Agreement" shall mean the Agreement and Plan of Merger,
dated as of December 3, 1996, among the Corporation, MediaOne of Michigan,
Inc., a Delaware corporation, Booth Communications of SE Michigan, Inc., a
Michigan corporation, Booth Communications of Mid-Michigan, Inc., a Michigan
corporation, and Booth Communications of Mid-Michigan Assets, Inc., a Michigan
corporation.
1.25 "Nasdaq" shall mean the Nasdaq National Market.
1.26 "NYSE" shall mean the New York Stock Exchange, Inc.
1.27 "Parity Stock" shall mean the Series A Stock, the Series B Stock,
the Series C Stock, the Series D Stock and the shares of any other class or
series of stock of the Corporation (other than Junior Stock) which, by the
terms of the Certificate of Incorporation or of the instrument by which the
Board of Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall fix the relative rights, preferences and limitations
thereof, shall, in the event that the stated dividends thereon are not paid in
full, be entitled to share ratably with the Series E Stock in the payment of
dividends, including accumulations, if any, in accordance with the sums which
would be payable on such shares if all dividends were declared and paid in
full, or shall, in the event that the amounts payable thereon on liquidation
are not paid in full, be entitled to share ratably with the Series E Stock in
any distribution of assets other than by way of dividends in accordance with
the sums which would be payable in such distribution if all sums payable were
discharged in full; provided, however, that the term "Parity Stock" shall
be deemed to refer (a) in Section 6 hereof, to any stock which is Parity Stock
in respect of the distribution of assets; and (b) in Sections 5.1 and 5.2
hereof, to any stock which is Parity Stock in respect of either dividend
rights or the distribution of assets and which, pursuant to the Certificate of
Incorporation or any instrument in which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall so
designate, is entitled to vote with the holders of Series E Stock.
1.28 "Person" shall mean an individual, corporation, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or other entity.
1.29 "Preferred Stock" shall mean the class of Preferred Stock, par
value $1.00 per share, of the Corporation authorized at the date of the
Certificate, including any shares thereof authorized after the date of the
Certificate.
1.30 "Record Date" shall have the meaning set forth in Section 2.1
hereof.
1.31 "Redemption Date" shall mean the date on which the Corporation
shall effect the redemption of all or any part of the outstanding shares of
Series E Stock pursuant to Section 4.1.
1.32 "Redemption Price" for each share of Series E Stock called for
redemption shall be equal to the sum of (a) the Liquidation Value plus (b) an
amount equal to the accrued and unpaid dividends on such share of Series E
Stock to the Redemption Date.
1.33 "Redemption Rescission Event" shall mean the occurrence of (a) any
general suspension of trading in, or limitation on prices for, securities on
the principal national securities exchange on which shares of Media Stock (or
such other class or series of common stock into which shares of this Series
are then convertible) are registered and listed for trading (or, if shares of
Media Stock (or such other class or series of common stock) are not registered
and listed for trading on any such exchange, in the over-the-counter market)
for more than six-and-one-half (6 1/2) consecutive trading hours, (b) any
decline in either the Dow Jones Industrial Average or the Standard & Poor's
Index of 500 Industrial Companies (or any successor index published by Dow
Jones & Company, Inc. or Standard & Poor's Corporation) by either (i) an
amount in excess of 10 percent, measured from the close of business on any
Trading Day to the close of business on the next succeeding Trading Day during
the period commencing on the Trading Day preceding the day notice of any
redemption of shares of this Series is given (or, if such notice is given
after the close of business on a Trading Day, commencing on such Trading Day)
and ending at the Redemption Date or (ii) an amount in excess of 15 percent
(or, if the time and date fixed for redemption is more than 15 days following
the date on which notice of redemption is given, 20 percent), measured from
the close of business on the Trading Day preceding the day notice of such
redemption is given (or, if such notice is given after the close of business
on a Trading Day, from such Trading Day) to the close of business on any
Trading Day on or prior to the Redemption Date, (c) a declaration of a banking
moratorium or any suspension of payments in respect of banks by Federal or
state authorities in the United States or (d) the commencement of a war or
armed hostilities or other national or international calamity directly or
indirectly involving the United States which in the reasonable judgment of the
Corporation could have a material adverse effect on the market for the Media
Stock (or such other class or series of common stock into which shares of this
Series are then convertible).
1.34 "Rescission Date" shall have the meaning set forth in Section 4.5
hereof.
1.35 "Senior Stock" shall mean the shares of any class or series of
stock of the Corporation which, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall fix
the relative rights, preferences and limitations thereof, shall be senior to
the Series E Stock in respect of the right to receive dividends or to
participate in any distribution of assets other than by way of dividends.
1.36 "Series A Stock" shall mean the series of Preferred Stock authorized
and designated as Series A Junior Participating Cumulative Preferred Stock at
the date of the Certificate, including any shares thereof authorized and
designated after the date of the Certificate.
1.37 "Series B Stock" shall mean the series of Preferred Stock
authorized and designated as Series B Junior Participating Cumulative
Preferred Stock at the date of the Certificate, including any shares thereof
authorized and designated after the date of the Certificate.
1.38 "Series C Stock" shall mean the series of Preferred Stock
authorized and designated as Series C Cumulative Redeemable Preferred Stock at
the date of the Certificate, including any shares thereof authorized and
designated after the date of the Certificate.
1.39 "Series D Stock" shall mean the series of Preferred Stock
authorized and designated as Series D Convertible Preferred Stock at the date
of the Certificate, including any shares thereof authorized and designated
after the date of the Certificate.
1.40 "Series E Stock" and "this Series" shall mean the series of
Preferred Stock authorized and designated as the Series E Convertible
Preferred Stock, including any shares thereof authorized and designated after
the date of the Certificate.
1.41 "Surrendered Shares" shall have the meaning set forth in Section
3.5 hereof.
1.42 "Trading Day" shall mean, so long as the Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) is listed or admitted to trading on the NYSE, a day on which the
NYSE is open for the transaction of business, or, if the Media Stock (or such
other class or series of common stock) is not listed or admitted to trading on
the NYSE, a day on which the principal national securities exchange on which
the Media Stock (or such other class or series of common stock) is listed is
open for the transaction of business, or, if the Media Stock (or such other
class or series of common stock) is not so listed or admitted for trading on
any national securities exchange, a day on which Nasdaq is open for the
transaction of business.
2. Dividends.
2.1 The holders of the outstanding shares of Series E Stock shall be
entitled to receive dividends, as and when declared by the Board of Directors
out of funds legally available therefor. Each dividend shall be at the annual
rate equal to 6.342 percent per share of Series E Stock (which is equivalent
to $0.79 quarterly and $3.17 annually per share). All dividends shall be
payable in cash on or about the first day of February, May, August and
November in each year, beginning on the first such date that is more than 15
days after the Effective Time, as fixed by the Board of Directors, or such
other dates as are fixed by the Board of Directors (each a "Dividend Payment
Date"), to the holders of record of Series E Stock at the close of business on
or about the 15th day of the month next preceding such first day of February,
May, August and November, as the case may be, as fixed by the Board of
Directors, or such other dates as are fixed by the Board of Directors (each a
"Record Date"). Such dividends shall accrue on each share cumulatively on a
daily basis, whether or not there are unrestricted funds legally available for
the payment of such dividends and whether or not earned or declared, from and
after the day immediately succeeding the Effective Time and any such dividends
that become payable for any partial dividend period shall be computed on the
basis of the actual days elapsed in such period. All dividends that accrue in
accordance with the foregoing provisions shall be cumulative from and after
the day immediately succeeding the Effective Time. The per share dividend
amount payable to each holder of record of Series E Stock on any Dividend
Payment Date shall be rounded to the nearest cent. The dividend rate per
share of this Series shall be appropriately adjusted from time to time to
reflect any split or combination of the shares of this Series.
2.2 Except as hereinafter provided in this Section 2.2 and except for
redemptions by the Corporation pursuant to Sections 4.1(b), 4.1(c)(i),
4.1(c)(iii) or 4.1(d), unless all dividends on the outstanding shares of
Series E Stock and any Parity Stock that shall have accrued through any prior
Dividend Payment Date shall have been paid in full, or declared and funds set
apart for payment thereof, no dividend or other distribution (payable other
than in shares of Junior Stock) shall be paid to the holders of Junior Stock
or Parity Stock, and no shares of Series E Stock, Parity Stock or Junior Stock
shall be purchased, redeemed or otherwise acquired by the Corporation or any
of its subsidiaries (except by conversion into or exchange for Junior Stock),
nor shall any monies or any other properties be paid or made available for a
purchase, redemption or sinking fund for the purchase or redemption of any
Series E Stock, Junior Stock or Parity Stock. When dividends are not paid in
full upon the shares of this Series and any Parity Stock, all dividends
declared upon shares of this Series and all Parity Stock shall be declared pro
rata so that the amount of dividends declared per share on this Series and all
such Parity Stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the shares of this Series and all such Parity
Stock bear to each other. No interest, or sum of money in lieu of interest,
shall be payable in respect of any dividend payment or payments on this Series
which may be in arrears.
