<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
U S West, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
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[LOGO]
7800 East Orchard Road
Englewood, Colorado 80111
NOTICE OF ANNUAL MEETING
The Annual Meeting of Shareholders of U S WEST, Inc. ("U S WEST" or the
"Company") will be held at the Marriott DTC Hotel, 4900 South Syracuse Street,
Denver, Colorado, on Friday, June 6, 1997, at 10:00 a.m., for the following
purposes:
1. To elect three Directors in Class III (see page 4);
2. To ratify the appointment of auditors (see page 6);
3. To approve an amendment to the U S WEST Communications Group Long-Term
Incentive Plan (see page 6);
4. To approve an amendment to the U S WEST 1994 Stock Plan (see page 7);
and
5. To act upon such other matters as may properly come before the Annual
Meeting, including shareholder proposals (see page 8).
Shareholders of record at the close of business on April 7, 1997 will be
entitled to vote at the Annual Meeting or any postponements or adjournments
thereof.
By Order of the Board of Directors
[SIGCUT]
CHARLES P. RUSS, III
Executive Vice President -- Law,
Public Policy and
Human Resources, General Counsel and
Secretary
April 7, 1997
EACH SHAREHOLDER'S VOTE IS IMPORTANT.
PLEASE DATE, SIGN, AND RETURN PROMPTLY THE ACCOMPANYING PROXY CARD.
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<PAGE>
U S WEST
Executive Offices
7800 East Orchard Road
Englewood, Colorado 80111
PROXY STATEMENT
This Proxy Statement and the accompanying proxy/voting instruction card
("proxy card") are first being mailed on April 7, 1997 to holders of U S WEST
Communications Group common stock ("Communications Stock") and U S WEST Media
Group common stock ("Media Stock") in connection with the solicitation of
proxies by the Board of Directors of U S WEST (the "Board"). Shares can be voted
at the Annual Meeting only if the shareholder is represented by proxy or is
present in person.
EACH SHAREHOLDER'S VOTE IS IMPORTANT. ACCORDINGLY, SHAREHOLDERS ARE URGED TO
SIGN AND RETURN THE ACCOMPANYING PROXY CARD REGARDLESS OF WHETHER THEY PLAN TO
ATTEND THE ANNUAL MEETING. If a shareholder attends and votes by ballot at the
Annual Meeting, that vote will cancel any previously given proxy vote.
Additionally, a shareholder giving a proxy may revoke it at any time before it
is voted at the Annual Meeting by giving a valid proxy bearing a later date.
When proxy cards are properly signed and returned, the shares represented
will be voted in accordance with the shareholder's directions. Votes will be
tallied by Boston EquiServe Limited Partnership, U S WEST's transfer agent. If a
proxy card is signed and returned without specifying choices, the shares will be
voted as recommended by the Board. No shareholder's vote will be disclosed
except to the extent necessary to meet legal requirements.
For participants in the U S WEST Shareowner Investment Plan, the proxy card
will cover the number of shares in the plan account, as well as shares
registered in the participant's name. For participants in the U S WEST Savings
Plan/ESOP ("SP/E"), the proxy card will serve also as a voting instruction card
for the trustees of those plans with respect to the shares held in the
participants' accounts. Shares held in the SP/E for which proxy cards are not
returned (as well as shares held in the suspense account of the SP/E) will be
voted in the same proportion as the shares for which signed proxy cards are
returned.
On January 31, 1997, approximately 722,195 record holders held 480,824,958
outstanding shares of Communications Stock, and approximately 700,545 record
holders held 606,095,033 outstanding shares of Media Stock. Each share of
Communications Stock is entitled to one vote, and each share of Media Stock is
entitled to 0.548 vote, on all matters properly brought before the Annual
Meeting. The relative voting power of Communications Stock and Media Stock is
determined by a formula set forth in U S WEST's Certificate of Incorporation.
The formula provides that each share of Communications Stock has one vote, and
each share of Media Stock has a variable number of votes equal to the ratio of
the time-weighted average market value of one share of Media Stock to the
time-weighted average market value of one share of Communications Stock,
calculated over a period of 20 days of trading on a national securities
exchange. The 20-day trading period ends ten trading days prior to the record
date for a meeting of shareholders. For this Annual Meeting, the 20-day period
began February 24, 1997 and ended March 21, 1997.
Shareholders representing a majority of the combined voting power of the
Communications Stock and the Media Stock must be present or represented by proxy
to constitute a quorum to conduct business at the Annual Meeting. Both classes
of common stock will vote together as a single class on all matters presented
for consideration at the Annual Meeting. If a quorum is present, the three
nominees for Directors receiving the highest number of votes will be elected.
For all other matters to be considered by shareholders at the Annual Meeting,
the affirmative vote of a majority of the votes of the shares entitled to vote
and present in person or by proxy is necessary for approval. Shares represented
by proxies that are
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marked "Abstain" on the proxy card with regard to such other matters, and
proxies that are marked to deny discretionary authority on other matters, will
not be included in the vote total and will have no effect on the outcome of the
vote. Shares held of record by brokers who are prohibited from exercising
discretionary authority for beneficial owners who have not provided voting
instructions (commonly described as "broker non-votes") likewise will not be
included in the vote total and will have no effect on the outcome of the vote.
Shareholders of record who do not have admission tickets will be admitted
upon verification of ownership at the shareholders' admission counter.
Beneficial owners can obtain tickets at the shareholders' admission counter by
presenting evidence of holdings such as a bank or brokerage firm account
statement.
A shareholder receiving more than one copy of U S WEST's Annual Report to
Shareholders may stop mailing of the duplicate copies by marking the designated
box on the proxy card for selected accounts. This helps reduce the expense of
printing and mailing duplicate materials but will not affect the mailing of
dividend checks, special notices, proxy materials and dividend reinvestment
statements.
BOARD OF DIRECTORS MEETINGS
Regular meetings of the Board take place six times during the year and
special meetings are scheduled as necessary. The Board held nine meetings in
1996. No incumbent Director attended fewer than 75 percent of the aggregate of
the total number of meetings of the Board and all Committees of the Board on
which the Director served. In addition to attending Board and Committee
meetings, Directors meet their responsibilities by participation in
informational sessions, informal consultations, and communication with members
of management on matters affecting U S WEST.
COMMITTEES
The Board has established the following standing Committees:
AUDIT COMMITTEE
The Audit Committee held four meetings in 1996. The Committee members are
Mr. Gilmour (Chair), Mr. Grieve, Ms. Nelson, and Mr. Jacobson. The Audit
Committee's purpose is to oversee U S WEST's accounting and financial reporting
policies and practices and to assist the Board in fulfilling its fiduciary and
corporate accountability responsibilities. U S WEST's internal auditors and
independent certified public accountants periodically meet with the Audit
Committee and have unrestricted direct access to the Audit Committee members.
BOARD AFFAIRS COMMITTEE
The Board Affairs Committee held two meetings in 1996. The Committee members
are Mr. Grieve (Chair), Ms. Diaz-Oliver, Mr. Jacobson, and Ms. Nelson. The
Committee serves as a nominating committee for the Board, evaluates the
effectiveness of the Board, makes recommendations regarding Board compensation
and Committee structure and composition, and oversees corporate governance. This
Committee will consider candidates for the Board recommended by shareholders if
the names and qualifications of such candidates are submitted in writing to the
Secretary of U S WEST, Inc., 7800 East Orchard Road, Suite 200, Englewood,
Colorado 80111.
CORPORATE DEVELOPMENT AND FINANCE COMMITTEE
The Corporate Development and Finance Committee held three meetings in 1996.
The Committee members are Mr. Jacobson (Chair), Mr. Gilmour, Mr. Grieve, and Mr.
Williams. The Committee is responsible for evaluating Company growth strategies
and financing for the Company's operations.
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HUMAN RESOURCES COMMITTEE
The Human Resources Committee held seven meetings in 1996. The Committee
members are Mr. Dove (Chair), Mr. Popoff, Ms. Diaz-Oliver, and Mr. Williams. The
Human Resources Committee is responsible to assure the appropriateness of the
compensation and benefits of the Executive Officers of U S WEST and its
subsidiaries and to provide for the orderly succession of management.
PUBLIC POLICY COMMITTEE
The Public Policy Committee held two meetings in 1996. The Committee members
are Ms. Diaz-Oliver (Chair), Ms. Nelson, Mr. Dove, and Mr. Popoff. The Committee
is responsible for reviewing public policy issues generally.
TRUST INVESTMENT COMMITTEE
The Trust Investment Committee held two meetings in 1996. The Committee
members are Mr. Popoff (Chair), Mr. Dove, Mr. Gilmour, and Mr. Williams. The
Committee is responsible for overseeing the administration of the Company's
trust funds for the benefit of the fund beneficiaries.
COMPENSATION OF DIRECTORS
To attract and retain exceptionally qualified Directors, the Company offers
a competitive Director compensation package, with a strategic mix of elements
weighted toward equity ownership to align the interests of Directors with the
long-term interests of shareholders. The Company considers equity ownership a
powerful influence to put decision-making in close contact with shareholder
interests and focus attention on directing the Company as owners. The remaining
compensation components consist of cash and non-cash benefits, described below.
The Board has completed a thorough review of the best practices for director
compensation from several nationally recognized sources and has determined that
the Company's policies follow the spirit of those practices.
Non-employee Directors receive an annual retainer of $30,000 and a fee of
$1,200 for attendance at each Board or Committee meeting. For multi-day
meetings, non-employee Directors receive a fee of $1,200 per day. For additional
service as Committee chairs, the chairpersons of the Audit, Human Resources and
Corporate Development & Finance Committees receive an annual retainer of $4,500
and the chairpersons of the Public Policy, Trust Investment and Board Affairs
Committees receive an annual retainer of $3,500.
Directors may elect to defer receipt of all or part of their retainers and
Committee fees in stock or in cash. Deferred amounts that otherwise would be
payable in common stock are credited, in evenly divided proportions of
Communications Stock and Media Stock, in an account as "phantom" stock units,
the value of which rises and falls with the price of Communications Stock and
Media Stock. Additional stock units are credited to the account when a dividend
is declared on the Company's common stock. Cash payments so deferred earn
interest, compounded quarterly, at a rate equal to the average interest rate for
ten-year United States Treasury notes for the previous quarter.
From time to time, on appropriate occasions, Directors are asked to
participate in informational sessions or informal consultations regarding
Company developments or otherwise to assist the Company with special projects or
other business matters with which they have expertise. For such sessions or
consultations of significant duration, Directors are compensated with a fee of
$1,200. Directors routinely participate in informational sessions and
consultations of shorter duration without any separate compensation.
Under the terms of the 1994 Stock Plan approved by shareholders (the "Stock
Plan"), Directors receive 400 shares of Communications Stock and 400 shares of
Media Stock in each of their first five years of service. They also receive
annual grants of 3,000 stock options for each class of common stock. These
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options have value for Directors only if the price of the Company's stock
appreciates from the date of the option grant.
Non-employee Directors who serve a minimum of five credited years on the
Board (or one year, in the event of a change of control of the Company) are
entitled to a retirement benefit equal in value to the amount of their
final-year retainer multiplied by the lesser of ten or their number of years of
service on the Board paid in ten annual installments, or at the Director's
discretion, a lesser number of annual installments discounted appropriately or a
lump sum.
Any Director who is an employee of U S WEST or one of its subsidiaries
receives no compensation for serving as a Director.
SECURITIES OWNED BY MANAGEMENT
The following table sets forth beneficial ownership of shares of
Communications Stock and Media Stock by each Director, each named Executive
Officer, and all Directors and Executive Officers as a group as of March 4,
1997. These shares represent less than one percent of either class of
outstanding common stock.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------------------------------------------------
COMMUNICATIONS STOCK MEDIA STOCK
-------------------------------- ---------------------------------
SHARES SUBJECT SHARES SUBJECT
TO OPTIONS* TO OPTIONS*
TOTAL NUMBER (INCLUDED IN TOTAL NUMBER (INCLUDED IN
OF SHARES TOTAL) OF SHARES TOTAL)
------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Remedios Diaz-Oliver................ 9,400 5,400 9,400 5,400
Grant A. Dove....................... 8,000 5,400 8,000 5,400
Allan D. Gilmour.................... 9,359 5,400 9,473 5,400
Michael P. Glinsky(1)............... 500 0 500 0
Pierson M. Grieve................... 7,400 5,400 7,400 5,400
Allen R. Jacobson................... 10,862(2) 5,400 10,862(2) 5,400
Charles M. Lillis................... 39,477 11,000 285,988 164,996
Richard D. McCormick................ 454,459(3) 216,625 616,915(4) 355,287
Marilyn Carlson Nelson.............. 7,200 5,400 17,200 5,400
Frank Popoff........................ 7,700 5,400 7,700 5,400
Charles P. Russ III................. 57,596 41,825 125,583 74,998
Solomon D. Trujillo................. 110,775 65,145 130,205 91,054
Jerry O. Williams................... 7,600 5,400 7,600 5,400
All Directors and Executive Officers
(as a group)....................... 757,437 391,072 1,289,538 758,815
</TABLE>
- ------------------------------
* Shares subject to acquisition through exercise of stock options within 60
days.
(1) Mr. Glinsky recently joined the Company in April, 1996.
(2) Includes 3,462 shares subject to shared voting and investment power.
(3) Includes 95,351 shares subject to shared voting and investment power.
(4) Includes 95,264 shares subject to shared voting and investment power.