3. Conversion Rights.
3.1 (a) Subject to Section 3.1(b), each holder of a share of this
Series shall have the right, at any time after receipt of a notice of
redemption given by the Corporation pursuant to (i) Section 4.3(a) with
respect to a redemption pursuant to Section 4.1(a), or (ii) Section 4.3(b)
with respect to a redemption in connection with a Media Group Subsidiary
Redemption, or (iii) Section 4.3(c) with respect to a redemption in connection
with a Media Group Disposition Dividend, or (iv) pursuant to Section 4.3(d)
with respect to a redemption in connection with a Media Group Disposition
Redemption following a Disposition of all (not merely substantially all) of
the properties and assets attributed to the Media Group, or (v) Section 4.3(e)
with respect to a redemption in connection with a Media Group Disposition
Redemption following Disposition of substantially all (but not all) of the
properties and assets attributed to the Media Group, or (vi) Section 4.3(f)
with respect to a redemption in connection with a Media Group Tender or
Exchange Offer, to convert such share into a number of shares of Media Stock
(or such other class or series of common stock into which shares of this
Series are then convertible) equal to the quotient of (a) the product of (i)
the Liquidation Value per share of the Series E Stock multiplied by (ii) 0.95,
divided by (b) the Current Market Price, subject to adjustment as provided in
this Section 3 (such rate, as so adjusted from time to time, is herein called
the "Conversion Rate"; and the "Conversion Price" at any time shall mean the
Redemption Price per share divided by the Conversion Rate in effect at such
time (rounded to the nearest one hundredth of a cent)).
(b) The right of a holder of a share of this Series called for
redemption pursuant to Sections 4.1(a) to convert such share into Media Stock
(or such other class or series of common stock into which shares of this
Series are then convertible) pursuant to Section 3.1(a) shall terminate at the
close of business on the Redemption Date unless the Corporation defaults in
the payment of the Redemption Price or, in the case of a redemption pursuant
to Section 4.1(a), the Corporation exercises its right to rescind such
redemption pursuant to Section 4.5, in which case such right of conversion
shall not terminate at the close of business on such date. The right of a
holder of a share of this Series called for redemption pursuant to Section
4.1(b): (i) in connection with a Media Group Subsidiary Redemption, a Media
Group Tender or Exchange Offer or a Media Group Disposition Redemption
involving a Disposition of all (not merely substantially all) of the
properties and assets attributed to the Media Group, to convert such share
into Media Stock pursuant to Section 3.1(a) shall terminate at the close of
business on the Redemption Date; (ii) in connection with a Media Group
Disposition Dividend or Media Group Special Dividend, to convert such share
into Media Stock pursuant to Section 3.1(a) shall terminate at the close of
business on the record date for determining holders entitled to receive such
dividend; and (iii) in connection with a Media Group Disposition Redemption
involving a Disposition of substantially all (but not all) of the properties
and assets attributed to the Media Group, to convert such share into Media
Stock shall terminate at the close of business on the date on which shares of
Media Stock are selected to be redeemed in such Media Group Disposition
Redemption, unless, in any of the foregoing cases, the Corporation defaults in
the payment of the Redemption Price or the conditions to such redemption set
forth in the last sentence of Section 4.1(b) shall not have been satisfied, in
which event such right of conversion shall not terminate at the close of
business on such date. In the event the Corporation converts all of the
outstanding shares of Media Stock into shares of Communications Stock (or, if
the Communications Stock is not Publicly Traded at such time and shares of any
other class or series of common stock of the Corporation (other than Media
Stock) are then Publicly Traded, of such other class or series of common stock
as has the largest Market Capitalization), the right of a holder of a share of
this Series called for redemption pursuant to Section 4.1(d) in connection
with an event substantially similar to a Media Group Special Event to convert
such share into Communications Stock (or such other class or series of common
stock) shall terminate on a date comparable to the date specified in the
preceding sentence with respect to a Media Group Special Event substantially
similar to such event.
3.2 If any shares of this Series are surrendered for conversion
subsequent to the Record Date preceding a Dividend Payment Date but on or
prior to such Dividend Payment Date (except shares called for redemption on a
Redemption Date between such Record Date and Dividend Payment Date and with
respect to which such redemption has not been rescinded), the registered
holder of such shares at the close of business on such Record Date shall be
entitled to receive the dividend, if any, payable on such shares on such
Dividend Payment Date notwithstanding the conversion thereof. Except as
provided in this Section 3.2, no adjustments in respect of payments of
dividends on shares surrendered for conversion or any dividend on the Media
Stock issued upon conversion shall be made upon the conversion of any shares
of this Series.
3.3 The Corporation may, but shall not be required to, in connection
with any conversion of shares of this Series, issue a fraction of a share of
Media Stock, and if the Corporation shall determine not to issue any such
fraction, the Corporation shall, subject to Section 3.6(c), make a cash
payment (rounded to the nearest cent) equal to such fraction multiplied by the
Closing Price of the Media Stock on the last Trading Day prior to the date of
conversion.
3.4 Any holder of shares of this Series electing to convert such shares
into Media Stock shall surrender the certificate or certificates for such
shares at the office of the transfer agent or agents therefor (or at such
other place in the United States as the Corporation may designate by notice to
the holders of shares of this Series) during regular business hours, duly
endorsed to the Corporation or in blank, or accompanied by instruments of
transfer to the Corporation or in blank, or in form satisfactory to the
Corporation, and shall give written notice to the Corporation at such office
that such holder elects to convert such shares of this Series. The
Corporation shall, as soon as practicable and in any event within five Trading
Days (subject to Section 3.6(c)) after such surrender of certificates for
shares of this Series, accompanied by the written notice above prescribed,
issue and deliver at such office to the holder for whose account such shares
were surrendered, or to his nominee, (a) certificates representing the number
of shares of Media Stock to which such holder is entitled upon such conversion
and (b) if less than the full number of shares of this Series represented by
such certificate or certificates is being converted, a new certificate of like
tenor representing the shares of this Series not converted.
3.5 Conversion shall be deemed to have been made immediately prior to
the close of business as of the date that certificates for the shares of this
Series to be converted, and the written notice prescribed in Section 3.4, are
received by the transfer agent or agents for this Series (such date being
referred to herein as the "Conversion Date"). The Person entitled to receive
the Media Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such Media Stock as of the close of business
on the Conversion Date and such conversion shall be at the Conversion Rate in
effect on such date. Notwithstanding anything to the contrary contained
herein, in the event the Corporation shall have rescinded a redemption of
shares of this Series pursuant to Section 4.5, any holder of shares of this
Series that shall have surrendered shares of this Series for conversion
following the day on which notice of the redemption shall have been given but
prior to the later of (a) the close of business on the Trading Day next
succeeding the date on which public announcement of the rescission of such
redemption shall have been made and (b) the date which is three Trading Days
following the mailing of the notice of rescission required by Section 4.5 (a
"Converting Holder") may rescind the conversion of such shares surrendered for
conversion by (i) properly completing a form prescribed by the Corporation and
mailed to holders of shares of this Series (including Converting Holders) with
the Corporation's notice of rescission, which form shall provide for the
certification by any Converting Holder rescinding a conversion on behalf of
any beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act)
of shares of this Series that the beneficial ownership (within the meaning of
such Rule) of such shares shall not have changed from the date on which such
shares were surrendered for conversion to the date of such certification and
(ii) delivering such form to the Corporation no later than the close of
business on that date which is fifteen (15) Trading Days following the date of
the mailing of the Corporation's notice of rescission. The delivery of such
form by a Converting Holder shall be accompanied by (A) any certificates
representing shares of Media Stock issued to such Converting Holder upon a
conversion of shares of this Series that shall be rescinded by the proper
delivery of such form (the "Surrendered Shares"), (B) any securities,
evidences of indebtedness or assets (other than cash) distributed by the
Corporation to such Converting Holder by reason of such Converting Holder's
being a record holder of the Surrendered Shares and (C) payment in New York
Clearing House funds or other funds acceptable to the Corporation of an amount
equal to the sum of (I) any cash such Converting Holder may have received in
lieu of the issuance of fractional shares upon conversion and (II) any cash
paid or payable by the Corporation to such Converting Holder by reason of such
Converting Holder being a record holder of the Surrendered Shares. Upon
receipt by the Corporation of any such form properly completed by a Converting
Holder and any certificates, securities, evidences of indebtedness, assets or
cash payments required to be returned or made by such Converting Holder to the
Corporation as set forth above, the Corporation shall instruct the transfer
agent or agents for shares of Media Stock and shares of this Series to cancel
any certificates representing the Surrendered Shares (which Surrendered Shares
shall be deposited in the treasury of the Corporation) and reissue
certificates representing shares of this Series to such Converting Holder
(which shares of this Series shall, notwithstanding their surrender for
conversion, be deemed to have been outstanding at all times). The Corporation
shall, as promptly as practicable, and in no event more than five (5) Trading
Days, following the receipt of any such properly completed form and any such
certificates, securities, evidences of indebtedness, assets or cash payments
required to be so returned or made, pay to the Converting Holder or as
otherwise directed by such Converting Holder any dividend or other payment
made on such shares of this Series Stock during the period from the time such
shares shall have been surrendered for conversion to the rescission of such
conversion. All questions as to the validity, form, eligibility (including
time of receipt) and acceptance of any form submitted to the Corporation to
rescind the conversion of shares of this Series, including questions as to the
proper completion or execution of any such form or any certification contained
therein, shall be resolved by the Corporation, whose good faith determination
shall be final and binding. The Corporation shall not be required to deliver
certificates for shares of Media Stock while the stock transfer books for such
stock or for this Series are duly closed for any purpose (but not for a period
in excess of two Trading Days) or during any period commencing at a Redemption
Rescission Event and ending at either (1) the time and date at which the
Corporation's right of rescission shall expire pursuant to Section 4.5 if the
Corporation shall not have exercised such right or (2) the close of business
on that day which is fifteen (15) Trading Days following the date of the
mailing of a notice of rescission pursuant to Section 4.5 if the Corporation
shall have exercised such right of rescission, but certificates for shares of
Media Stock shall be delivered as soon as practicable after the opening of
such books or the expiration of such period.
3.6 The Conversion Rate shall be adjusted from time to time as follows
for events occurring after the Effective Time:
(a) The Corporation shall be entitled to make such increases in the
Conversion Rate as shall be determined by the Board of Directors to be
necessary in order that any dividend or distribution in Media Stock, any
subdivision, reclassification or combination of shares of Media Stock or any
issuance of rights or warrant to purchase shares of Media Stock, shall not be
taxable to the holders of Media Stock for United States Federal income tax
purposes.
(b) To the extent permitted by applicable law, the Corporation may from
time to time increase the Conversion Rate by any amount for any period of time
if the period is at least 20 Trading Days, the increase is irrevocable during
such period and the Board of Directors shall have made a determination that
such increase would be in the best interests of the Corporation, which
determination shall be conclusive.
(c) In any case in which an adjustment to the Conversion Rate pursuant
to this Section 3.6 is to be made effective as of or immediately following a
record date, the Corporation may elect to defer (but only for five (5) Trading
Days following the occurrence of the event which necessitates the filing of
the statement referred to in Section 3.9(a)) issuing to the holder of any
shares of this Series converted after such record date (i) the shares of Media
Stock and other capital stock of the Corporation issuable upon such conversion
over and above the shares of Media Stock and other capital stock of the
Corporation issuable upon such conversion on the basis of the Conversion Rate
prior to adjustment and (ii) paying to such holder any amount in cash in lieu
of any fraction thereof pursuant to Section 3.3; provided, however, that
the Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares
upon the occurrence of the event requiring such adjustment.
(d) Subject to Section 3.6(a) hereof, no adjustment shall be made
pursuant to this Section 3.6 with respect to any share of Series E Stock that
is converted prior to the time such adjustment otherwise would be made.
3.7 In case of (a) any consolidation or merger to which the Corporation
is a party, other than a merger or consolidation in which the Corporation is
the surviving or continuing corporation and which does not result in any
reclassification of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as a result of a
subdivision or combination) in, outstanding shares of Media Stock (or such
other class or series of common stock into which shares of this Series are
then convertible) or (b) any sale or conveyance of all or substantially all of
the property and assets of the Corporation, then lawful provision shall be
made as part of the terms of such transaction whereby the holder of each share
of Series E Stock which is not converted into the right to receive stock or
other securities and property in connection with such transaction shall have
the right thereafter, during the period such share shall be convertible, to
convert such share into the kind and amount of shares of stock or other
securities and property receivable upon such consolidation, merger, sale or
conveyance by a holder of the number of shares of Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) into which such shares of this Series could have been converted
immediately prior to such consolidation, merger, sale or conveyance (assuming
that shares of this Series were then convertible pursuant to Section 3.1),
subject to adjustment which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 3. If holders of
Media Stock (or such other class or series of common stock into which shares
of this Series are then convertible) are entitled to elect the kind or amount
of securities or other property receivable upon such consolidation, merger,
sale or conveyance, all adjustments made pursuant to this Section 3.7 shall be
based upon (i) the election, if any, made in writing to the Secretary of the
Corporation by the record holder of the largest number of shares of Series E
Stock prior to the earlier of (A) the last date on which a holder of Media
Stock (or such other class or series of common stock) may make such an
election and (B) the date which is five (5) Trading Days prior to the record
date for determining the holders of Media Stock (or such other class or series
of common stock) entitled to participate in the transaction (or if no such
record date is established, the effective date of such transaction) or (ii) if
no such election is timely made, an assumption that each holder of Shares of
this Series failed to exercise such rights of election (provided that if the
kind or amount of securities or other property receivable upon such
consolidation, merger, sale or conveyance is not the same for each nonelecting
share, then the kind and amount of securities or other property receivable
upon such consolidation, merger, sale or conveyance for each nonelecting share
shall be deemed to be the kind and amount so receivable per share by a
plurality of the nonelecting shares). Concurrently with the mailing to
holders of Media Stock (or such other class or series of common stock) of any
document pursuant to which such holders may make an election regarding the
kind or amount of securities or other property that will be receivable by such
holder in any transaction described in clause (a) or (b) of the first sentence
of this Section 3.7, the Corporation shall mail a copy thereof to the holders
of shares of the Series E Stock. The Corporation shall not enter into any of
the transactions referred to in clauses (a) or (b) of the first sentence of
this Section 3.7 unless, prior to the consummation thereof, effective
provision shall be made in a certificate or articles of incorporation or other
constituent document or written instrument of the Corporation or the entity
surviving the consolidation or merger, if other than the Corporation, or the
entity acquiring the Corporation's assets, unless, in either case, such entity
is a direct or indirect subsidiary of another entity, in which case such
provision shall be made in the certificate or articles of incorporation or
other constituent document or written instrument of such other entity (any
such entity or other entity being the "Surviving Entity") so as to assume the
obligation to deliver to each holder of shares of Series E Stock such stock or
other securities and property and otherwise give effect to the provisions set
forth in this Section 3.7. The provisions of this Section 3.7 shall apply
similarly to successive consolidations, mergers, sales or conveyances.
3.8 After the date, if any, on which all outstanding shares of Media
Stock (or such other class or series of common stock into which shares of this
Series are then convertible) are converted into or exchanged for shares of
another class or series of common stock of the Corporation, each share of this
Series shall thereafter be convertible into or exchangeable for the number of
shares of such other class or series of common stock receivable upon such
conversion or exchange equal to the quotient of (a) $50 divided by (b) the
product of (i) 0.95 multiplied by (ii) the Current Market Price for such other
class or series of common stock. From and after any such conversion or
exchange, Conversion Rate adjustments as nearly equivalent as may be
practicable to the adjustments pursuant to Sections 3.6 and 3.7 which, prior
to such exchange, were made in respect of Media Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
shall instead be made pursuant to such Sections 3.6 and 3.7 in respect of
shares of such other class or series of common stock.
3.9 (a) Whenever the Conversion Rate is adjusted as provided in this
Section 3, the Corporation (or, in the case of Section 3.7, the Corporation or
the Surviving Entity, as the case may be) shall forthwith place on file with
its transfer agent or agents for this Series a statement signed by a duly
authorized officer of the Corporation or the Surviving Entity, as the case may
be, stating the adjusted Conversion Rate determined as provided herein. Such
statements shall set forth in reasonable detail such facts as shall be
necessary to show the reason for and the manner of computing such adjustment.
Promptly after the adjustment of the Conversion Rate, the Corporation or the
Surviving Entity, as the case may be, shall mail a notice thereof to each
holder of shares of this Series. Whenever the Conversion Rate is increased
pursuant to Section 3.6(b), such notice shall be mailed to each holder of
shares of this Series as promptly as possible after the Corporation shall have
determined to effect such increase and, in any event, at least 15 Trading Days
prior to the date such increased Conversion Rate takes effect, and such notice
shall state such increased Conversion Rate and the period during which it will
be in effect. Where appropriate, the notice required by this Section 3.9(a)
may be given in advance and included as part of the notice required pursuant
to Section 3.9(b) or 3.9(c).