ELECTION OF DIRECTORS (ITEM A ON PROXY CARD)
Pursuant to the Certificate of Incorporation of U S WEST, the Board consists
of three classes of Directors. Each class of Directors is subject to election by
shareholders every three years. Any Director appointed by the Board between
annual meetings is subject to election by shareholders at the following annual
meeting. The Board has adopted a policy that requires Directors to retire at the
annual meeting following the Director's 72nd birthday.
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<PAGE>
Unless otherwise instructed, proxies will be voted for the election of the
three nominees listed below. If a shareholder returning a proxy does not wish
shares to be voted for particular nominees, the shareholder must so indicate in
the space provided on the proxy card.
If one or more of the nominees becomes unavailable or unable to serve by the
time of the Annual Meeting, the shares to be voted for such nominee or nominees
that are represented by proxies will be voted for any substitute nominee or
nominees designated by the Board or, if none, the size of the Board will be
reduced. The Board knows of no reason why any of the nominees would be
unavailable or unable to serve at the time of the Annual Meeting.
A brief listing of the principal occupations, other primary affiliations and
ages of the three nominees for election as Directors, and all other Directors
follows.
NOMINEES FOR ELECTION AS DIRECTORS IN CLASS III
(THE TERM OF THIS CLASS OF DIRECTORS EXPIRES AT THE 2000 ANNUAL MEETING OF
SHAREHOLDERS)
ALLAN D. GILMOUR, retired. Vice Chairman of Ford Motor Co. from 1993 to
1995; Executive Vice President of Ford Motor Co. and President, Ford Automotive
Group, from 1990 to 1993; Executive Vice President, Corporate Staffs, from 1989
to 1990; Executive Vice President, International Automotive Operations, from
1987 to 1989. Director of The Dow Chemical Company, DTE Energy Company, The
Prudential Insurance Company of America and Whirlpool Corporation. Director of U
S WEST since 1992. Age 62.
FRANK POPOFF, Chairman of The Dow Chemical Company since 1992 and Chief
Executive Officer from 1987 to 1995. Director of American Express Company,
Chemical Financial Corporation and United Technologies Corporation. Director of
U S WEST since 1993. Age 61.
JERRY O. WILLIAMS, President and Chief Executive Officer of Grand Eagle
Companies, Inc., since May, 1992. Chairman of the Board of The Monotype
Corporation Plc. from December, 1990 to May, 1992; Managing Director from
January, 1990 to May, 1992. Director of ECRM Inc. and Monotype Typography, Inc.
Director of U S WEST since 1988. Age 58.
DIRECTORS IN CLASS I
(THE TERM OF THIS CLASS OF DIRECTORS EXPIRES AT THE 1998 ANNUAL MEETING OF
SHAREHOLDERS)
REMEDIOS DIAZ-OLIVER, President and Chief Executive Officer of All American
Containers, Inc. since November 1991. Chief Executive Officer and President of
American International Containers, Inc., from 1990 to October 1991; Chief
Executive Officer and Executive Vice President from 1977 to 1990. Director of
Avon Products, Inc., Barnett Banks, Inc., American Cancer Society, Hamilton
Foundation, Infants in Need, Jackson Memorial Foundation, National Hispanic
Leadership Agenda, and University of Miami School of Medicine. Director of U S
WEST since 1988. Age 58.
GRANT A. DOVE, Managing Partner of Technology Strategies and Alliances since
1992. Executive Vice President of Texas Instruments from 1982 to 1987. Director
of Control Data Systems Incorporated, Cooper Cameron Corporation, Control
Systems International, Inc., Forefront Group, Inc., InterVoice, Inc.,
Microelectronics and Computer Technology Corporation, and Netspeed, Inc.
Director and Chairman of Optek Technology, Inc. Director of U S WEST since 1988.
Age 68.
ALLEN F. JACOBSON, retired. Chairman and Chief Executive Officer of
Minnesota Mining & Manufacturing Company from 1986 to 1991. Director of Abbott
Laboratories, Deluxe Corporation, Minnesota Mining & Manufacturing Corporation,
Mobil Corporation, Northern States Power Company, Potlatch Corporation, The
Prudential Insurance Company of America, Sara Lee Corporation, Silicon Graphics,
Inc., and Valmont Industries, Inc. Director of U S WEST since 1983. Age 70.
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DIRECTORS IN CLASS II
(THE TERM OF THIS CLASS OF DIRECTORS EXPIRES AT THE 1999 ANNUAL MEETING OF
SHAREHOLDERS)
PIERSON M. GRIEVE, retired. Chairman of the Board and Chief Executive
Officer of Ecolab, Inc. from 1983 through 1995. Director of Danka Business
Systems PLC, Meredith Corporation, Norwest Corporation, and St. Paul Companies.
Director of U S WEST since 1990. Age 69.
RICHARD D. MCCORMICK, Chairman of the Board since May 1992; President and
Chief Executive Officer since 1991; President and Chief Operating Officer from
1986 to 1991. Director of Norwest Corporation and UAL, Inc. Director of U S WEST
since 1986. Age 56.
MARILYN CARLSON NELSON, Vice Chair of Carlson Holdings, Inc. since 1991;
Senior Vice President, 1988 to 1991. Director of Exxon Corporation, the First
Bank System, Inc. and Carlson Companies, Inc. Director of U S WEST since 1993.
Age 57.
------------------------
RATIFICATION OF APPOINTMENT OF AUDITORS (ITEM B ON PROXY CARD)
The Board, upon recommendation of the Audit Committee, has appointed the
firm of Arthur Andersen LLP, Certified Public Accountants, as independent
auditors to make an examination of the accounts of U S WEST for calendar year
1997. THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" RATIFICATION OF THIS
APPOINTMENT.
Coopers & Lybrand L.L.P. served as the Company's independent auditor, and
Arthur Andersen LLP served as the primary auditing firm for major subsidiaries
of U S WEST Media Group, from 1984 to 1995. In view of the targeted stock
structure that the Company adopted in 1995, the Company determined, following a
recommendation of the Audit Committee, that it is more efficient and effective
for the Company to have a single firm perform the auditing function for the
entire business.
During the Company's fiscal years ended December 31, 1995 and December 31,
1994, the reports of Coopers & Lybrand L.L.P. on the Company's financial
statements contained no adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting principles.
In addition, during such fiscal years and the interim periods thereafter: (1) no
disagreements with Coopers & Lybrand L.L.P. occurred on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Coopers &
Lybrand L.L.P., would have caused it to make reference to the subject matter of
the disagreement in connection with its report on the Company's financial
statements; (2) no reportable events involving Coopers & Lybrand L.L.P. occurred
that must be disclosed under applicable securities laws; and (3) the Company did
not consult with Arthur Andersen LLP on items that concerned the application of
accounting principles to a specific transaction, either completed or proposed,
or on the type of audit opinion that might be rendered on the Company's
financial statements.
Representatives of Arthur Andersen LLP are expected to be present at the
Annual Meeting. They will have the opportunity to make a statement if they
desire, and will be available to respond to questions.
------------------------
PROPOSAL TO APPROVE AN AMENDMENT TO THE U S WEST COMMUNICATIONS GROUP LONG-TERM
INCENTIVE PLAN (ITEM C ON PROXY CARD)
The U S WEST Communications Group Long-Term Incentive Plan (the "LTIP")
provides key executives of U S WEST Communications Group and the Company with an
opportunity to earn incentive compensation based on the sum of regular cash
dividends, if any, paid on Communications Stock, and the achievement of
pre-established, objective performance goals. Under the terms of the LTIP, which
shareholders approved in 1996, the Human Resources Committee may assign up to
200,000 Dividend Equivalent Units ("DEUs") in any performance period to any
eligible participant. At the conclusion of multi-year performance periods,
participants are eligible to receive a percentage of their respective DEUs
multiplied
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by the aggregate value of any dividends paid during the performance period on
one share of Communications Stock. The percentage, which currently may not
exceed 100% (the "Performance Percentage"), is determined by reference to a
performance formula that is based on several criteria, including a selected
combination of financial results, revenue, productivity and efficiency measures,
customer service, employee and management satisfaction.
To provide incentives under the LTIP for continuous improvement in cases
where participants achieve 100% of targeted performance levels, the Board
recommends to shareholders an amendment to the LTIP that increases the maximum
number of DEUs that may be granted to a participant in any performance period to
500,000, and increases the maximum Performance Percentage to 150%. The amendment
also adds stock performance to the criteria that may be included in the LTIP's
performance formula. This addition to the formula further enhances the
performance targets against which participants are measured to the ultimate
benefit of shareholders. These changes, which would apply to performance periods
that begin in 1997 or afterwards, will further encourage participants to perform
and achieve at their highest possible levels, and possibly beyond the targets
set by the Human Resources Committee. Performance at such levels would benefit
the Company as well as holders of Communication Stock through additional
long-term value creation, and the Board believes that performance above and
beyond targeted achievement levels should be encouraged and recognized with an
opportunity for additional compensation. The Board also recommends to
shareholders an amendment to the LTIP that modifies the circumstances under
which future LTIP amendments would come before shareholders for a vote. Like the
comparable section of the Stock Plan described below, the amendment section of
the LTIP is based on the previously effective terms of former Rule 16b-3 under
the Securities Exchange Act of 1934. In 1996, the Securities and Exchange
Commission adopted amendments to Rule 16b-3 that, among other things, enable the
Board to amend compensation plans. This recent change to that rule now enables
the Company to have the flexibility to amend the LTIP from time to time with
Board approval, except in circumstances described below. While this amendment
facilitates the ability of the Board to adopt plan amendments in its discretion,
shareholder approval of plan amendments will be retained in certain instances.
Shareholders will continue to vote on any amendment that increases the number of
shares of Communications Stock that may be issued under the LTIP. The current
limitation is 1.3 million shares over the life of the LTIP. Shareholders also
will approve amendments in certain other instances. For example, under Section
162(m) of the Internal Revenue Code and the regulations thereunder, compensation
paid to covered employees in excess of $1,000,000 is not eligible for tax
deduction by the Company unless certain conditions are satisfied. If the Company
sought to increase the number of DEUs that could be granted to an executive
officer and intended to deduct the compensation attributable to the additional
DEUs, such conditions would require, among other things, that the Company's
shareholders approve an amendment to the LTIP setting forth the maximum number
of DEUs that could be granted under the LTIP.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THIS PLAN AMENDMENT.
------------------------
PROPOSAL TO APPROVE AN AMENDMENT TO THE U S WEST 1994 STOCK PLAN
(ITEM D ON PROXY CARD)
The U S WEST 1994 Stock Plan is a shareholder-approved means of affording
certain eligible employees, executive officers, Directors and certain outside
advisors with an opportunity to acquire a proprietary interest in the Company.
Through grants of stock options, restricted and unrestricted stock and other
instruments, the Stock Plan aligns the financial interests of participants with
those of shareholders, and provides participants with a strong incentive to
maximize shareholder value. The maximum number of shares that may be granted in
any calendar year under the Stock Plan is nine-tenths of one percent (0.90%) and
three-quarters of one percent (0.75%), respectively, of the Communications Stock
and Media Stock outstanding on the first day of that calendar year, though in
the event that fewer than the full number of shares of either class available
for issuance in any calendar year is issued in that year, the shares not issued
are added to the shares of that class available for issuance in any subsequent
year or years.
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The Stock Plan currently provides that, while the Board of Directors may
amend the Stock Plan from time to time without shareholder approval, the Board
will not amend the Stock Plan to materially (i) modify the requirements as to
eligibility for participation of executive officers or Directors in the Stock
Plan, (ii) increase the number of stock awards (including common stock, stock
options, stock appreciation rights, and other stock-based awards under the Stock
Plan) that may be issued to executive officers or Directors, or (iii) increase
the benefits accruing to executive officers or Directors. The Stock Plan's
provision for shareholder approval of certain amendments is based on the
previously effective terms of the Securities and Exchange Commission's former
Rule 16b-3 under the Securities Exchange Act of 1934. In 1996, the Securities
and Exchange Commission adopted amendments to Rule 16b-3 that, among other
things, enable these sorts of plan amendments to be approved by the Board. This
recent change in the law will allow the Company to have the flexibility to amend
the Stock Plan from time to time with Board approval, except in certain
circumstances described below. This added flexibility should help maintain the
Company's competitiveness by facilitating its ability to respond quickly to
changes in the marketplace for executive talent. For these reasons, the Board
recommends to shareholders an amendment to the Stock Plan that modifies the
circumstances under which future plan amendments would come before shareholders
for a vote. Pursuant to this amendment, the Board will have the authority,
subject to limitations described below, to adopt amendments to the Stock Plan
without putting the matter to a vote by shareholders. While this amendment
facilitates the ability of the Board to adopt plan amendments in its discretion,
shareholder approval of plan amendments will be retained in certain instances.
Under the terms of the amendment, shareholders will continue to vote on any
amendment that either increases the number of shares that may be issued under
the Stock Plan in any calendar year or allows for any issuance of stock options
at a price below market value on the date of grant. Shareholders also will
continue to vote in other instances. For example, under Section 162(m) of the
Internal Revenue Code and the regulations thereunder, compensation paid to
covered employees in excess of $1,000,000 is not eligible for a tax deduction by
the Company unless certain conditions are satisfied. If the Company sought to
increase the number of stock options that could be granted to an executive
officer or Director under the Stock Plan and intended to deduct the compensation
attributable to the additional stock options, such conditions would require,
among other things, that the Company's shareholders approve an amendment to the
Stock Plan setting forth the maximum number of shares subject to stock options
that an individual could receive under the Stock Plan. Likewise, the Internal
Revenue Code requires that incentive stock options be granted under a
shareholder-approved plan that sets forth the maximum number of shares that may
be issued as incentive stock options and the individuals who are eligible to
receive incentive stock options. Any addition to the Stock Plan's existing
limitations on incentive stock options would also remain an amendment subject to
shareholder approval.
THE BOARD RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THIS PLAN AMENDMENT.
SHAREHOLDER PROPOSALS
Shareholder proponents have notified the Company of their intent to present
the following proposals and supporting statements at the Annual Meeting. The
adoption of either of the proposals would constitute a recommendation to the
Board and would not, in itself, cause the implementation of the action or policy
called for by the proposal.
SHAREHOLDER PROPOSAL (ITEM 1 ON THE PROXY CARD)
Evelyn Y. Davis, Watergate Office Building, 2600 Virginia Avenue, N.W.,
Suite 215, Washington, D.C. 20037, owning of record 120 shares of Communications
Stock and 120 shares of Media Stock, has given notice that she intends to
present at the Annual Meeting the following resolution:
"RESOLVED: That the shareholders of U S WEST recommend that the Board of
Directors take the necessary steps to institute the election of directors
ANNUALLY, instead of the stagger system as is now provided."
8
<PAGE>
"REASONS: The great majority of New York Stock Exchange listed
corporations elect all their directors each year."
"This ensures that ALL directors will be more accountable to ALL
shareholders each year and to a certain extent prevents the
self-perpetuation of the Board."
"Last year the owners of 249,077,043 shares, representing approximately
44.1% of shares VOTING, voted FOR this proposal."
"If you AGREE, please mark your proxy FOR this resolution."
THIS PROPOSAL HAS BEEN SUBMITTED AT EACH OF THE PAST EIGHT ANNUAL MEETINGS
AND EACH TIME HAS BEEN DEFEATED. THE BOARD AGAIN HAS CONSIDERED THE PROPOSAL AND
AGAIN RECOMMENDS THAT SHAREHOLDERS VOTE "AGAINST" IT.
The Board believes that the election of Directors by classes enhances the
likelihood of continuity and stability in the Board and its policies. When
Directors are elected by classes, a change in the composition of a majority of
the Board normally requires at least two shareholder meetings, instead of one.
Board classification also encourages any person seeking to acquire control of U
S WEST to initiate such an action through arm's length negotiations with
management and the Board, who are in a position to negotiate a transaction that
is fair to all shareholders of U S WEST. With a classified Board, it is more
likely that a majority of the Directors of U S WEST will have prior U S WEST
Board experience, which will continue to facilitate planning for the business of
U S WEST.
SHAREHOLDER PROPOSAL (ITEM 2 ON THE PROXY CARD)
Mr. John J. Gilbert and Mrs. Margaret R. Gilbert, 29 East 64th Street, New
York, New York, 10021-7043, owners, executors of estates holding, and
co-trustees of family trusts owning of record approximately 1060 shares of
Communications Stock and 801 shares of Media Stock; Mr. Allan Frank, 6882 East
Center Ave., Denver, Colorado, 80224-1503, owner of record of 308 shares each of
Communications Stock and Media Stock; Mr. Gerald Armstrong, P.O. Box 18546,
Capitol Hill Station, Denver, Colorado 80218, owner of record of 20 shares each
of Communications Stock and Media Stock; and Mr. Edward Rudy and Mrs. Edith
Rudy, Box 7077, Yorkville Station, New York, New York 10126, owners of record of
366 shares of Communications Stock and 348 shares of Media Stock, have given
notice that they intend to present at the Annual Meeting the following
resolution:
"RESOLVED: That the stockholders of U S WEST, Inc., assembled in annual
meeting in person and by proxy, hereby request the Board of Directors to
take the steps necessary to provide for cumulative voting in the election of
directors, which means each stockholder shall be entitled to as many votes
as shall equal the number of shares he or she owns multiplied by the number
of directors to be elected, and he or she may cast all of such votes for a
single candidate, or any two or more of them as he or she may see fit."
"REASONS: Continued strong support along the lines we suggest were shown
at the 1995 annual meeting, when 22.28%, or owners of 78,453,655 shares,
were cast in favor of this proposal. The vote against included 54,182,052
unmarked proxies."
"A California law provides that all state pension holdings and state
college funds invested in shares must be voted in favor of cumulative voting
proposals, showing increasing recognition of the importance of this
democratic means of electing directors."
"Both target stocks have declined in market value. Also, no dividend
increases have occurred in four years. Accordingly, Media Group may benefit
by having its own directors on the Board, which can be accomplished only
with cumulative voting. Some of the Board members and officers of U S WEST
and its subsidiaries are elected through cumulative voting on other boards.
We believe that cumulative voting is the answer to find more new directors."
9
<PAGE>
"The National Bank Act provides for cumulative voting. In many cases
companies get around it by forming holding companies without cumulative
voting. Banking authorities have the right to question the capability of
directors to be on banking boards. In many cases authorities come in after
and say the director or directors were not qualified. We were delighted to
see that the SEC has finally taken action to prevent bad directors from
being on boards of public companies. The SEC should have hearings to prevent
such persons from becoming directors before they harm investors."
"Many successful companies have cumulative voting. For example, Pennzoil
defeated Texaco in that famous case. Ingersoll-Rand, also having cumulative
voting, won two awards. FORTUNE magazine ranked it second in its industry as
'America's Most Admired Corporations,' and the WALL STREET TRANSCRIPT noted,
'on almost any criteria used to evaluate management, Ingersoll-Rand
excels.' "
"Lockheed-Martin, as well as VWR Corporation, now has a provision that
if anyone has 40% or more of the shares then cumulative voting applies."
"Alleghany Power System tried to take away cumulative voting, as well as
put in a stagger system, and stockholders defeated it, showing stockholders
are interested in their rights."
"If you agree, please mark your proxy for this resolution; otherwise it
is automatically cast against it, unless you have marked to abstain."
THIS PROPOSAL WAS SUBMITTED AT THREE OF THE LAST FOUR ANNUAL MEETINGS AND
WAS SOUNDLY DEFEATED EACH TIME. THE BOARD OF DIRECTORS HAS AGAIN CONSIDERED THE
PROPOSAL AND AGAIN RECOMMENDS THAT SHAREHOLDERS VOTE AGAINST IT.
Currently, each Director of U S WEST is elected by the holders of a majority
of the U S WEST shares represented and voting at a meeting of shareholders. This
method reflects the widely-held approach that Directors should be elected for
their willingness and ability to serve all shareholders. The Board of Directors
believes that cumulative voting can result in the election of Directors by a
relatively small group of shareholders. Such Directors tend to represent special
interests of the small group that elected them. This partisanship among
Directors voting on behalf of special interests could interfere with the
effectiveness of the Board and thus be contrary to the interests of U S WEST and
its shareholders as a whole.
Further, as stated in U S WEST's October 31, 1995 Proxy Statement to
implement the targeted stock structure, "a board of directors owes an equal duty
to all stockholders regardless of class or series." The proponents' suggestion
that "Media Group may benefit by having its own directors on the Board" exposes
the special interest nature of the proposal and misunderstands the fiduciary
obligation of each Board member to act in the best interests of the Company's
shareholders as a whole.
10
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION --------------------------------------------
--------------------------------- SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/SARS LTIP
SALARY COMPEN- AWARD(S) -------------------- PAYOUTS
NAME AND PRINCIPAL POSITION YEAR ($) BONUS ($) SATION ($) ($) CLASS (#)(3) ($)(4)
- -------------------------------- --------- --------- --------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RICHARD D. MCCORMICK 1996 $ 760,000 $1,100,000 $ 19,113 $ -- M 153,500 $ --
President, CEO and C 211,736
Chairman of the Board 1995 $ 760,000 $ 450,000 $ 22,865 $ -- U 140,000 $2,083,292
1994 $ 700,000 $ 560,000 $ 27,527 $ -- U 100,000 $ --
CHARLES M. LILLIS 1996 $ 548,846 $ 458,500 $ 1,059 $ -- M 143,150 $ --
Executive Vice President, C 33,000
U S WEST & President 1995 $ 490,000 $ 375,000 $ 632 $ 100,800(2) U 100,000 $1,488,098
and CEO, U S WEST 1994 $ 453,333 $ 295,000 $ 14,380 $ -- U 55,000 $ --
Media Group
SOLOMON D. TRUJILLO 1996 $ 432,477 $ 383,500 $ 15,029 M 56,650 $ --
Executive Vice President, C 113,461
U S WEST & President 1995 $ 342,500 $ 300,000 $ 10,468 U 130,000 $ 976,441
and CEO, U S WEST C 8,049
Communications Group 1994 $ 289,583 $ 170,000 $ 4,796 $ 428,750(2) U 25,000 $ --
CHARLES P. RUSS, III 1996 $ 399,423 $ 285,800 $ 4,459 M 46,250 $ --
Executive Vice President-- C 38,502
Law, Public Policy and 1995 $ 370,000 $ 180,000 $ 15,050 U 40,000 $ 892,847
Human Resources, C 4,160
General Counsel and Secretary 1994 $ 361,667 $ 170,000 $ 2,578 $ -- U 25,000 $ --
MICHAEL P. GLINSKY(1) 1996 $ 276,923 $ 285,800 $ 111 M 46,250 $ --
Executive Vice President and C 28,000
Chief Financial Officer
<CAPTION>
ALL OTHER
COMPEN-
SATION
NAME AND PRINCIPAL POSITION ($)(5)
- -------------------------------- ------------
<S> <C>
RICHARD D. MCCORMICK $ 54,049
President, CEO and
Chairman of the Board $ 68,182
$ 35,612
CHARLES M. LILLIS $ 67,635
Executive Vice President,
U S WEST & President $ 31,156
and CEO, U S WEST $ 27,067
Media Group
SOLOMON D. TRUJILLO $ 45,458
Executive Vice President,
U S WEST & President $ 29,491
and CEO, U S WEST
Communications Group $ 30,538
CHARLES P. RUSS, III $ 30,644
Executive Vice President--
Law, Public Policy and $ 26,241
Human Resources,
General Counsel and Secretary $ 29,381
MICHAEL P. GLINSKY(1) $ 304,549
Executive Vice President and
Chief Financial Officer
</TABLE>
- ------------------------------
* U = U S WEST, Inc. Common Stock
C = Communications Stock
M = Media Stock
NOTE: On October 31, 1995, the shareholders of U S WEST approved the
reincorporation from Colorado to Delaware and the creation of two classes of
common stock, Communications Stock and Media Stock, which are intended to
reflect separately the performance of the Company's communications and
multimedia businesses. Options granted on or after the effective date, November
1, 1995, are options in either Communications Stock or Media Stock. Options
outstanding prior to November 1, 1995, were reclassified as one option each of
Communications Stock and Media Stock. The exercise price of these reclassified
options is based on the weighted closing price of Communications Stock and Media
Stock as of November 1, 1995, which on a combined basis equals the full exercise
price of the original option.
(1) Mr. Glinsky was elected Executive Vice President and Chief Financial Officer
effective April 15, 1996.
(2) Mr. Lillis received 5,600 shares of Media Stock in November, 1995, subject
to a two-year restriction on sale or transferability. Mr. Trujillo received
10,000 shares of U S WEST common stock in February, 1994, subject to
restrictions on sale or transferability that lapse on one quarter of such
shares on the first through the fourth anniversaries of the grant date of
such shares.
(3) A portion of the 1996 Media Stock options were granted in 1997 for
performance in 1996. The applicable portions for Messrs. McCormick, Lillis,
Trujillo, Russ and Glinsky are 28,500, 18,150, 15,650, 11,250 and 11,250,
respectively.
(4) Yearly payouts of restricted shares, if any, under the now-expired Executive
Long-Term Incentive Plan were determined by the total shareholder return
achieved by the Company over a six-year performance period that ended in
1996. As a result of the Company's negative total shareholder return in
1996, no shares of restricted stock were paid to participants. In 1995,
total shareholder return was sufficiently positive to offset the negative
total shareholder return of 1994 and still permit a payout of shares to
participants. Messrs. McCormick, Lillis, Trujillo, and Russ, respectively,
received 36,710, 26,222, 17,206, and 15,733 shares each of Communications
Stock and Media Stock as a result of the total shareholder return in 1995.
All of the shares paid for 1995 are subject to a two-year restriction period
on sale or transferability, measured from the date of issuance, and all such
shares shall be entitled to dividends, if any, paid during such restriction
period. At December 31, 1996, Messrs. McCormick,
11
<PAGE>
Lillis, Trujillo, Russ, and Glinsky, respectively, held 36,710, 26,222,
17,206, 15,733 and 0 restricted shares of Communications Stock, and 36,710,
26,222, 17,206, 15,733 and 0 restricted shares of Media Stock. At December
31, 1996, the aggregate value of all shares of restricted stock held by
Messrs. McCormick, Lillis, Trujillo, Russ and Glinsky, respectively, was
$1,226,695, $1,430,389, $1,124,179, $796,483 and $0.
(5) The amounts in this column are attributable to (1) the Company matching
contribution under the Deferred Compensation Plan, (2) the Company matching
contribution under the SP/E, (3) the current dollar value of the remainder
of the premium paid under a split-dollar insurance arrangement, and (4) the
amount paid for the term insurance portion of the foregoing split-dollar
arrangement. The separate components of these amounts are set forth below.