(b) Subject to the provisions of Section 3.9(c), if: (i) the
Corporation takes any action that would require an adjustment of the
Conversion Rate pursuant to Sections 3.6 through 3.8; (ii) there shall be any
consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation is required, or the sale or
transfer of all or substantially all of the assets of the Corporation; or
(iii) there shall occur the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, then the Corporation shall, as promptly as
possible, but at least 10 Trading Days prior to the record date or other date
set for definitive action if there shall be no record date, cause notice to be
filed with the transfer agent or agents for this Series and given to each
record holder of outstanding shares of this Series stating the action or event
for which such notice is being given and the record date for and the
anticipated effective date of such action or event. Failure to give or
receive such notice or any defect therein shall not affect the legality or
validity of the related transaction.
(c) If the Corporation intends to convert all of the outstanding shares
of Media Stock into shares of Communications Stock (or, if the Communications
Stock is not Publicly Traded at such time and shares of any other class or
series of common stock of the Corporation (other than Media Stock) are then
Publicly Traded, of such other class or series of common stock as has the
largest Market Capitalization) (as provided in Section 2.4 of Article V of the
Certificate of Incorporation), then the Corporation shall, not later than the
35th Trading Day and not earlier than the 45th Trading Day prior to the date
of such conversion, cause notice to be filed with the transfer agent or agents
for this Series and given to each record holder of shares of this Series,
setting forth: (i) a statement that all outstanding shares of Media Stock
shall be converted; (ii) the date of such conversion; (iii) the per share
number of shares of Communications Stock (or such other class or series of
common stock) to be received with respect to each share of Media Stock,
including details as to the calculation thereof; (iv) a statement to the
effect that, subject to Section 2.4.5(I) of Article V of the Certificate of
Incorporation, dividends on shares of such Media Stock shall cease to be paid
as of the date of such conversion; and (v) a statement as to what such holder
will be entitled to receive pursuant to the terms of Section 3.8 if such
holder thereafter properly converts shares of this Series. In addition, from
and after any conversion of Media Stock effected in accordance with Section
2.4 of Article V of the Certificate of Incorporation, if (A) a class or series
of common stock of the Corporation exists in addition to the class or series
of common stock into which the Media Stock was converted and (B) the
Corporation intends to convert the class or series of common stock into which
the Media Stock was converted into another such class or series of common
stock of the Corporation, then the Corporation shall give notice comparable to
the notice described in the preceding sentence of its intention to effect such
a conversion. In the event of any conflict between the notice provisions of
this Section 3.9(c) and Section 3.9(b), the notice provisions of this Section
3.9(c) shall govern.
3.10 There shall be no adjustment of the Conversion Rate in case of the
issuance of any stock of the Corporation in a reorganization, acquisition or
other similar transaction except as specifically set forth in this Section 3.
If any action or transaction would require adjustment of any Conversion Rate
established hereunder pursuant to more than one paragraph of this Section 3,
only the adjustment which would result in the largest increase of such
Conversion Rate shall be made.
3.11 The Corporation shall at all times reserve and keep available, free
from preemptive rights, out of its authorized but unissued stock, for the
purpose of effecting the conversion of the shares of this Series, such number
of its duly authorized shares of Media Stock (or, if applicable, any other
shares of Capital Stock of the Corporation) as shall from time to time be
sufficient to effect the conversion of all outstanding shares of this Series
into such Media Stock (or such other shares of Capital Stock) at any time;
provided, however, that nothing contained herein shall preclude the
Corporation from satisfying its obligations in respect of the conversion of
the shares by delivery of purchased shares of Media Stock (or such other
shares of Capital Stock) that are held in the treasury of the Corporation.
All shares of Media Stock (or such other shares of Capital Stock of the
Corporation) which shall be deliverable upon conversion of the shares of this
Series shall be duly and validly issued, fully paid and nonassessable. For
purposes of this Section 3, the number of shares of Media Stock or any other
class or series of common stock of the Corporation at any time outstanding
shall not include any shares of Media Stock or such other class or series of
common stock then owned or held by or for the account of Corporation or any
subsidiary of the Corporation.
3.12 If any shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) which
would be issuable upon conversion of shares of this Series hereunder require
registration with or approval of any governmental authority before such shares
may be issued upon conversion, the Corporation will in good faith and as
expeditiously as possible cause such shares to be duly registered or approved,
as the case may be. The Corporation will endeavor to list the shares of (or
depositary shares representing fractional interests in) Media Stock (or such
other class or series of common stock into which shares of this Series are
then convertible) required to be delivered upon conversion of shares of this
Series prior to such delivery upon the principal national securities exchange
upon which the outstanding Media Stock (or such other class or series of
common stock) is listed at the time of such delivery.
3.13 The Corporation shall pay any and all issue, stamp, documentation,
transfer or other taxes that may be payable in respect of any issue or
delivery of shares of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible) on conversion of
shares of this Series pursuant hereto. The Corporation shall not, however, be
required to pay any tax which is payable in respect of any transfer involved
in the issue or delivery of Media Stock (or such other class or series of
common stock) in a name other than that in which the shares of this Series so
converted were registered, and no such issue or delivery shall be made unless
and until the Person requesting such issue has paid to the Corporation the
amount of such tax, or has established, to the satisfaction of the
Corporation, that such tax has been paid.
4. Redemption.
4.1 (a) The Corporation may, at its sole option, subject to Section 2.2
hereof, from time to time on and after the fifth (5th) anniversary of the
Effective Time, redeem, out of funds legally available therefor, all or any
part of the outstanding shares of this Series at the Redemption Price.
(b) The Corporation shall redeem at the Redemption Price, out of funds
legally available therefor, all of the outstanding shares of this Series, if
any of the following events with respect to the Media Group occur (such events
being collectively referred to herein as the "Media Group Special Events"):
(i) (A) the Corporation redeems all of the outstanding shares of Media
Stock in exchange for shares of common stock of the Media Group Subsidiaries
as provided in Section 2.4.3 of Article V of the Certificate of Incorporation
(the "Media Group Subsidiary Redemption") or (B) following a Disposition of
all or substantially all of the properties and assets attributed to the Media
Group, the Corporation either (I) pays a dividend on the Media Stock in an
amount equal to the product of the Outstanding Media Fraction multiplied by
the Fair Value of the Net Proceeds of such Disposition as provided in Section
2.4.1(A)(1)(a) of Article V of the Certificate of Incorporation (the "Media
Group Disposition Dividend"), or (II) redeems shares of Media Stock for an
amount equal to the product of the Outstanding Media Fraction multiplied by
the Fair Value of the Net Proceeds of such Disposition as provided in Section
2.4.1(A)(1)(b) of Article V of the Certificate of Incorporation (the "Media
Group Disposition Redemption"); or
(ii) the Corporation pays a dividend on, or the Corporation or any of
its subsidiaries consummates a tender offer or exchange offer for, shares of
Media Stock and the aggregate amount of such dividend or the consideration
paid in such tender offer or exchange offer is an amount equal to the Fair
Value of all or substantially all of the properties and assets attributed to
the Media Group (the "Media Group Special Dividend" or the "Media Group Tender
or Exchange Offer", respectively); provided, however, that the calculation
of the Fair Value of all or substantially all of the properties and assets
attributed to the Media Group shall be made without giving effect to any money
borrowed by the Corporation or any of its subsidiaries in connection with such
dividend or tender offer or exchange offer, as the case may be.
The Redemption Date for shares of this Series to be redeemed by the
Corporation pursuant to this Section 4.1(b) shall be, if the applicable Media
Group Special Event is (1) the Media Group Subsidiary Redemption, the date of
such exchange, (2) the Media Group Disposition Dividend or the Media Group
Special Dividend, the date of payment of such dividend, (3) the Media Group
Disposition Redemption, the date of such redemption or (4) the Media Group
Tender or Exchange Offer, the date such tender offer or exchange offer is
consummated. Notwithstanding anything to the contrary contained in this
Section 4.1(b), any redemption pursuant to this Section 4.1(b) shall be
conditioned upon the actual redemption of Media Stock for shares of common
stock of the Media Group Subsidiaries, payment of the Media Group Disposition
Dividend or the amount due as a result of the Media Group Disposition
Redemption (in each case in the required kind of capital stock, cash,
securities and/or other property), payment of the Media Group Special Dividend
or the consummation of the Media Group Tender or Exchange Offer, as the case
may be.
(c) (i) Commencing with the first Dividend Payment Date after the tenth
(10th) anniversary of the Effective Time and on each anniversary of such
Dividend Payment Date thereafter through the ninth (9th) anniversary of such
Dividend Payment Date, the Corporation shall redeem at the Redemption Price,
out of funds legally available therefor, 49,704 shares of the Series E Stock
or such lesser number of shares of Series E Stock as shall then remain
outstanding.