In April, 1996, upon his employment with the Company, Mr. Glinsky received a
one-time cash payment of $204,250.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------
DEFERRED
COMPENSATION SAVINGS PLAN SPLIT-DOLLAR TERM PORTION
NAME COMPANY MATCH COMPANY MATCH PREMIUM VALUE PREMIUM
- -------------------------------- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Richard D. McCormick............ $ 30,499 $ 7,500 $ 14,505 $ 1,545
Charles M. Lillis............... $ 19,942 $ 7,500 $ 39,159 $ 1,034
Solomon D. Trujillo............. $ 18,148 $ 7,500 $ 19,539 $ 271
Charles P. Russ, III............ $ 12,471 $ 7,500 $ 10,079 $ 594
Michael P. Glinsky.............. $ -- $ -- $ 99,583 $ 711
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------
DEFERRED
COMPENSATION SAVINGS PLAN SPLIT-DOLLAR TERM PORTION
NAME COMPANY MATCH COMPANY MATCH PREMIUM VALUE PREMIUM
- -------------------------------- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Richard D. McCormick............ $ 30,441 $ 7,500 $ 28,826 $ 1,415
Charles M. Lillis............... $ -- $ 7,500 $ 22,831 $ 825
Solomon D. Trujillo............. $ 8,885 $ 7,500 $ 12,886 $ 220
Charles P. Russ, III............ $ 11,000 $ 7,500 $ 7,199 $ 542
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------------------------------------------------
DEFERRED
COMPENSATION SAVINGS PLAN SPLIT-DOLLAR TERM PORTION
NAME COMPANY MATCH COMPANY MATCH PREMIUM VALUE PREMIUM
- -------------------------------- ----------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
Richard D. McCormick............ $ 26,826 $ 7,500 $ -- $ 1,286
Charles M. Lillis............... $ 15,195 $ 7,188 $ 4,051 $ 633
Solomon D. Trujillo............. $ 11,022 $ 7,324 $ 12,000 $ 192
Charles P. Russ, III............ $ 10,583 $ 7,500 $ 10,814 $ 484
</TABLE>
12
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted to the
named Executive Officers during 1996. The Company employed the Black-Scholes
option pricing model to develop the theoretical values set forth under the
"Grant Date Present Value" column. These stock options comprise a portion of the
named Executive Officers' total long-term compensation potential. As such, the
issued amounts are consistent with the Company's compensation philosophy as
outlined in the Report of the Human Resources Committee on Executive
Compensation, beginning on p. 17.
COMMUNICATIONS STOCK OPTIONS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE GRANT DATE
SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE VALUE ($)
- ---------------------------------------------- ------------ ---------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Richard D. McCormick.......................... 100,000 2.94% $ 30.625 3/15/06 $ 350,161(3)
14,771(2) 0.43% $ 35.625 12/1/99 $ 58,047(4)
26,424(2) 0.78% $ 35.625 1/5/01 $ 110,389(4)
43,733(2) 1.29% $ 35.625 11/7/01 $ 188,994(4)
26,808(2) 0.79% $ 35.625 1/4/03 $ 120,080(4)
Charles M. Lillis............................. 33,000 0.97% $ 30.625 3/15/06 $ 115,553(3)
Solomon D. Trujillo........................... 100,000 2.94% $ 30.625 3/15/06 $ 350,161(3)
5,010(2) 0.15% $ 32.125 1/5/01 $ 19,328(4)
8,451(2) 0.25% $ 32.125 1/4/03 $ 34,684(4)
Charles P. Russ, III.......................... 28,000 0.82% $ 30.625 3/15/06 $ 98,045(3)
10,502(2) 0.31% $ 31.875 7/8/02 $ 42,256(4)
Michael P. Glinsky............................ 28,000 0.82% $ 32.875 6/7/06 $ 98,045(3)
</TABLE>
MEDIA STOCK OPTIONS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/ GRANTED TO OR BASE GRANT DATE
SARS EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE VALUE ($)
- ------------------------------------------------ ----------- ---------------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Richard D. McCormick............................ 125,000 2.38% $ 20.500 3/15/06 $ 953,931(5)
Charles M. Lillis............................... 125,000 2.38% $ 20.500 3/15/06 $ 953,931(5)
Solomon D. Trujillo............................. 41,000 0.78% $ 20.500 3/15/06 $ 312,889(5)
Charles P. Russ, III............................ 35,000 0.67% $ 20.500 3/15/06 $ 267,101(5)
Michael P. Glinsky.............................. 35,000 0.67% $ 17.875 6/7/06 $ 267,101(5)
</TABLE>
- ------------------------------
(1) Except as otherwise noted, these stock options become exercisable in
one-third increments on the first, second and third anniversaries of the
date of grant, and include a reload feature. The reload feature gives the
optionee the right to receive a further option, at the then current market
price, for a number of shares equal to the number of shares of stock
surrendered by the optionee in payment of the exercise price of the original
option.
(2) These stock options become fully exercisable one year from the date of
grant and do not include a reload feature.
13
<PAGE>
(3) This value reflects the standard application of the Black-Scholes option
pricing model to options issued on Communications Stock, using the following
assumptions: volatility 19.6%, dividend yield, 7.0%, and a risk-free rate of
return of 6.2% based on options being outstanding for a 4.5 year option
term.
(4) This value reflects the standard application of the Black-Scholes option
pricing model to options issued on Communications Stock, using the following
assumptions: volatility, 19.6%, dividend yield of 6.0% to 6.7%, and a
risk-free rate of return of 5.2% to 6.7% based on the options being
outstanding for a term ranging from 46 months to 84 months.
(5) This value reflects the standard application of the Black-Scholes option
pricing model to options issued on Media Stock, using the following
assumptions: volatility, 28.5%, dividend yield, 0.0%, and a risk-free rate
of return of 6.2% based on the options being outstanding for a 5 year option
term.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
COMMUNICATIONS STOCK OPTIONS
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SHARES OPTIONS/SARS VALUE OF UNEXERCISED
ACQUIRED VALUE AT FY-END (#) IN-THE-MONEY
ON EXERCISE REALIZED -------------------------- OPTIONS/SARS
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. McCormick.......... 150,400 $ 2,101,123 163,221 405,074 $ 1,116,977 $ 1,818,824
Charles M. Lillis............. -- $ -- 63,300 154,670 $ 292,322 $ 1,058,689
Solomon D. Trujillo........... 16,000 $ 151,085 56,937 235,131 $ 290,759 $ 1,072,994
Charles P. Russ, III.......... 2,300 $ 135,836 49,656 90,170 $ 297,907 $ 483,973
Michael P. Glinsky............ -- $ -- -- 28,000 $ -- $ --
</TABLE>
MEDIA STOCK OPTIONS
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED
SHARES OPTIONS/SARS VALUE OF UNEXERCISED
ACQUIRED VALUE AT FY-END (#) IN-THE-MONEY
ON EXERCISE REALIZED -------------------------- OPTIONS/SARS
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------ ----------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Richard D. McCormick.......... -- $ -- 313,621 318,338 $ 827,078 $ 460,394
Charles M. Lillis............. -- $ -- 123,330 246,670 $ 239,067 $ 264,555
Solomon D. Trujillo........... -- $ -- 74,888 162,670 $ 134,023 $ 199,557
Charles P. Russ, III.......... -- $ -- 63,332 86,668 $ 133,741 $ 117,563
Michael P. Glinsky............ -- $ -- -- 35,000 $ -- $ 17,500
</TABLE>
14
<PAGE>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
The following table provides information concerning dividend equivalent
units granted to the five named executive officers during 1996 under the U S
WEST Communications Group Long-Term Incentive Plan. Each dividend equivalent
unit represents the right to receive an amount equal to the cumulative dividends
paid on Communications Stock during a performance period, multiplied by a
percentage representing the extent to which U S WEST Communications Group
achieves certain performance goals based on financial results, revenue,
productivity and efficiency, service and customer care, employee satisfaction,
and stock performance.
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
PERFORMANCE PERIOD NON-STOCK PRICE-BASED PLAN(1)
UNTIL MATURATION -------------------------------------
NAME NUMBER OF UNITS OR PAYOUT THRESHOLD TARGET MAXIMUM
- ---------------------------------------- --------------- ------------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Richard D. McCormick.................... 62,500 1996-1997 0 $ 267,500 $ 267,500
65,500 1996-1998 0 $ 420,510 $ 420,510
Charles M. Lillis....................... 20,500 1996-1997 0 $ 87,740 $ 87,740
21,500 1996-1998 0 $ 138,030 $ 138,030
Solomon D. Trujillo..................... 60,500 1996-1997 0 $ 258,940 $ 258,940
64,500 1996-1998 0 $ 414,090 $ 414,090
Charles P. Russ, III.................... 17,500 1996-1997 0 $ 74,900 $ 74,900
18,500 1996-1998 0 $ 118,770 $ 118,770
Michael P. Glinsky...................... 17,500 1996-1997 0 $ 74,900 $ 74,900
18,500 1996-1998 0 $ 118,770 $ 118,770
</TABLE>
- ------------------------------
(1) Estimated future payouts assume a quarterly dividend rate of $0.535 per
share over each performance period. Any change to the quarterly dividend
rate would vary the payouts, which will be distributed as shares of
Communications Stock.
U S WEST PENSION PLANS
The following table illustrates the maximum estimated annual benefits
payable to the named Executive Officers upon retirement pursuant to the U S WEST
Pension Plans, based upon the pension plan formula for specified final average
annual compensation and specified years of service:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ANNUAL ------------------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40 45
- -------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 500,000................. $ 112,500 $ 160,000 $ 187,500 $ 225,000 $ 262,500 $ 293,750 $ 325,000
600,000................. 135,000 180,000 225,000 270,000 315,000 352,500 390,000
700,000................. 157,500 210,000 262,500 315,000 367,500 411,250 455,000
800,000................. 180,000 240,000 300,000 360,000 420,000 470,000 520,000
900,000................. 202,500 270,000 337,500 405,000 472,500 528,750 585,000
1,000,000................ 225,000 300,000 375,000 450,000 525,000 587,500 650,000
1,100,000................ 247,500 330,000 412,500 495,000 577,500 646,250 715,000
1,200,000................ 270,000 360,000 450,000 540,000 630,000 705,000 780,000
1,300,000................ 292,500 390,000 487,500 585,000 682,500 763,750 845,000
1,400,000................ 315,000 420,000 525,000 630,000 735,000 822,500 910,000
1,500,000................ 337,500 450,000 562,500 675,000 787,500 881,250 975,000
1,600,000................ 360,000 480,000 600,000 720,000 840,000 940,000 1,040,000
1,700,000................ 382,500 510,000 637,500 765,000 892,500 998,750 1,105,000
</TABLE>
15
<PAGE>
The calculation of "final average annual compensation" is the highest
average compensation for 60 consecutive months of the 120 consecutive month
period preceding retirement and includes compensation that would appear under
the "Salary" and "Bonus" columns of the Summary Compensation Table. As of
December 31, 1996, Messrs. McCormick, Lillis, Trujillo, Russ and Glinsky had 35,
11, 22, 4, and 0.75 actual years of service, respectively. Mr. Lillis is
eligible for a variable percentage of his final average annual compensation
(calculated as his highest average compensation over any 60 consecutive-month
period of his employment) based upon his age at retirement, less any amounts
payable under any U S WEST pension plans. The applicable percentage is 35% at
age 55 (his present age), and increases by varying increments from year to
year--i.e., 5% per year through age 58, and approximately 1.5% per year
thereafter. Mr. Russ is also eligible for a variable percentage of his final
average compensation, calculated as his highest average compensation over any 60
consecutive-month period of his employment, less any pension payments by his
former employer and amounts payable under any U S WEST pension plans. The
applicable variable percentage for Mr. Russ is 39% at age 52 (his present age),
and increases by approximately 1.5% per year through age 65. In the event it is
greater, Mr. Russ alternatively may receive $14,000 for each of his first seven
years of service at U S WEST. Mr. Glinsky is eligible for supplemental service
credits under the U S WEST Mid-Career Pension Plan, which has been available to
newly-hired executives who were age 35 or older and met certain eligibility
requirements at the time of their employment. The Company has agreed to credit
Mr. Glinsky with 1 3/4 years of service for each year of service completed.
Benefits set forth in the preceding table are computed as a straight-life
annuity and are subject to deduction for Social Security.