(ii) Commencing with the first Dividend Payment Date after the tenth
(10th) anniversary of the Effective Time and on each anniversary of such
Dividend Payment Date thereafter through the ninth (9th) anniversary of such
Dividend Payment Date, the Corporation may, at its sole option, subject to
Section 2.2 hereof, redeem at the Redemption Price, out of funds legally
available therefor, 49,704 shares of the Series E Stock or such lesser number
of shares of Series E Stock as shall then remain outstanding.
(iii) The Corporation shall, on the thirtieth day after the twentieth
(20th) anniversary of the Effective Time, redeem at the Redemption Price, out
of funds legally available therefor, all of the outstanding shares of the
Series E Stock.
(d) The Corporation shall redeem, out of funds legally available
therefor, all of the outstanding shares of this Series at the Redemption
Price, if (i) the Corporation converts all of the outstanding shares of Media
Stock into shares of Communications Stock (or, if the Communications Stock is
not Publicly Traded at such time and shares of any other class or series of
common stock of the Corporation (other than Media Stock) are then Publicly
Traded, of such other class or series of common stock as has the largest
Market Capitalization) as provided in Section 2.4 of Article V of the
Certificate of Incorporation and (ii) at any time following such conversion
(A) an event substantially similar to any Media Group Special Event occurs in
respect to the Communications Stock (or such other class or series of common
stock) and (B) at the time of such event shares of another class or series of
common stock of the Corporation (other then Communications Stock or such other
class or series of common stock) are then Publicly Traded. The Redemption
Date for, and the conditions to, any such redemption shall be determined in a
manner consistent with the Redemption Date and conditions set forth in Section
4.1(b) for a redemption resulting from a substantially similar Media Group
Special Event.
4.2 In the event that fewer than all of the outstanding shares of this
Series are to be redeemed pursuant to Section 4.1(a) or 4.1(c), the aggregate
number of shares of this Series held by each holder which will be redeemed
shall be determined by the Corporation by lot or pro rata or by any other
method as may be determined by the Board of Directors in its sole discretion
to be equitable, and the certificate of the Corporation's Secretary or an
Assistant Secretary filed with the transfer agent or transfer agents for this
Series in respect of such determination by the Board of Directors shall be
conclusive.
4.3 (a) If the Corporation determines to redeem shares of this Series
pursuant to Section 4.1(a) or 4.1(c), the Corporation shall, not later than
the 15th Trading Day nor earlier than the 60th Trading Day prior to the
Redemption Date, cause notice to be filed with the transfer agent or agents
for this Series and to be given to each record holder of the shares to be
redeemed, setting forth: (i) the Redemption Date; (ii) in the case of a
redemption pursuant to Section 4.1(c)(iii), that all shares of this Series
outstanding on the Redemption Date shall be redeemed by the Corporation; (iii)
in the case of a redemption pursuant to Section 4.1(a) or 4.1(c)(i) or
4.1(c)(ii), the total number of shares of this Series to be redeemed and, if
fewer than all the shares held by such holder are to be redeemed, the
aggregate number of such shares which will be redeemed; (iv) the Redemption
Price (v) in the case of a redemption pursuant to Section 4.1(a), that shares
of this Series called for redemption may be converted at any time prior to the
Redemption Date (unless the Corporation (A) shall default in payment of the
Redemption Price or (B) shall exercise its right to rescind such redemption
pursuant to Section 4.5, in which case such right of conversion shall not
terminate at such time and date); (vi) in the case of a redemption pursuant to
Section 4.1(a), a description of the manner in which the Conversion Price will
be determined in accordance with the Certificate; (vii) the place or places
where certificates for such shares are to be surrendered for payment of the
Redemption Price; and (viii) that dividends on the shares to be redeemed will
cease to accrue on the Redemption Date. Promptly, following the Redemption
Date, the Corporation shall cause notice to be filed with the transfer agent
or agents for this Series and to be given to each record holder of the shares
to be redeemed setting forth the percentage of such holder's shares which the
Corporation has elected to redeem.
(b) If the Corporation determines to effect a Media Group Subsidiary
Redemption, the Corporation shall, not later than the 30th Trading Day and not
earlier than the 45th Trading Day prior to the Redemption Date, cause notice
to be filed with the transfer agent or agents for this Series and given to
each record holder of shares of this Series, setting forth: (i) the
Redemption Date (which, pursuant to the penultimate sentence of Section
4.1(b), shall be the same as the date specified in clause (viii) below); (ii)
that all shares of this Series outstanding on the Redemption Date shall be
redeemed by the Corporation; (iii) the Redemption Price; (iv) that the
redemption of the shares of this Series shall be conditioned upon the
consummation of the Media Group Subsidiary Redemption; (v) the place or places
where certificates for shares of this Series, properly endorsed or assigned
for transfer (unless the Corporation waives such requirement), are to be
surrendered for payment of the Redemption Price; (vi) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (vii) a
statement that all shares of Media Stock outstanding on the date of the Media
Group Subsidiary Redemption shall be redeemed in exchange for shares of common
stock of the Media Group Subsidiaries; (viii) the date of such Media Group
Subsidiary Redemption; (ix) the Outstanding Media Fraction on the date of such
notice; (x) the place or places where certificates for shares of Media Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered for delivery of certificates for
shares of the Media Group Subsidiaries; (xi) a statement to the effect that,
subject to Section 2.4.5(I) of Article V of the Certificate of Incorporation,
dividends on the Media Stock shall cease to be paid as of the Redemption Date;
(xii) the number of shares of Media Stock outstanding and, to the extent
determinable on the 3rd Trading Date prior to the date of such notice, the
number of shares of Media Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, including the number of
outstanding shares of this Series and a description of the manner in which the
Conversion Price will be determined in accordance with the certificate; and
(xiii) that a holder of shares of this Series shall be entitled to receive
shares of common stock of the Media Group Subsidiaries upon the Media Group
Subsidiary Redemption in lieu of the Redemption Price only if such holder
converts such shares of this Series on or prior to the Redemption Date.
(c) If the Corporation determines to effect a Media Group Disposition
Dividend, the Corporation shall, not later than the 30th Trading Day following
the consummation of the Disposition by the Corporation of all or substantially
all of the properties and assets attributed to the Media Group, cause notice
to be filed with the transfer agent or agents for this Series and given to
each record holder of shares of this Series, setting forth: (i) the
anticipated Redemption Date (which, pursuant to the penultimate sentence of
Section 4.1(b), shall be the same as the date specified in clause (viii)
below); (ii) that all shares of this Series outstanding on the Redemption Date
shall be redeemed by the Corporation; (iii) the Redemption Price; (iv) that
the redemption of the shares of this Series shall be conditioned upon the
payment of the Media Group Disposition Dividend; (v) the place or places where
certificates for shares of this Series, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), are to be
surrendered for payment of the Redemption Price; (vi) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (vii) the
record date for determining holders of Media Stock entitled to receive the
Media Group Disposition Dividend, which shall be not earlier than the 40th
Trading Day and not later than the 50th Trading Day following the consummation
of such Disposition; (viii) the anticipated date of payment of the Media Group
Disposition Dividend (which shall not be more than 85 Trading Days following
the consummation of such Disposition); (ix) the type of property to be paid as
such dividend in respect of the outstanding shares of Media Stock; (x) the Net
Proceeds of such Disposition; (xi) the Outstanding Media Fraction on the date
of such notice; (xii) the number of outstanding shares of Media Stock and, to
the extent determinable on the 3rd Trading Date prior to the date of such
notice, the number of shares of Media Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and
the conversion, exchange or exercise price thereof, including the number of
outstanding shares of this Series and a description of the manner in which the
Conversion Price will be determined in accordance with the Certificate at such
time; and (xiii) that a holder of shares of this Series shall be entitled to
receive such dividend in lieu of the Redemption Price only if such holder
properly converts such shares on or prior to the record date referred to in
clause (vii) of this sentence and that shares of this Series shall not be
convertible after such record date.