EXECUTIVE AGREEMENTS
U S WEST has entered into change of control agreements with certain of its
officers, including the named Executive Officers. The change of control
agreements provide compensation and/or termination benefits to Executive
Officers under circumstances following a change of control of U S WEST. The
purpose of these agreements is to encourage the Executive Officers to continue
to carry out their duties in the event of a possible change of control. A
"Change of Control" is defined in these agreements as: (i) a change of control
that would have to be reported under Item 6(e) of Schedule 14A of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), regardless of whether the
Company is subject to that reporting requirement; (ii) the acquisition by a
party or certain related parties, directly or indirectly, of securities
representing twenty percent or more of the total voting power of the Company's
then outstanding voting securities; (iii) any period of two consecutive calendar
years during which there shall cease to be a majority of the Board comprised of
individuals who at the beginning of such period constitute the Board and any new
Director(s) whose election by the Board or nomination for election by the
Company's shareholders was approved by a vote of at least two-thirds of the
Directors then still in office who either were Directors at the beginning of the
period or whose election or nomination for election was previously so approved
(and excluding for this purpose any individual whose initial assumption of
office resulted from an actual or threatened proxy contest); (iv) shareholders
of the Company approve a merger, consolidation, sale or other disposition of all
or substantially all of the assets of the Company, unless immediately afterwards
the holders of the Company's voting securities prior thereto hold securities
representing seventy percent or more of the voting power of the then outstanding
voting securities of the Company or other surviving entity and, also immediately
afterwards, no party or certain related parties (other than trustees of employee
benefit plans) hold twenty percent or more of the total voting power of the
Company's then outstanding voting securities, and members of the Company's Board
prior to such transaction constitute more than half of the Company's or other
surviving entity's Board; (v) the shareholders of the Company approve a plan of
complete liquidation or dissolution; (vi) except in limited circumstances, the
Company redeems substantially all shares of either class of common stock in
exchange for shares of a subsidiary that holds the assets attributed to that
class, or it distributes to all shareholders of either class of common stock the
shares of a subsidiary that holds the assets attributable to that class; the
Company converts all shares of
16
<PAGE>
either class of common stock into the other class of common stock; the Company
distributes to shareholders, at a time when only one class of common stock
exists, shares of a subsidiary that holds all or substantially all of the assets
of the Company; or the Company disposes of all or substantially all of the
assets attributed to a particular class of stock, and then distributes the
proceeds of such disposition to the holders of that class of stock; or (vii) any
other event that a majority of the Board, in its sole discretion, deems to be a
change of control. The agreements are effective and are renewed automatically
for three-year periods, and are subject to cancellation by the Board upon not
less than 90 days' notice prior to a three-year renewal. These agreements
provide that, in particular circumstances, the officers will receive certain
benefits upon termination of their employment or if their job duties or
compensation and benefits are reduced or otherwise substantially adversely
modified following a Change of Control. In the case of the Chief Executive
Officer, these benefits will be paid in certain circumstances if he voluntarily
terminates employment following a Change of Control.
Termination benefits, when payable under the agreements, are to be paid
immediately upon termination following a change of control. These benefits
include salary and payments under short- and long-term incentive plans in which
officers participate, which payments are to be calculated in all cases as if a
Change of Control had occurred under such plans. Termination benefits also
consist of three times a sum equal to annual base salary prior to termination,
annual bonus amount under any short-term incentive program in which the officer
participates (calculated at 100% of target unless the percentage actually
achieved is greater than 100%, in which case the higher percentage shall apply),
and the annual long-term incentive grant value under any long-term incentive
program in which the officer participates (calculated at 100% of target). The
Company will gross-up income sufficient to cover any excise taxes incurred in
connection with the benefits paid upon termination. The change of control
agreements also provide for continued health care benefits on terms
substantially similar to those the Company would provide if the officer were
eligible for retiree health care benefits immediately prior to the Change of
Control, and limited perquisites. Upon termination under change of control
agreements, the officer's pension benefits vest immediately if they are not
already vested, and three years are added to both the officer's age and years of
service.
U S WEST has entered into executive severance agreements with certain of its
officers, including the Executive Officers, other than the Chief Executive
Officer. These agreements set forth the severance benefits that would be payable
in certain circumstances other than a change of control, such as a termination
not for cause, termination in connection with a downsizing, or resignation of an
officer who elects not to accept reassignment to a non-comparable position. The
severance benefits payable in such circumstances, following the delivery of a
waiver and release of claims by the Executive Officer, include: (i) an amount
equal to two times base salary; (ii) the amounts that otherwise would be due
under the Executive Short-Term Incentive Plan and any long-term incentive plan,
in each case pro-rated to the date of termination and calculated on the basis of
full achievement of targeted performance levels; and (iii) financial counseling
services, or the cash value thereof, through the year following the year of
termination. The agreements also provide for the lapse of restrictions on
certain grants of common stock issued to the officer, and the accelerated
vesting of a pro-rated portion of the stock options issued to the officer.
Finally, the agreements include provisions for medical, dental and vision
benefits following termination, and provisions to protect confidentiality of
Company information and to arbitrate employment disputes. In the event of a
change of control, the terms of the executive severance agreements will be
superseded by any applicable change of control agreement.
REPORT OF HUMAN RESOURCES COMMITTEE ON EXECUTIVE COMPENSATION
HUMAN RESOURCES COMMITTEE. The Human Resources Committee of the Board (the
"Committee") is composed entirely of independent outside Directors who meet
regularly to oversee compensation levels and benefits plans to ensure that such
levels and plans are appropriately competitive with the marketplace and aligned
with shareholder interests. The Committee submits reports to the full Board
concerning its activities and decisions. None of these non-employee Directors
has interlocking or other relationships with
17
<PAGE>
other boards or the Company that would call into question his or her
independence as a Committee member.
COMPENSATION PHILOSOPHY. The Committee has approved a compensation plan
designed to attract, motivate, and retain the high-caliber executives necessary
to achieve the Company's business strategies. The plan rewards those executives
for building long-term value for Company shareholders. The Company takes an
integrated and managed approach in developing its executive compensation
strategy and programs. This approach balances the overall needs of the Company,
including the unique business strategies and human resources initiatives among U
S WEST, the Communications Group and the Media Group.
Each compensation element supports the Company's mission, values, and
culture. The compensation principles that link the individual elements into an
integrated compensation strategy are as follows: (i) a compensation structure
that directly aligns the executives with the interests and concerns of
shareholders; (ii) competitive compensation within industry and peer companies;
(iii) customized business unit plans that reflect the unique characteristics of
the Company's diversified operations; (iv) individual compensation highly
correlated with personal performance and shareholder value creation; (v)
programs that foster executive movement across the organization; and (vi)
executive development and succession planning programs to provide long-term
organizational strength and flexibility.
The key elements of the Company's executive compensation program are base
salary, annual incentives, and long-term incentive compensation consisting
primarily of stock options and performance-based stock plans. In developing an
executive's total compensation package, the Committee considers each of these
key compensation elements, as well as retirement benefits, insurance, and
limited perquisites.
Overall, the Committee believes that the Company's competitive market for
executive talent is broader than the industry peer groups established to compare
shareholder returns, which are set forth on the accompanying Performance Graphs.
Accordingly, the population of companies surveyed for compensation data extends
beyond the companies included in the peer group indices in the Performance
Graphs.
Total compensation is targeted near industry median benchmarks of surveyed
companies for each component of compensation. Superior performance will result
in above-market compensation delivered through variable-pay components.
Likewise, less than satisfactory performance will result in below-market
compensation.
BASE SALARY. U S WEST has in place a market and performance based salary
structure for its executive employees. Determination of appropriate compensation
is based on level of responsibility, scope and impact of decision-making, and
internal and external comparability. For purposes of comparability and
competitive market pricing, the Company utilizes annual executive compensation
salary surveys prepared by nationally recognized independent compensation
consulting firms. These surveys encompass both the telecommunications and media
industries, as well as surveys of companies of similar size in other industries.
On average, the Company seeks to target executive base salary levels at the
median range of surveyed companies. To facilitate executive movement among U S
WEST, Inc., Communications Group, and Media Group, the Company has established
comparable base salary opportunities across company lines.
Executive salary reviews generally are conducted within a twelve to
twenty-four month cycle. Base salary adjustments may occur at the time of such
reviews and depend upon individual performance results, changes in job
responsibilities, competitive forces, and/or the overall financial condition of
the Company. Mr. McCormick did not receive a salary increase in 1996, and his
base salary was $760,000.
SHORT-TERM INCENTIVE COMPENSATION. The U S WEST Executive Short-Term
Incentive Plan (ESTIP) approved by shareholders in May, 1994 provides each named
Executive Officer with the potential to earn annual cash awards based on the
achievement of pre-established performance goals. Participants include
18
<PAGE>
the Chief Executive Officer and any individual employed by the Company at the
end of any calendar year who appears in the Summary Compensation Table of the
Annual Proxy Statement to Shareholders. The cash bonus pool from which the
Company pays the bonuses for the CEO and the other named Executive Officers is
limited to 0.25% of "Cash Provided by Operating Activities" for the annual
performance period. The Committee has discretion to pay any portion of this pool
based on factors including the Company's performance relative to pre-set
financial, strategic, and customer goals, as well as individual performance
goals. Any amount of the cash bonus pool not so paid may be added, at the
Committee's sole discretion, to the cash bonus pool that is available for any
subsequent year or years. The Committee has elected not to add unpaid portions
of 1996's cash bonus pool to the bonus pool for 1997 and subsequent years.
The pre-set performance goals for 1996 were an average roll-up of the goals
of Communications Group and Media Group business units. The business unit goals
for 1996 included EBITDA (earnings before interest, taxes, depreciation and
amortization), net cash flow, operating income, strategic accomplishments, and
qualitative measures.
In determining the amount to be paid to Mr. McCormick for 1996 performance,
the Committee considered the above-mentioned pre-set performance goals for U S
WEST, Inc., Communications Group and Media Group and his individual performance
related to total corporate strategic and operational objectives. Mr. McCormick
received ESTIP compensation of $1,100,000, which is within the median range of
competitive market data for chief executive officer bonus awards for companies
with comparable performance.
LONG-TERM INCENTIVE COMPENSATION. For 1996, the Company's long-term
incentive compensation included performance-based restricted stock issued under
the U S WEST Executive Long-Term Incentive Plan (ELTIP) and stock options issued
under the U S WEST 1994 Stock Plan. Shareholders have approved both plans.
During the past year, this combination of stock options and
performance-based restricted stock opportunities provided a strategic mix of
equity-based incentives that (i) continues to focus performance on the
attainment of long-term strategic objectives, (ii) provides incentive to the
executives for increasing total shareholder return, and (iii) provides
continuity throughout the officer team by rewarding long-term commitment to the
Company. The long-term compensation elements used for 1996 were:
PERFORMANCE-BASED RESTRICTED STOCK. For the six-year performance period
beginning January 1, 1991, a target number of restricted performance shares
of U S WEST stock was set for potential earn out by each Executive Officer,
including the named Executive Officers. A portion of such shares may be
earned annually based upon total shareholder return. Recipients of
restricted stock grants have the rights and privileges of a shareholder with
respect to the shares, including the right to vote such shares and receive
dividends.
The original target number of performance shares granted was determined
by a market survey of the long-term incentive plans of 35 companies
(telecommunications industry or similar size). The performance grants were
converted to an annual full market value as a percent of salary and
multiplied by six (years of duration of the performance period) to establish
the target award for executives.
For purposes of this plan, shareholder return over the six-year
performance period is calculated annually as share price appreciation, plus
dividends, divided by the share price at the beginning of the six-year
performance period. Share price appreciation is derived using the average
beginning and end-of-year closing prices of U S WEST stock for a
20-business-day period commencing 10 business days prior to the end of each
year. Because of the multi-year orientation of this plan, if total
shareholder return is negative during a plan year, no payout would occur for
that year, and the negative total
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<PAGE>
shareholder return would need to be offset in the following year(s) before
further payouts could occur.
Under this formula, U S WEST's consolidated total shareholder return for
1996 was a negative 2.0%. For that reason, no payout was made in 1996 from
the performance share pool to Mr. McCormick or any other named Executive
Officer.
STOCK OPTIONS. The Committee generally has elected to grant stock
options annually. The Company's stock option grants are designed to deliver,
together with other long-term incentives, the potential for the executive to
earn a market-based percentage of salary dependent on future stock
performance. The Committee may take into consideration prior years' grants
and circumstances when setting current year grants. Stock options granted
during 1996 have an exercise price equal to the market price of the
Company's stock on the date of grant, vest in one-third increments
commencing one year from the grant date, and carry a ten-year term.
Mr. McCormick received a stock option grant of: 100,000 Communications
Stock shares and 125,000 Media Stock shares. He earned an additional 28,500
Media Stock options for 1996 performance resulting in the achievement of in
excess of 20% EBITDA growth by Media Group. The Committee believes that the
grant to Mr. McCormick in 1996 is consistent with the Committee's total
compensation philosophy to link a substantial portion of the CEO's
compensation directly with the long-term value created for shareholders.
This option grant is consistent with the average grants made to peer company
CEOs as determined by market survey data.
SIGNIFICANT EVENTS AFFECTING FUTURE LONG-TERM COMPENSATION. In conjunction
with the implementation of targeted stock, the Board approved long-term
compensation programs for Communications Group, Media Group, and U S WEST
executives. These programs are designed to maintain direct alignment with
shareholders' interests by focusing executives' efforts on the strategic
imperatives that drive long-term value creation for the Communications Group and
Media Group shareholders.
Communications Group executives' long-term opportunity is comprised of a
combination of Communication Group stock options and performance-based
dividend equivalent units (DEUs) issued under the U S WEST Communications
Group Long-Term Incentive Plan, which was approved at the 1996 Annual
Meeting. A DEU represents the sum of regular cash dividends per share of
Communications Stock, if any, paid during a performance period under the
plan. DEUs provide the executive the opportunity to earn incentive
compensation based on the achievement of pre-established strategic and/or
financial goals. These goals are structured to focus the executive's
medium-term performance on the strategic imperatives that drive long-term
value creation for the Company's shareholders. The initial DEU performance
measurement period began in January 1996 and any awards earned under this
plan will pay out in shares of Communications Stock proportionately in 1998
and 1999. Mr. McCormick also is eligible to participate in the
Communications Group Long-Term Incentive Plan that began in January 1996
and, if appropriate, will pay out in 1998 and 1999.
The long-term incentive opportunity for Media Group executives is comprised
entirely of Media Group stock options. The shares available for grant were
established under the 1994 Stock Plan.
The long-term incentive opportunity for certain named Executive Officers is
based on the combined long-term results of Communications Group and Media
Group. Mr. McCormick's long-term incentive opportunity is weighted equally
between the performance of Communications Group and Media Group. These
weightings will be reviewed annually by the Committee and may be adjusted to
remain consistent with the needs of the business.
DEDUCTIBILITY OF COMPENSATION. The Committee has carefully considered
Section 162 (m) of the Internal Revenue Code and believes the Company's
pay-for-performance practices ensure that executive compensation is strongly
tied to performance. The Committee believes it is in the best interests of the
Company and its shareholders to comply with the new tax law while still
preserving the flexibility to reward
20
<PAGE>
executives consistent with the Company's pay philosophy for each compensation
element. The Committee is obligated to the Board and shareholders of the Company
to recognize and reward performance that increases the value of the Company.
Accordingly, the Committee will exercise discretion in those instances where tax
law considerations would compromise the interests of the shareholder.
STOCK OWNERSHIP GUIDELINES. To encourage further growth in shareholder
value, the Board has approved stock ownership targets for the Executive Officers
of the Company. The Board established these targets because it believes that a
significant level of stock ownership provides a powerful incentive to manage the
Company as owners. The Committee reviews Executive Officers' stock ownership
annually and, at its discretion, may consider such ownership in the granting of
restricted shares and stock options. The target ownership level for the Chairman
and CEO equals 5 times base salary. At the end of 1996, Mr. McCormick held
Company stock valued at 15.5 times his 1996 salary.
CONCLUSION. It is the opinion of the Committee that U S WEST's integrated
executive compensation strategy aligns the Company's executive compensation
practices with corporate performance and the best interests of shareholders by
ensuring the continuity and ongoing development of a strong leadership team
fully aligned with our shareholders. We trust this letter and the accompanying
tables and graphs will help you understand further the Company's compensation
philosophy, programs, and actions.
U S WEST, Inc. Board of Directors Human Resources Committee:
<TABLE>
<S> <C>
Remedios Diaz-Oliver Grant A. Dove (Chairman)
Frank P. Popoff Jerry O. Williams
</TABLE>
21
<PAGE>
SHAREHOLDER RETURN PERFORMANCE GRAPH
CONSOLIDATED U S WEST PERFORMANCE
The following graph and chart compare the yearly change in cumulative total
shareholder return on the consolidated Company's common stocks, including the
reinvestment of dividends, with the return on the Standard & Poor's 500 Stock
Index and the "Regional Holding Company Group." On November 1, 1995, the Company
recapitalized its former single class of stock into Communications Stock and
Media Stock. The performance graph sets forth the return on $100 invested in U S
WEST common stock on December 31, 1991 over a 5-year period, and reflects a
composite return for the two new classes of stock distributed on November 1,
1995.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN(A)
AMONG U S WEST CONSOLIDATED(B),
S&P 500 INDEX, AND REGIONAL HOLDING COMPANY GROUP(C)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
US WEST - CONSOLIDATED S&P 500 REGIONAL HOLDING COMPANY GROUP
<S> <C> <C> <C>
Dec-91 100 100 100
Dec-92 107 108 111
Dec-93 134 118 130
Dec-94 110 120 119
Dec-95 177 165 187
Dec-96 171 203 187
Value of $100.00 Invested
12/31/91
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
DEC-1991 DEC-1992 DEC-1993 DEC-1994 DEC-1995 DEC-1996
US WEST - Consolidated 100 107 134 110 177 171
S&P 500 100 108 118 120 165 203
RHCs - Weighted 100 111 130 119 187 187
</TABLE>
Assumes $100 invested on December 31, 1991 in the common stock of U S WEST,
the S&P 500 Index, and the Regional Holding Company Group.
Notes:
(a)
Total return assumes the reinvestment of dividends.
(b)
Combined returns from Communications Stock and Media Stock.
(c)
Consists of the regional holding companies, excluding U S WEST, that were
created upon the divestiture of American Telephone and Telegraph Company of
its local telephone operating companies. Includes the returns of Ameritech,
Bell Atlantic, BellSouth, NYNEX, Pacific Telesis, and SBC Communications,
weighted by market capitalization.
22
<PAGE>
SEPARATE COMMON STOCK GRAPHS
In addition to the Performance Graph for the Company's consolidated total
return, the Company has included two additional performance graphs that indicate
the performance of the Communications Group and the Media Group against their
respective peer groups. Each graph charts the performance of the Company stock
relative to the Standard & Poor's 500 Stock Index and the customized peer group
index for the 14-month period since November 1, 1995.
For comparison of cumulative total shareholder return on Communications
Stock, the Company has established a customized peer group that includes
companies that offer communications services, including local telephone
services, to business and residential customers in domestic geographic markets.
The graph assumes $100 was invested in each of the Communications Stock, the
Standard & Poor's 500 Stock Index and the Communications Peer Group in order to
provide the returns on the Communications Stock relative to the indices since
the recapitalization. For the companies in the Communications Peer Group, the
returns of each such company have been weighted to reflect the relative stock
market capitalization as of the beginning of the 14-month performance period.
COMPARISON OF 14-MONTH CUMULATIVE TOTAL RETURN(A) AMONG
U S WEST COMMUNICATIONS GROUP,
S&P 500 INDEX, AND COMMUNICATIONS PEER GROUP(B)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
US WEST COMMUNICATIONS GROUP S&P 500 COMMUNICATIONS PEER GROUP - WEIGHTED
<S> <C> <C> <C>
Oct-95 100 100 100
Dec-95 124 107 109
Dec-96 120 131 111
Value of $100.00 Invested
10/31/95
</TABLE>
<TABLE>
<S> <C> <C> <C>
OCT-95 DEC-95 DEC-96
US WEST Communications Group 100 124 120
S&P 500 100 107 131
Communications Peer Group - Weighted 100 109 111
</TABLE>
Assumes $100 invested on October 31, 1995, in the common stock of U S WEST
Communications Group, the S&P 500 Index, and the Communications Peer Group --
Weighted.
Notes:
(a)
Total return assumes the reinvestment of dividends.
(b)
Includes the returns weighted by market capitalization of Alltel, Ameritech,
Bell Atlantic, BellSouth, Cincinnati Bell, Frontier Corp., GTE, NYNEX, Pacific
Telesis Group, SBC Communications, and Southern New England Telecom.
For comparison of cumulative total shareholder return on Media Stock, the
Company has established a customized peer group that includes companies whose
mix of businesses is consistent with the Media
23
<PAGE>
Group's portfolio of domestic and international businesses, including wireless
communications networks, cable, and multimedia content and services businesses.
The graph assumes $100 was invested in each of the Media Stock, the Standard &
Poor's 500 Stock Index and the Media Peer Group in order to provide the returns
on the Media Stock relative to the indices since the recapitalization. For the
companies in the Media Peer Group, the returns of each such company have been
weighted to reflect the relative stock market capitalization as of the beginning
of the 14-month performance period.
COMPARISON OF 14-MONTH CUMULATIVE TOTAL RETURN(A)
AMONG U S WEST MEDIA GROUP,
S&P 500 INDEX, AND MEDIA PEER GROUP(B)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
US WEST MEDIA GROUP S&P 500 MEDIA PEER GROUP - WEIGHTED
<S> <C> <C> <C>
Oct-95 100 100 100
Dec-95 99 107 106
Dec-96 96 131 103
</TABLE>
<TABLE>
<S> <C> <C> <C>
OCT-95 DEC-95 DEC-96
US WEST Media Group 100 99 96
S&P 500 100 107 131
Media Peer Group - Weighted 100 106 103
</TABLE>
Assumes $100 invested on October 31, 1995, in the common stock of U S WEST
Media Group, the S&P 500 Index, and the Media Peer Group -- Weighted.
Notes:
(a)
Total return assumes the reinvestment of dividends.
(b)
Includes the returns weighted by market capitalization of AirTouch
Communications, Cablevision Systems, Cellular Communications, Comcast Corp.,
Cox Communications, Dow Jones & Co., Gannett Co., International Family
Entertainment, Jones Intercable, TCA Cable TV, Tele-Comm -- TCI Group, Times
Mirror, Tribune Co., United International Holdings, U.S. Cellular Corp., and
Vanguard Cellular Systems. Cellular Communications, Inc. merged with AirTouch
Communications on August 16, 1996; Cellular Communications Inc.'s total
shareholder return parallels that of AirTouch after this date. The Media Group
generally outperformed the cable and wireless communications companies within
the Media Peer Group in 1996. The publishing companies within the Media Peer
Group collectively comprised approximately 31% of the aggregate market
capitalization of all companies included within the Media Peer Group as of
November 1, 1995. If the proportionate weighting of all of the companies
included within the Media Peer Group were adjusted to reflect the percentage
of the Media Group's business that was devoted to publishing during the
performance period (i.e., 26% on an asset value basis prior to announcement of
the Continental merger in February, 1996, and 13% thereafter), and the
remaining percentage devoted to cable, wireless communications, and
international ventures (i.e., 74% on an asset value basis prior to
announcement of the Continental merger and 87% thereafter), the total return
on the Media Peer Group investment as of December 31, 1996 would have amounted
to approximately $96, compared with the total return of $96 on the Media Stock
over the same period.
24
<PAGE>
SOLICITATION OF PROXIES
The cost of soliciting proxies in the accompanying form will be borne by U S
WEST. U S WEST has retained Beacon Hill Associates, Inc. to aid in the
solicitation of proxies at a fee of approximately $17,500 plus out-of-pocket
expenses. Proxies may be solicited also in person or by telephone or telegram by
the Directors, Executive Officers, and employees of U S WEST, who will not
receive additional compensation for such activities.
Brokers, nominees and other similar record holders will be requested to
forward proxy solicitation material to beneficial owners and, upon request, will
be reimbursed by U S WEST for their out-of-pocket expenses.
------------------------
SUBMISSION OF SHAREHOLDER PROPOSALS
Proposals intended for inclusion in next year's Proxy Statement should be
sent to the Secretary of U S WEST at 7800 East Orchard Road, Suite 200,
Englewood, Colorado 80111, and must be received by December 8, 1997.
FINANCIAL STATEMENTS AVAILABLE
CONSOLIDATED FINANCIAL STATEMENTS FOR U S WEST AND ITS SUBSIDIARIES, AS WELL
AS FINANCIAL STATEMENTS FOR THE COMMUNICATIONS GROUP AND THE MEDIA GROUP, ARE
INCLUDED AS APPENDICES A, B AND C TO THIS PROXY STATEMENT. ADDITIONAL COPIES OF
THESE STATEMENTS AND THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1996 (EXCLUDING EXHIBITS, UNLESS SUCH EXHIBITS HAVE BEEN SPECIFICALLY
INCORPORATED BY REFERENCE THEREIN), MAY BE OBTAINED WITHOUT CHARGE FROM THE
TREASURER OF U S WEST, 7800 EAST ORCHARD ROAD, SUITE 200, ENGLEWOOD, COLORADO
80111. THE ANNUAL REPORT ON FORM 10-K IS ALSO ON FILE WITH THE SECURITIES AND
EXCHANGE COMMISSION, WASHINGTON, D.C. 20549, AND THE NEW YORK STOCK EXCHANGE.
Dated: April 7, 1997
25
<PAGE>
U S WEST, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Sales and other revenues............................. $ 12,911 $ 11,746 $ 10,953 $ 10,294 $ 9,823
Income before extraordinary items and cumulative
effect of change in accounting principles(1)....... 1,144 1,329 1,426 476 1,076
Net income (loss)(2)................................. 1,178 1,317 1,426 (2,806) (614)
Earnings per common share before extraordinary items
and cumulative effect of change in accounting
principle(1, 3).................................... -- -- 3.14 1.13 2.61
Earnings (loss) per common share(2, 3)............... -- -- 3.14 (6.69) (1.49)
Dividends per common share(3)........................ -- -- 2.14 2.14 2.12
Weighted average common shares outstanding
(thousands)(3)..................................... -- -- 453,316 419,365 412,518
Total assets......................................... $ 40,855 $ 25,071 $ 23,204 $ 20,680 $ 23,461
Total debt(4)........................................ 15,351 8,855 7,938 7,199 5,430
Manditorily redeemable preferred securities(5)....... 1,131 651 51 -- --
Shareowners' equity.................................. 11,549 7,948 7,382 5,861 8,268
Return on common shareowners' equity(6).............. 13.2% 17.2% 21.6% -- 14.4%
Percentage of debt to total capital(4)............... 54.8% 50.7% 51.6% 55.1% 39.6%
Ratio of earnings to combined fixed charges and
preferred stock dividends.......................... 3.29 4.03 4.85 2.38 3.85
Capital expenditures(4).............................. $ 3,474 $ 3,140 $ 2,820 $ 2,441 $ 2,554
Employees............................................ 69,286 61,047 61,505 60,778 63,707
Number of common shareowners......................... -- -- 816,099 836,328 867,773
COMMUNICATIONS GROUP INFORMATION:(1, 2, 3)
Earnings per common share.......................... $ 2.62 $ 2.50 $ 2.53
Dividends per common share......................... 2.14 2.14 2.14
Average common shares outstanding (thousands)...... 477,549 470,716 453,316
Number of common shareowners....................... 725,560 775,125 --
MEDIA GROUP INFORMATION:(1, 2, 3)
Earnings (loss) per common share................... $ (0.16) $ 0.29 $ 0.61
Average common shares outstanding (thousands)...... 491,924 470,549 453,316
Number of common shareowners....................... 705,341 770,346 --
</TABLE>
- ------------------------------
(1) 1996 income is before the cumulative effect of a change in accounting
principle and includes a gain of $36 ($0.08 per Communications share) on the
sales of certain rural telephone exchanges and current effect of $15 ($0.03
per Communications share) from adopting Statement of Financial Accounting
Standard ("SFAS") No. 121. Also included are net losses of $71 ($0.15 per
Media share) related to the November 15, 1996 merger of Continental
Cablevision, Inc. ("Continental") (the "Merger" or the "Continental Merger")
into a wholly owned subsidiary of U S WEST, Inc. ("U S WEST" or "Company")
and a charge of $19 ($0.04 per Media share) from the sale of the Company's
cable television interests in Norway, Sweden and Hungary. 1995 income is
before an extraordinary item and includes a gain of $95 ($0.20 per Media
share) from the merger of Telewest Communications plc ("Telewest") with SBC
CableComms (UK), a gain of $85 ($0.18 per Communications share) on the sales
of certain rural telephone exchanges and costs of $17 ($0.01 per
Communications share and $0.02 per Media share) associated with the November
1, 1995, recapitalization. 1994 income includes a gain of $105 ($0.23 per
share) on the partial sale of U S WEST's
A-1
<PAGE>
U S WEST, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
joint venture interest in Telewest, a gain of $41 ($0.09 per share) on the
sale of U S WEST's paging operations and a gain of $51 ($0.11 per share) on
the sales of certain rural telephone exchanges. 1993 income is before
extraordinary items and was reduced by a restructuring charge of $610 ($1.46
per share) and a charge of $54 ($0.13 per share) for the cumulative effect
on deferred taxes of the 1993 federally mandated increase in income tax
rates. 1993 and 1992 income is from continuing operations.