(d) If the Corporation determines to effect a Media Group Disposition
Redemption following a Disposition of all (not merely substantially all) of
the properties and assets attributed to the Media Group (in accordance with
Section 2.4.1(A)(1)(b)(i) of Article V of the Certificate of Incorporation),
the Corporation shall, not later than the 35th Trading Day and not earlier
than the 45th Trading Day prior to the Redemption Date, cause notice to be
filed with the transfer agent or agents for this Series and given to each
record holder of shares of this Series, setting forth: (i) the Redemption
Date (which, pursuant to the penultimate sentence of Section 4.1(b), shall be
the same as the date specified in clause (viii) below); (ii) that all shares
of this Series outstanding on the Redemption Date shall be redeemed by the
Corporation; (iii) the Redemption Price; (iv) that the redemption of shares of
this Series shall be conditioned upon the consummation of the Media Group
Disposition Redemption; (v) the place or places where certificates for shares
of this Series, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease
to accrue on the Redemption Date; (vii) that all shares of Media Stock
outstanding on the date of such Media Group Disposition Redemption shall be
redeemed; (viii) the date of such Media Group Disposition Redemption (which
shall not be more than 85 Trading Days following the consummation of such
Disposition); (ix) the type of property in which the redemption price for the
shares of Media Stock to be redeemed is to be paid; (x) the Net Proceeds of
such Disposition; (ix) the Outstanding Media Fraction on the date of such
notice; (xii) the place or places where certificates for shares of Media
Stock, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for delivery of cash and/or
securities or other property; (xii) the number of outstanding shares of Media
Stock and, to the extent determinable on the 3rd Trading Date prior to the
date of such notice, the number of shares of Media Stock into or for which
such outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and a description of the
manner in which the Conversion Price will be determined in accordance with the
Certificate; (xiv) that a holder of shares of this Series shall be entitled to
participate in the Media Group Disposition Redemption in lieu of participating
in the redemption of the shares of this Series only if such holder properly
converts such shares of this Series on or prior to the Redemption Date; and
(xv) that, except as otherwise provided by Section 2.4.5(I) of Article V of
the Certificate of Incorporation, dividends on shares of Media Stock shall
cease to be paid as of the Redemption Date.
(e) If the Corporation determines to effect a Media Group Disposition
Redemption following a Disposition of substantially all (but not all) of the
properties and assets attributed to the Media Group (in accordance with
Section 2.4.1(A)(1)(b)(ii) of Article V of the Certificate of Incorporation),
the Corporation shall, not later than the 30th Trading Day following the
consummation of such Disposition, cause notice to be filed with the transfer
agent or agents for this Series and given to each record holder of shares of
this Series, setting forth: (i) the anticipated Redemption Date (which,
pursuant to the penultimate sentence of Section 4.1(b), shall be the same as
the date specified in clause (viii) below); (ii) that all shares of this
Series outstanding on the Redemption Date shall be redeemed by the
Corporation; (iii) the Redemption Price; (iv) that the redemption of shares of
this Series shall be conditioned upon the consummation of the Media Group
Disposition Redemption; (v) the place or places where certificates for shares
of this Series, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease
to accrue on the Redemption Date; (vii) a date not earlier than the 40th
Trading Day and not later than the 50th Trading Day following the consummation
of such Disposition on which shares of Media Stock shall be selected for
redemption pursuant to such Media Group Disposition Redemption; (viii) the
anticipated date of such Media Group Disposition Redemption (which shall not
be more than 85 Trading Days following the consummation of such Disposition);
(ix) the type of property in which the redemption price for the shares of
Media Stock to be redeemed is to be paid; (x) the Net Proceeds of such
Disposition; (xi) the Outstanding Media Fraction; (xii) the number of shares
of Media Stock outstanding and, to the extent determinable on the 3rd Trading
Date prior to the date of such notice, the number of shares of Media Stock
into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, including the number of outstanding shares of this Series and a
description of the manner in which the Conversion Price will be determined in
accordance with the Certificate; (xiii) that a holder of shares of this Series
shall be eligible to participate in such selection for redemption pursuant to
such Media Group Disposition Redemption in lieu of participating in the
redemption of shares of this Series only if such holder properly converts such
shares of this Series on or prior to the date referred to in clause (vii) of
this sentence and that shares of this Series shall not be convertible after
such date; and (xiv) a statement that the Corporation will not be required to
register a transfer of any shares of Media Stock for a period of 15 Trading
Days next preceding the date referred to in clause (vii) of this sentence.
(f) If the Corporation determines to effect a Media Group Special
Dividend, the Corporation shall, not later than the 45th Trading Day and not
earlier than the 60th Trading day prior to the date of payment of such
dividend, cause notice to be filed with transfer agent or agent for this
Series and given to each record holder of shares of this Series, setting
forth: (i) the anticipated Redemption Date (which, pursuant to the
penultimate sentence of Section 4.1(b), shall be the same as the date
specified in clause (viii) below); (ii) that all shares of this Series
outstanding on the Redemption Date shall be redeemed by the Corporation; (iii)
the Redemption Price; (iv) that the redemption of the shares of this Series
shall be conditioned upon the payment of the Media Group Special Dividend; (v)
the place or places where certificates for shares of this Series, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for payment of the Redemption Price; (vi)
that dividends on the shares to be redeemed will cease to accrue on the
Redemption Date; (vii) the record date for determining holders of Media Stock
entitled to receive the Media Group Special Dividend, which shall be not
earlier than the 20th Trading Day prior to the date of payment of such
dividend; (viii) the anticipated date of payment of the Media Group Special
Dividend; (ix) the type of property to be paid as such dividend in respect of
the outstanding shares of Media Stock; (x) the Outstanding Media Fraction on
the date of such notice; (xi) the number of outstanding shares of Media Stock
and, to the extent determinable on the 3rd Trading Date prior to the date of
such notice, the number of shares of Media Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and
the conversion, exchange or exercise price thereof, including the number of
outstanding shares of this Series and a description of the manner in which the
Conversion Price will be determined in accordance with the Certificate; and
(xii) that a holder of shares of this Series shall be entitled to receive such
dividend in lieu of the Redemption Price only if such holder properly converts
such shares on or prior to the record date referred to in clause (vii) of this
sentence and that shares of this Series shall not be convertible after such
record date.
(g) If the Corporation or any of its subsidiaries determines to effect a
Media Group Tender or Exchange Offer, the Corporation shall, on the date of
the public announcement of such tender offer or exchange offer by the
Corporation or any of its subsidiaries but in any event not later than the
35th Trading Day prior to such redemption, cause notice to be filed with the
transfer agent or agent for this Series and given to each record holder of
shares of this Series, setting forth: (i) the anticipated Redemption Date
(which, pursuant to the penultimate sentence of Section 4.1(b), shall be the
same as the date specified in clause (vii) below); (ii) that all shares of
this Series outstanding on the Redemption Date shall be redeemed by the
Corporation; (iii) the Redemption Price; (iv) that the redemption of shares of
this Series shall be conditioned upon the consummation of the Media Group
Tender or Exchange Offer; (v) the place or places where certificates for
shares of this Series, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease
to accrue on the Redemption Date; (vii) the anticipated date of consummation
of such Media Group Tender or Exchange Offer; (viii) the type of consideration
to be paid by the Corporation or its subsidiary in such Media Group Tender
Offer or Exchange Offer for shares of Media Stock; (ix) the date on which such
Media Group Tender or Exchange Offer commenced, the date on which such Media
Group Tender or Exchange Offer is scheduled to expire unless extended and any
other material terms thereof (or the material terms of any amendment thereto);
(x) the Outstanding Media Fraction on the date of such notice; (xi) the number
of outstanding shares of Media Stock and, to the extent determinable on the
3rd Trading Date prior to the date of such notice, the number of shares of
Media Stock into or for which such outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, including the number of outstanding shares of this
Series and a description of the manner in which the Conversion will be
determined in accordance with the Certificate; and (xii) that a holder of
shares of this Series shall be entitled to participate in the Media Group
Tender or Exchange Offer in lieu of participating in the redemption of the
shares of this Series only if such holder properly converts such shares of
this Series on or prior to the Redemption Date and then complies with the
terms and conditions of the Media Group Tender or Exchange Offer and that such
holder shall be permitted to tender or exchange shares of Media Stock upon
conversion of shares of this Series by notice of guaranteed delivery so long
as physical certificates are tendered as soon as practicable after physical
receipt thereof.
(h) In the event the Corporation shall redeem shares of this Series
pursuant to Section 4.1(d), notice of such redemption shall be given by the
Corporation at a time, and such notice shall contain information, comparable
to the time or information, as the case may be, specified in Sections 4.3(b)
through (g) with respect to a notice of a redemption pursuant to Section
4.1(b) resulting from a substantially similar Media Group Special Event.
4.4 If notice of redemption shall have been given by the Corporation as
provided in Section 4.3, from and after the Redemption Date, dividends on the
shares of this Series so called for redemption shall cease to accrue, such
shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of the Corporation with respect to shares so
called for redemption (except, the right to receive from the Corporation the
Redemption Price without interest) shall cease (including any right to receive
dividends otherwise payable on any Dividend Payment Date that would have
occurred after the Redemption Date), unless (a) the Corporation defaults in
the payment of the Redemption Price, (b) in the case of a redemption pursuant
to Section 4.1(a), the Corporation exercises its right to rescind such
redemption pursuant to Section 4.5, or (c) in the case of a redemption
pursuant to Section 4.1(b) or 4.1(d), the conditions to such redemption shall
not have been satisfied, in which case such rights shall not terminate at the
close of business on such date. On or before the Redemption Date, the
Corporation shall deposit with a bank or trust company doing business in New
York, as paying agent, money sufficient to pay the Redemption Price on the
Redemption Date, in trust, with irrevocable instructions that such money be
applied to the redemption of shares of this Series so called for redemption.