(2) 1996 net income includes a gain of $34 ($0.07 per Communications share)
for the cumulative effect of the adoption of SFAS No. 121. 1995 net income
was reduced by an extraordinary item of $12 ($0.02 per Communications share
and $0.01 per Media share) for the early extinguishment of debt. 1993 net
income was reduced by extraordinary charges of $3,123 ($7.45 per share) for
the discontinuance of SFAS No. 71 and $77 ($0.18 per share) for the early
extinguishment of debt. 1993 net income also includes a charge of $120
($0.28 per share) for U S WEST's decision to discontinue the operations of
its capital assets segment. 1992 net income includes a charge of $1,793
($4.35 per share) for the cumulative effect of a change in accounting
principles. Discontinued operations provided net income of $38 ($0.09 per
share) and $103 ($0.25 per share) in 1993 and 1992, respectively.
(3) Media Group's 1996 average common shares outstanding include 150,615,000
shares issued related to the November 15, 1996 Continental Merger. Effective
November 1, 1995, each share of U S WEST, Inc. common stock was converted
into one share each of U S WEST Communications Group common stock and U S
WEST Media Group common stock. Earnings per common share and dividends per
common share for 1995 and 1994 have been presented on a pro forma basis to
reflect the two classes of stock as if they had been outstanding since
January 1, 1994. For periods prior to the recapitalization, the average
common shares outstanding are assumed to be equal to the average common
shares outstanding for U S WEST.
(4) Capital expenditures, debt and the percentage of debt to total capital
excludes the capital assets segment, which has been discontinued and is held
for sale. Percentage of debt to total capital includes Company-obligated
mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures ("Preferred Securities") and other
preferred stock as a component of total capital.
(5) Includes Preferred Securities of $1,080 in 1996, $600 in 1995 and
preferred stock subject to mandatory redemption of $51 in 1996, 1995 and
1994.
(6) 1996 return on common shareowners' equity is based on income before the
cumulative effect of a change in accounting principle. 1995 return on common
shareowners' equity is based on income before extraordinary items. 1993
return on common shareowners' equity is not presented. Return on common
shareowners' equity for fourth-quarter 1993 was 19.9 percent based on income
from continuing operations. 1992 return on common shareowners' equity is
based on income before the cumulative effect of change in accounting
principles.
A-2
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the local exchange, intraLATA
toll, cable, telephony, wireless and directories markets, (ii) changes in demand
for the Company's products and services, including optional custom calling
features, (iii) different than anticipated employee levels, capital
expenditures, and operating expenses at the Communications Group as a result of
unusually rapid, in-region growth, (iv) the gain or loss of significant
customers, (v) pending regulatory actions in state jurisdictions, (vi)
regulatory changes affecting the cable and telecommunications industries,
including changes that could have an impact on the competitive environment in
the local exchange market, (vii) a change in economic conditions in the various
markets served by the Company's operations that could adversely affect the level
of demand for cable, wireless, directories or other services offered by the
Company, (viii) greater than anticipated competitive activity requiring new
pricing for services, (ix) higher than anticipated start-up costs associated
with new business opportunities, (x) increases in fraudulent activity with
respect to wireless services, or (xi) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
THE RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate in
Delaware and create two classes of common stock. Under the Recapitalization
Plan, shareholders approved an Agreement and Plan of Merger between U S WEST
Colorado and U S WEST, Inc., a Delaware corporation ("U S WEST" or the
"Company"), pursuant to which U S WEST continues as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST has
been amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock") and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock").
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups"). For a detailed description of the business activities of
the Communications Group and Media Group, please see the Management's Discussion
and Analysis of Financial Condition and Results of Operations of Communications
Group and Media Group included herein.
CONTINENTAL CABLEVISION, INC. MERGER
On November 15, 1996, Continental Cablevision, Inc. ("Continental") was
merged into a wholly owned subsidiary of U S WEST (the "Merger" or the
"Continental Merger"). Continental, the nation's third largest cable operator,
serves 4.5 million domestic customers and passes 7.4 million domestic homes.
Continental holds significant domestic and international investments, including
a 50 percent interest in a cable venture in Argentina, a 25 percent interest in
a cable venture in Singapore, an 11 percent interest in Teleport Communications
Group ("TCG"), a 10 percent interest in PRIMESTAR (a direct broadcast satellite
service), telephone access businesses in Florida and Virginia, and interests in
programming that
A-3
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
include Time Warner, Inc., E! Entertainment Television and the Golf Channel. The
aggregate consideration paid by U S WEST to shareholders of Continental
consisted of 150,615,000 shares of Media Stock valued at $2.59 billion,
20,000,000 shares of U S WEST Series D Preferred Stock with a market value of
$920 million and $1.15 billion in cash. In connection with the Merger, U S WEST
also assumed all of Continental's outstanding indebtedness and other
liabilities, which approximated $7.0 billion at November 15, 1996, for a total
purchase price of $11.7 billion. U S WEST has accounted for the Merger by the
purchase method of accounting. Accordingly, the purchase price is allocated to
the assets acquired and liabilities assumed based on their estimated fair
values.
The following results of operations discussion is condensed. For a detailed
discussion of operating results on a Group basis, see the Communications Group
and the Media Group Management's Discussion and Analysis of Financial Condition
and Results of Operations -- "Results of Operations."
RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
NET INCOME (LOSS)
<TABLE>
<CAPTION>
EARNINGS (LOSS)PER SHARE
NET INCOME (LOSS) --------------------------- INCREASE
------------------------------------------
INCREASE (DECREASE)
(DECREASE) ---------
--------------------
1996 1995 $ % 1996 1995(1) $
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Communications Group............................ $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12
Media Group..................................... (71) 141 (212) -- (0.16) 0.29 (0.45)
--------- --------- --------- ---------
Total net income................................ $ 1,178 $ 1,317 $ (139) (10.6)
--------- --------- --------- ---------
--------- --------- --------- ---------
<CAPTION>
%
--
<S> <C>
Communications Group............................ 4.8
Media Group..................................... --
Total net income................................
</TABLE>
- ------------------------------
(1) Earnings (loss) per share have been presented on a pro forma basis as if
the Communications Stock and Media Stock had been outstanding since January
1, 1995. For periods prior to the recapitalization, the average common
shares outstanding are assumed to be equal to the average common shares
outstanding for U S WEST.
COMMUNICATIONS GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE
-------------------------------------------- --------------------
INCREASE
(DECREASE)
------------
1996 1995 $ % 1996 1995(1)
--------- --------- --------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Reported net income........................................ $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.............. (36) (85) 49 57.6 (0.08) (0.18)
Cumulative effect of change in accounting principle(2)... (34) -- (34) -- (0.07) --
Current year effect of change in accounting
principle(2)........................................... (15) -- (15) -- (0.03) --
Recapitalization costs................................... -- 8 (8) -- -- 0.01
Early extinguishment of debt............................. -- 8 (8) -- -- 0.02
--------- --------- --------- --- --------- ---------
Normalized income.......................................... $ 1,164 $ 1,107 $ 57 5.1 $ 2.44 $ 2.35
--------- --------- --------- --- --------- ---------
--------- --------- --------- --- --------- ---------
<CAPTION>
INCREASE
(DECREASE)
----------------------
$ %
--------- -----
<S> <C> <C>
Reported net income........................................ $ 0.12 4.8
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.............. 0.10 55.6
Cumulative effect of change in accounting principle(2)... (0.07) --
Current year effect of change in accounting
principle(2)........................................... (0.03) --
Recapitalization costs................................... (0.01) --
Early extinguishment of debt............................. (0.02) --
--------- ---
Normalized income.......................................... $ 0.09 3.8
--------- ---
--------- ---
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications Stock had been outstanding since January 1, 1995. For periods
prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
(2) Effective January 1, 1996, U S WEST adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See the U S
WEST Consolidated Financial Statements -- Note 7 -- Property, Plant and
Equipment.
A-4
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Communications Group's 1996 normalized income was $1,164, an increase of
$57, or 5.1 percent, compared with $1,107 in 1995. Normalized earnings per share
were $2.44, an increase of $0.09, or 3.8 percent, as compared to 1995. The
increase in normalized income is primarily attributable to demand for services,
evidenced by revenue growth of 6.3 percent. Partially offsetting the increased
demand are higher costs incurred to address business growth, service-improvement
initiatives and costs related to new business opportunities.
The Communications Group expects net income growth in the core business to
be partially offset by cost increases related to growth initiatives such as
wireless personal communications services ("PCS") and interLATA long-distance
service. Net income growth could also be impacted by costs related to
implementing the interconnection requirements and other provisions of the
Telecommunications Act of 1996. However, the net income impact will depend on
the nature and timing of the requirements, and the type of recovery mechanisms
provided for by the Federal Communications Commission ("FCC") and state
commissions. (See the Communications Group Management's Discussion and Analysis
of Financial Condition and Results of Operations -- "Regulatory Environment.")
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted
in a one-time gain of $34 (net of tax of $22), or $0.07 per Communications
share, related to the cumulative effect of change in accounting principle. See
the U S WEST Consolidated Financial Statements -- Note 7 -- Property, Plant and
Equipment.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
MEDIA GROUP NET INCOME (LOSS)
<TABLE>
<CAPTION>
NET INCOME (LOSS) EARNINGS (LOSS) PER SHARE
------------------------------------------ -------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- ---------
1996 1995 $ % 1996 1995(1) $
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Reported net income (loss)............................ $ (71) $ 141 $ (212) -- $ (0.16) $ 0.29 $ (0.45)
Adjustments to reported net income:
Merger of joint venture(2).......................... -- (95) 95 -- -- (0.20) 0.20
Recapitalization costs.............................. -- 9 (9) -- -- 0.02 (0.02)
Early extinguishment of debt........................ -- 4 (4) -- -- 0.01 (0.01)
--------- --------- --------- --- --------- --------- ---------
Normalized income (loss).............................. $ (71) $ 59 $ (130) -- $ (0.16) $ 0.12 $ (0.28)
--------- --------- --------- --- --------- --------- ---------
--------- --------- --------- --- --------- --------- ---------
<CAPTION>
%
---------
<S> <C>
Reported net income (loss)............................ --
Adjustments to reported net income:
Merger of joint venture(2).......................... --
Recapitalization costs.............................. --
Early extinguishment of debt........................ --
---
Normalized income (loss).............................. --
---
---
</TABLE>
- ------------------------------
(1) Earnings (loss) per share have been presented on a pro forma basis as if
the Media Stock had been outstanding since January 1, 1995. For periods
prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
(2) Relates to the merger of Telewest Communications plc ("Telewest") with SBC
CableComms (UK).
During 1996, the Media Group recorded a net loss of $71, or $0.16 per Media
share, compared to normalized income of $59, or $0.12 per Media share, in 1995.
Excluding the effects of the Continental Merger, the Media Group would have been
break-even. The decline in 1996 normalized income (loss), excluding Continental,
is primarily due to higher equity losses related to international and domestic
growth initiatives, partially offset by improvement in the domestic cellular
operation. Media Group losses will be significant in 1997 and beyond as a result
of the Continental Merger.
A-5
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 1995, the Media Group incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment") and incurred
after-tax costs of $9 associated with the Recapitalization Plan.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group....................................................... $ 10,079 $ 9,484 $ 595 6.3
Media Group................................................................ 2,955 2,374 581 24.5
Intergroup eliminations.................................................... (123) (112) (11) (9.8)
--------- --------- --------- ---
Total sales and other revenues............................................. $ 12,911 $ 11,746 $ 1,165 9.9
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1996 1995 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service.......................... $ 4,770 $ 4,344 $ 413 $ 27 $ 8 $ (22) $ 426
Interstate access...................... 2,507 2,378 250 (48) (69) (4) 129
Intrastate access...................... 770 747 45 (16) -- (6) 23
Long-distance network.................. 1,100 1,189 (53) (7) (1) (28) (89)
Other services......................... 932 826 -- -- -- 106 106
--------- --------- ----- ----- ----- ----- ---------
Total.................................. $ 10,079 $ 9,484 $ 655 $ (44) $ (62) $ 46 $ 595
--------- --------- ----- ----- ----- ----- ---------
--------- --------- ----- ----- ----- ----- ---------
<CAPTION>
%
---------
<S> <C>
Local service.......................... 9.8
Interstate access...................... 5.4
Intrastate access...................... 3.1
Long-distance network.................. (7.5)
Other services......................... 12.8
---
Total.................................. 6.3
---
---
</TABLE>
Local service revenues include local telephone exchange, local private line
and public telephone services. The 9.8 percent increase in local service
revenues is primarily attributable to growth in access lines and increased
demand for new product and service offerings, and existing central office
features. Total reported access lines increased 629,000 during 1996, or 4.3
percent, of which 244,000 was attributed to second lines. Second line
installations increased 30.5 percent compared with 1995. Access lines grew by
742,000, or 5.0 percent, when adjusted for sales of approximately 113,000 rural
telephone access lines during 1996.
Access charges are collected primarily from interexchange carriers for their
use of the local exchange network. For interstate access services there is also
a fee collected directly from telephone customers. Approximately 30 percent of
access revenues and 10 percent of total revenues are derived from providing
access services to AT&T Corp. ("AT&T").
Higher revenues from interstate access services were driven by access line
growth and an increase of 8.9 percent in interstate billed access minutes of
use. The increased business volume was partially offset by the effects of price
reductions and sharing related accrued refunds to interexchange carriers. The
Communications Group reduced prices for interstate access services in both 1996
and 1995 as a result of FCC orders and competitive pressures. Intrastate access
revenues increased primarily due to higher demand partially offset by the
effects of price reductions.
A-6
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Long-distance revenues are derived from calls made within the Local Access
and Transport Area ("LATA") boundaries of the Communications Group 14 state
region (the "Region"). During 1996, long-distance revenues decreased 7.5
percent, primarily due to the effects of competition and the implementation of
multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in May and October
1996, respectively. The MTCPs essentially allow independent telephone companies
to act as toll carriers. The 1996 impact of the MTCPs was a $27 reduction in
long-distance revenues, offset by increases in intrastate access revenues of $5
and decreases in other operating expenses (i.e., access expense) of $21. Similar
changes in other states are scheduled to occur in 1997, though the impact on
1997 net income is not expected to be material.
Excluding the effects of the MTCPs, long-distance revenues decreased 5.2
percent. Long-distance revenues have declined over the last several years as
customers have migrated to interexchange carriers that have the ability to offer
long-distance services on both an intraLATA and interLATA basis. A portion of
revenues lost to competition, however, is recovered through access charges paid
by the interexchange carriers. The Communications Group expects erosion in
long-distance revenue to continue in 1997 due to the loss of exclusivity of 1+
dialing in Minnesota and Arizona, effective in February and April 1996,
respectively, and continued dial-around activity in other states within the
Region, though management expects the decline to be less than in 1996. The
Communications Group is partially mitigating competitive losses through
competitive pricing of intraLATA long-distance services and increased
promotional efforts to retain customers.
Revenues from other services primarily consist of voice messaging services,
inside wire maintenance services, billing and collection services provided to
interexchange carriers, high-speed data transmission services, and the provision
of customer premises equipment ("CPE").
During 1996, revenues from other services increased $106, or 12.8 percent,
primarily as a result of continued market penetration in voice messaging
services and increased inside wire maintenance services. Also contributing to
other services revenue growth were increased contract revenues related to a
large wire installation project and CPE sales.
Future revenues at U S WEST Communications, Inc. ("U S WEST Communications")
may be affected by pending regulatory actions in federal and local regulatory
jurisdictions. (See the Communications Group Management's Discussion and
Analysis of Financial Condition and Results of Operations -- "Regulatory
Environment.")
A-7
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
MEDIA GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.................................................................... $ 1,120 $ 1,058 $ 62 5.9
International............................................................... 139 122 17 13.9
--------- --------- --------- ---------
1,259 1,180 79 6.7
Wireless communications:
Cellular service............................................................ 1,078 845 233 27.6
Cellular equipment.......................................................... 105 96 9 9.4
--------- --------- --------- ---------
1,183 941 242 25.7
Cable and telecommunications:
Domestic.................................................................... 488 215 273 --
International............................................................... 6 -- 6 --
--------- --------- --------- ---------
494 215 279 --
Other......................................................................... 19 38 (19) (50.0)
--------- --------- --------- ---------
Sales and other revenues...................................................... $ 2,955 $ 2,374 $ 581 24.5
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Media Group sales and other revenues increased 24.5 percent, to $2,955 in
1996. Excluding the effects of the Continental Merger, sales and other revenues
increased 13.9 percent. The increase was primarily due to strong growth in
cellular service revenue.
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising, which represents 98 percent of the domestic directory and
information services revenue, increased 7.4 percent, to $1,102 in 1996. The
increases are largely a result of a 5.7 percent increase in revenue per local
advertiser (primarily a result of price increases of approximately 4.0 percent)
combined with an increase of 3,000 in local advertisers during the year.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 27.6 percent,
to $1,078 in 1996, due to a 40 percent increase in subscribers during the year
(with 22 percent of the additions occurring in December), partially offset by a
12 percent drop in average revenue per subscriber to $53.00 per month. The
increase in subscribers relates to continued growth in demand for wireless
services. Consumers, who use cellular phones for safety and convenience, have
contributed significantly to this growth in demand. U S WEST anticipates this
growth trend to continue, although at decreased rates.
New wireless competitors offering PCS services will create additional
competitive pressures on pricing in Media Group markets in 1997. Pricing
pressures associated with new and existing competitors, combined with the
continuing shift in the customer base from businesses to consumers, will cause
the average revenue per subscriber to continue to decline.
Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a
result of a 61 percent increase in units sold which was somewhat offset by lower
equipment costs. A 30 percent increase in customers added during the year and
the implementation of a phone exchange program for existing customers led to the
increase in units sold.
A-8
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues increased $273, to $488 in 1996. The November 15, 1996 Continental
Merger contributed $252 to the increase. Revenues related to the cable systems
in Atlanta (the "Atlanta Systems") increased 9.8 percent, to $236, as a result
of a 3.9 percent increase in revenue per subscriber to $39.36 per month
(primarily a result of price increases of 6 to 7 percent) and a basic subscriber
increase of 4.5 percent.
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group........................................................... $ 2,340 $ 2,178 $ 162 7.4
Media Group.................................................................... 515 467 48 10.3
--------- --------- --------- ---
Total operating income......................................................... $ 2,855 $ 2,645 $ 210 7.9
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP OPERATING INCOME
The Communications Group's operating income increased $162, or 7.4 percent,
to $2,340 during 1996. Revenues increased $595, or 6.3 percent, partially offset
by an increase of $433, or 5.9 percent, in operating costs. Higher operating
costs were incurred to address business growth, service-improvement initiatives
and costs related to new business opportunities.
MEDIA GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic....................................................................... $ 452 $ 399 $ 53 13.3
International.................................................................. 2 (1) 3 --
--------- --------- --- ---------
454 398 56 14.1
Wireless communications.......................................................... 243 147 96 65.3
Cable and telecommunications:
Domestic....................................................................... (13) 23 (36) --
International.................................................................. (7) -- (7) --
--------- --------- --- ---------
(20) 23 (43) --
Other(1)......................................................................... (162) (101) (61) (60.4)
--------- --------- --- ---------
Operating income................................................................. $ 515 $ 467 $ 48 10.3
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>
- ------------------------------
(1) Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
Media Group operating income increased $48, or 10.3 percent, to $515.
Excluding the effects of the November 15, 1996 Continental Merger, Media Group
operating income increased $73, or 15.6 percent. The increase was primarily due
to strong subscriber growth in wireless communications operations.
A-9
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
DIRECTORY AND INFORMATION SERVICES. During 1996, operating income related
to domestic Yellow Pages directory advertising increased 1.6 percent to $511.
Revenue increases of 7.4 percent were offset by an approximate 10 percent
increase in paper, printing, delivery and distribution costs and a charge of $25
to reorganize and reduce headcount in 1996. Operating losses associated with
on-going product development activities reduced domestic directory and
information services operating income by $59 in 1996, compared with a reduction
of $104 in 1995. The decrease in operating losses is primarily the result of
exiting various product development activities in 1995.
WIRELESS COMMUNICATIONS. Cellular operating income increased 65.3 percent,
to $243 in 1996. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has
been more than offset by a combined decrease of 18 percent in the costs incurred
to acquire and support customers.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications results include
an operating loss of $25 related to the November 15, 1996 Continental Merger.
The operating loss includes $112 of depreciation and amortization expense as a
result of the preliminary purchase price allocation. Continental will generate
operating losses for the foreseeable future because of the effects of
amortization of intangible assets and depreciation associated with network
upgrades.
The Atlanta Systems contributed operating income of $12 in 1996, compared
with $23 in 1995. An increase in depreciation expense related to system upgrade
activities has contributed to the decline in operating income.
OTHER. Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Other operating losses increased in 1996 primarily as a result of a change in
cost allocation policy. Beginning in 1996, other operating losses include costs
that are not specifically identifiable with an operating company. Previously
such costs were allocated to the operating companies. Other operating losses
also include a charge of $10 related to staff reductions at international
headquarters in 1996.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense................................................................... $ 612 $ 527 $ 85 16.1
Equity losses in unconsolidated ventures........................................... 346 207 139 67.1
Guaranteed minority interest expense............................................... 55 14 41 --
Other expense -- net............................................................... 61 36 25 69.4
</TABLE>
Interest expense increased $85, or 16.1 percent, primarily as a result of
assuming $6.5 billion, at market value, in debt related to the Continental
Merger. Also contributing to the increase was a higher average debt level at the
Communications Group and a decrease in the amount of interest capitalized
resulting from a lower average balance of telecommunications plant under
construction at the Communications Group.
A-10
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Equity losses increased $139 in 1996, primarily due to network expansion
costs and additional financing costs at Telewest and One 2 One. Rapid customer
growth at One 2 One also contributed to the increase. Start-up and other costs
associated with new international investments located in Poland and Malaysia
contributed to the increase, along with losses related to Continental's cable
and telecommunications investments. Domestically, improved results from the TWE
partnership, related to improvements in cable and programming operations, were
more than offset by increased losses at PrimeCo Personal Communications L.P.
("PrimeCo") as the partnership launched service in the fourth quarter of 1996.
The Company expects PrimeCo to experience several years of operating losses
associated with the start-up phase of its operations. The Company expects equity
losses to continue to be significant in 1997 as expansion activities of its
equity investments continue.
Guaranteed minority interest expense reflects an increase of $34 related to
the September 11, 1995 issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Company-guaranteed
debentures ("Preferred Securities") totaling $600, and an increase of $7 related
to an additional $480 issuance of Preferred Securities on October 29, 1996.
Other expense increased $25 in 1996, primarily as a result of a pretax
charge of $31, associated with the sale of the Company's cable television
interests in Norway, Sweden and Hungary, and a $13 adjustment related to the
Company's equity investment in Bell Communications Research, Inc. ("Bellcore"),
of which U S WEST Communications has a one-seventh ownership interest. Partially
offsetting were foreign currency translation gains associated with loans to
international ventures and costs incurred in 1995 associated with the
Recapitalization Plan.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes.............................................. $ 696 $ 825 $ (129) (15.6)
Effective tax rate...................................................... 37.8% 38.3% -- --
</TABLE>
The decrease in the effective tax rate is primarily a result of lower pretax
earnings and a one-time benefit associated with the leveraged lease portfolio.
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
NET INCOME
<TABLE>
<CAPTION>
NET INCOME
------------------------------------------ EARNINGS PER SHARE(1)
INCREASE (DECREASE) ------------------------------------------
DECREASE
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Communications Group...................... $ 1,176 $ 1,150 $ 26 2.3 $ 2.50 $ 2.53 $ (0.03) (1.2)
Media Group............................... 141 276 (135) (48.9) 0.29 0.61 (0.32) (52.5)
--------- --------- --------- ---------
Total net income.......................... $ 1,317 $ 1,426 $ (109) (7.6)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications Stock and Media Stock had been outstanding since January 1,
1994. For periods prior to the recapitalization, the average common shares
outstanding are assumed to be equal to the average common shares outstanding
for U S WEST.
A-11
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
COMMUNICATIONS GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE(1)
------------------------------------------ ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income....................... $ 1,176 $ 1,150 $ 26 2.3 $ 2.50 $ 2.53 $ (0.03) (1.2)
Adjustments to reported net income:
Gains on sales of rural telephone
exchanges............................. (85) (51) (34) (66.7) (0.18) (0.11) (0.07) (63.6)
Recapitalization costs.................. 8 -- 8 -- 0.01 -- 0.01 --
Early extinguishment of debt............ 8 -- 8 -- 0.02 -- 0.02 --
--------- --------- --- --------- --------- --------- --------- ---------
Normalized income......................... $