Any money so deposited with any such paying agent which shall not be required
for such redemption because of the exercise of any right of conversion,
rescission or otherwise (including if the conditions to a redemption pursuant
to Section 4.1(b) or 4.1(d) are not satisfied) shall be returned to the
Corporation forthwith. Upon surrender (in accordance with the notice of
redemption) of the certificate or certificates for any shares of this Series
to be so redeemed (properly endorsed or assigned for transfer, if the
Corporation shall so require and the notice of redemption shall so state),
such shares shall be redeemed by the Corporation at the Redemption Price
(unless, in the case of a redemption pursuant to Section 4.1(a), the
Corporation shall have exercised its right to rescind such redemption
pursuant to Section 4.5 or, in the case of a redemption pursuant to Section
4.1(b) or 4.1(d), the conditions to such redemption shall not have been
satisfied). In case fewer than all the shares represented by any such
certificate are to be redeemed, a new certificate shall be issued representing
the unredeemed shares (or fractions thereof as provided in Section 7.4),
without cost to the holder thereof. Subject to applicable escheat laws, any
moneys so set aside by the Corporation and unclaimed at the end of two (2)
years from the Redemption Date shall revert to the general funds of the
Corporation, after which reversion the holders of such shares so called for
redemption shall look only to the Corporation for the payment of the
Redemption Price, without interest. Any interest accrued on any funds so
deposited shall be paid to the Corporation from time to time upon request of
the Corporation.
4.5 If notice of redemption pursuant to Section 4.1(a)or 4.1(c)(ii)
shall have been given by the Corporation pursuant to Section 4.3(a), in the
event that a Redemption Rescission Event shall occur following the date of
such notice but at or prior to the Redemption Date, the Corporation may, at
its sole option, at any time prior to the earlier of (a) the close of business
on that day which is five (5) Trading Days following such Redemption
Rescission Event and (b) the Redemption Date, rescind such redemption by
making a public announcement of such rescission (the date on which such public
announcement shall have been made being hereinafter referred to as the
"Rescission Date"). The Corporation shall be deemed to have made such
announcement if it shall issue a release to the Dow Jones News Service and
Reuters Information Services or any successor news wire service. From and
after the making of such announcement, the Corporation shall have no
obligation to effect such redemption or to pay the Redemption Price therefor
and all rights of holders of shares of this Series shall be restored as if
notice of redemption had not been given. The Corporation shall give notice of
any such rescission by first-class mail, postage prepaid, mailed as promptly
as practicable, but in no event later than the close of business on that date
which is five (5) Trading Days following the Rescission Date to each record
holder of shares of this Series at the close of business on the Rescission
Date and to any other Person or entity that was a record holder of shares of
this Series and that shall have surrendered shares of this Series for
conversion following the giving of notice of the subsequently rescinded
redemption. Each notice of rescission shall (i) state that such redemption
has been rescinded, (ii) state that any Converting Holder shall be entitled to
rescind the conversion of shares of this Series surrendered for conversion
following the day on which notice of such redemption was given but on or prior
to the later of (A) the close of business on the Trading Day next succeeding
the date on which public announcement of the rescission of such redemption
shall have been made and (B) the date which is three (3) Trading Days
following the mailing of the Corporation's notice of rescission, (iii) be
accompanied by a form prescribed by the Corporation to be used by any
Converting Holder rescinding the conversion of shares so surrendered for
conversion (and instructions for the completion and delivery of such form,
including instructions with respect to payments that may be required to
accompany such delivery in accordance with Section 3.5) and (iv) state that
such form must be properly completed and received by the Corporation no later
than the close of business on a date that shall be fifteen (15) Trading Days
following the date of the mailing of such notice of rescission.
5. Voting. The shares of this Series shall have no voting rights
except as required by law or as set forth below.
5.1 So long as any shares of this Series remain outstanding, unless a
greater percentage shall then be required by law, the Corporation shall not,
without the affirmative vote at a meeting or the written consent with or
without a meeting of the holders of shares of this Series representing at
least a majority of the shares of this Series then outstanding (a) authorize
any Senior Stock or reclassify any Junior Stock or Parity Stock as Senior
Stock, or (b) amend, alter or repeal any of the provisions of the Certificate
or the Certificate of Incorporation, so as in any such case to materially and
adversely affect the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions of the shares of this Series; provided,
however, that an amendment which effects a split of this Series or which
effects a combination of the shares of this Series into a fewer number of
Shares shall not be deemed to have any such material adverse effect.
5.2 No vote or consent of holders of shares of this Series shall be
required for (a) the creation of any indebtedness of any kind of the
Corporation, (b) the authorization or issuance of any class of Junior Stock
(including any class or series of common stock of the Corporation) or Parity
Stock, (c) the authorization, designation or issuance of additional shares of
Series E Stock or (iv) subject to Section 5.1(a), the authorization or
issuance of any other shares of Preferred Stock.
6. Liquidation Rights.
6.1 Upon the dissolution, liquidation or winding up of the Corporation,
whether voluntary or involuntary, the holders of the shares of this Series
shall be entitled to receive out of the assets of the Corporation available
for distribution to stockholders, in preference to the holders of, and before
any payment of distribution shall be made on, Junior Stock, the Liquidation
Value in effect at such time, plus an amount equal to all accrued and unpaid
dividends to the date of final distribution.
6.2 The Liquidation Value shall initially be equal to $50 per share of
Series E Stock. The Liquidation Value shall be subject to adjustment from
time to time to appropriately give effect to any split or combination of the
shares of this Series.
6.3 Neither the sale, exchange or other conveyance (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property and assets of the Corporation nor the merger or consolidation of the
Corporation into or with any other corporation, or the merger or consolidation
of any other corporation into or with the Corporation, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, for the
purposes of this Section 6.
6.4 After the payment to the holders of the shares of this Series of
full preferential amounts provided for in this Section 6, the holders of this
Series as such shall have no right or claim to any of the remaining assets of
the Corporation.
6.5 In the event the assets of the Corporation available for
distribution to the holders of shares of this Series upon any dissolution,
liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to Section 6.1, no such distribution shall be
made on account of any shares of any Parity Stock upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the shares of this Series, ratably, in proportion to the
full distributable amounts for which holders of all Parity Stock are entitled
upon such dissolution, liquidation or winding up.
7. Other Provisions.
7.1 All notices from the Corporation to the holders shall be given by
first class mail, postage prepaid, to the holders of shares of this Series at
their last address as it shall appear on the stock register. With respect to
any notice to a holder of shares of this Series required to be provided
hereunder, neither failure to mail such notice, nor any defect therein or in
the mailing thereof, shall affect the sufficiency of the notice or the
validity of the proceedings referred to in such notice or affect the legality
or validity of any distribution, right, warrant, reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding up, or the vote upon any such action. Any notice which was mailed in
the manner herein provided shall be conclusively presumed to have been duly
given whether or not the holder receives the notice.
7.2 All notices and other communications from a holder of shares of this
Series shall be deemed given if delivered personally or sent by overnight
courier (providing proof of delivery) to the Corporation at the following
address (or at such other address as the Corporation shall specify in a notice
pursuant to Section 7.1): U S WEST, Inc., 7800 East Orchard Road, Englewood,
Colorado 80111, Attention: General Counsel.
7.3 Any shares of this Series which have been converted, redeemed,
exchanged or otherwise acquired by the Corporation shall, after such
conversion, redemption, exchange or acquisition, as the case may be, be
retired and promptly canceled and the Corporation shall take all appropriate
action to cause such shares to obtain the status of authorized but unissued
shares of Preferred Stock, without designation as to series, until such shares
are once more designated as part of a particular series by the Board of
Directors. The Corporation may cause a certificate setting forth a resolution
adopted by the Board of Directors that none of the authorized shares of this
Series are outstanding to be filed with the Secretary of State of the State of
Delaware. When such certificate becomes effective, all references to Series E
Stock shall be eliminated from the Certificate of Incorporation and the shares
of Preferred Stock designated hereby as Series E Stock shall have the status
of authorized and unissued shares of Preferred Stock and may be reissued as
part of any new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors.
7.4 The shares of this Series shall be issuable in whole shares or in
any fraction of a whole share or any integral multiple of such fraction.
7.5 The Corporation shall, to the fullest extent permitted by law, be
entitled to recognize the exclusive right of a Person registered on its
records as the holder of shares of this Series, and such record holder shall
be deemed the holder of such shares for all purposes.
7.6 All notice periods referred to in the Certificate shall commence on
the date of the mailing of the applicable notice.
7.7 Subject to applicable law, any determinations made in the exercise
of the good faith business judgment of the Board of Directors under any
provision of the Certificate shall be final and binding on all stockholders of
the Corporation, including the holders of shares of this Series.
7.8 Certificates for shares of this Series shall bear such legends as
the Corporation shall from time to time deem appropriate.
IN WITNESS WHEREOF, U S WEST, INC. has caused this certificate to be
signed and attested this 30th day of June, 1997.
U S WEST, INC.
By: /s/ FRANK M. EICHLER
Name: Frank M. Eichler
Title: Vice President - Public Policy and
Regulatory Law and President-
Corporate Development
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30,
1997 1996
EARNINGS PER COMMON SHARE --------- ---------
Net income for per share calculation $ 332,235 $ 323,958
========= =========
Weighted average common shares
outstanding 482,542 476,803
========= =========
Earnings per common share $ 0.69 $ 0.68
========= =========
Six Months Ended
June 30,
1997 1996
EARNINGS PER COMMON SHARE --------- ---------
Income before cumulative effect of
change in accounting principle $ 671,605 $ 618,253
Cumulative effect of change in
accounting principle - net of tax - 34,158
--------- ---------
Net income for per share calculation $ 671,605 $ 652,411
========= =========
Weighted average common shares
outstanding 481,945 475,929
========= =========
Income before cumulative effect of
change in accounting principle $ 1.39 $ 1.30
Cumulative effect of change in
accounting principle - net of tax - 0.07
--------- ---------
Earnings per common share $ 1.39 $ 1.37
========= =========
</TABLE>
1
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30,
EARNINGS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ---------
Net income for per share calculation $ 332,235 $ 323,958
========= =========
Weighted average common shares
outstanding 482,542 476,803
Incremental shares from assumed
exercise of stock options 1,956 1,658
--------- ---------
Total common shares 484,498 478,461
========= =========
Earnings per common and common
equivalent share $ 0.69 $ 0.68
========= =========
Six Months Ended
June 30,
EARNINGS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ---------
Income before cumulative effect of
change in accounting principle $ 671,605 $ 618,253
Cumulative effect of change in
accounting principle - net of tax - 34,158
--------- ---------
Net income for per share calculation $ 671,605 $ 652,411
========= =========
Weighted average common shares
outstanding 481,945 475,929
Incremental shares from assumed
exercise of stock options 1,905 1,721
--------- ---------
Total common shares 483,850 477,650
========= =========
Income before cumulative effect of
change in accounting principle $ 1.39 $ 1.29
Cumulative effect of change in
accounting principle - net of tax - 0.07
--------- ---------
Earnings per common and common $ 1.39 $ 1.36
equivalent share ========= =========
</TABLE>
2
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30,
EARNINGS PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: --------- ---------
Net income $ 332,235 $ 323,958
Interest on Convertible Liquid Yield
Option Notes (LYONS) 3,306 3,137
--------- ---------
Adjusted net income for per share
calculation $ 335,541 $ 327,095
========= =========
Weighted average common shares
outstanding 482,542 476,803
Incremental shares from assumed
exercise of stock options 2,562 1,658
Shares issued upon conversion of LYONS 9,386 9,620
--------- ---------
Total common shares 494,490 488,081
========= =========
Earnings per common share -
assuming full dilution $ 0.68 $ 0.67
========= =========
</TABLE>
3
<PAGE>
EXHIBIT 11
U S WEST COMMUNICATIONS GROUP
Computation of Earnings Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
June 30,
EARNINGS PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: --------- ---------
Income before cumulative effect of
change in accounting principle $ 671,605 $ 618,253
Interest on Convertible Liquid Yield
Option Notes (LYONS) 6,643 6,299
--------- ---------
Adjusted income before cumulative effect
of change in accounting principle 678,248 624,552
Cumulative effect of change in
accounting principle - net of tax - 34,158
--------- ---------
Adjusted net income for per share
calculation $ 678,248 $ 658,710
========= =========
Weighted average common shares
outstanding 481,945 475,929
Incremental shares from assumed
exercise of stock options 2,635 1,722
Shares issued upon conversion of LYONS 9,386 9,627
--------- ---------
Total common shares 493,966 487,278
========= =========
Adjusted income before cumulative effect
of change in accounting principle $ 1.37 $ 1.28
Cumulative effect of change in
accounting principle - net of tax - 0.07
--------- ---------
Earnings per common share -
assuming full dilution $ 1.37 $ 1.35
========= =========
</TABLE>
4
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Loss Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30,
1997 1996
LOSS PER COMMON SHARE --------- ----------
Loss before extraordinary item $ (97,170) $ (10,992)
Extraordinary item:
Early extinguishment of debt - net
of tax 2,873 -
---------- ----------
Net loss (94,297) (10,992)
Less preferred dividends 12,642 855
---------- ----------
Loss available for common
share calculation $ (106,939) $ (11,847)
========== ==========
Weighted average common shares
outstanding 606,446 473,593
========== ==========
Loss per common share $ (0.17) $ (0.03)
========== ==========
</TABLE>
1
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Loss Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
June 30,
1997 1996
LOSS PER COMMON SHARE --------- ----------
Loss before extraordinary item $ (206,174) $ (8,075)
Extraordinary item:
Early extinguishment of debt - net
of tax 2,873 -
---------- ----------
Net loss (203,301) (8,075)
Less preferred dividends 25,345 1,709
---------- ----------
Loss available for common
share calculation $ (228,646) $ (9,784)
========== ==========
Weighted average common shares
outstanding 606,486 473,298
========== ==========
Loss per common share $ (0.38) $ (0.02)
========== ==========
</TABLE>
2
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Loss Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30,
LOSS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ----------
Loss before extraordinary item $ (97,170) $ (10,992)
Extraordinary item:
Early extinguishment of debt - net
of tax 2,873 -
---------- ----------
Net loss (94,297) (10,992)
Less preferred dividends 12,642 855
---------- ----------
Loss available for common
share calculation $ (106,939) $ (11,847)
========== ==========
Weighted average common shares
outstanding 606,446 473,593
Incremental shares from assumed
exercise of stock options 1,329 1,138
---------- ----------
Total common shares 607,775 474,731
========== ==========
Loss per common and common
equivalent share $ (0.17) $ (0.03)
========== ==========
</TABLE>
3
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Loss Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
June 30,
LOSS PER COMMON AND COMMON 1997 1996
EQUIVALENT SHARE: --------- ----------
Loss before extraordinary item $ (206,174) $ (8,075)
Extraordinary item:
Early extinguishment of debt - net
of tax 2,873 -
---------- ----------
Net loss (203,301) (8,075)
Less preferred dividends 25,345 1,709
---------- ----------
Loss available for common
share calculation $ (228,646) $ (9,784)
========== ==========
Weighted average common shares
outstanding 606,486 473,298
Incremental shares from assumed
exercise of stock options 1,317 1,287
---------- ----------
Total common shares 607,803 474,585
========== ==========
Loss per common and common
equivalent share $ (0.38)$ (0.02)
========== ==========
</TABLE>
4
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Loss Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended
June 30,
LOSS PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: (1)<F1> --------- ----------
Loss before extraordinary item $ (97,170) $ (10,992)
Extraordinary item:
Early extinguishment of debt - net
of tax 2,873 -
---------- ----------
Adjusted net loss (94,297) (10,992)
Less preferred dividends 12,642 855
---------- ----------
Loss available for common
share calculation $ (106,939) $ (11,847)
========== ==========
Weighted average common shares
outstanding 606,446 473,593
Incremental shares from assumed
exercise of stock options 1,861 1,137
---------- ----------
Total common shares 608,307 474,730
========== ==========
Loss per common share - assuming
full dilution $ (0.18) $ (0.03)
========== ==========
<FN>
<F1>
(1) 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.
</FN>
</TABLE>
5
<PAGE>
EXHIBIT 11
U S WEST MEDIA GROUP
Computation of Loss Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
June 30,
LOSS PER COMMON SHARE - ASSUMING 1997 1996
FULL DILUTION: (1)<F1> --------- ----------
Loss before extraordinary item $ (206,174) $ (8,075)
Extraordinary item:
Early extinguishment of debt - net
of tax 2,873 -
---------- ----------
Adjusted net loss (203,301) (8,075)
Less preferred dividends 25,345 1,709
---------- ----------
Loss available for common
share calculation $ (228,646) $ (9,784)
========== ==========
Weighted average common shares
outstanding 606,486 473,298
Incremental shares from assumed
exercise of stock options 1,868 1,286
---------- ----------
Total common shares 608,354 474,584
========== ==========
Loss per common share - assuming
full dilution $ (0.38) $ (0.02)
========== ==========
<FN>
<F1>
(1) 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.
</FN>
</TABLE>
6
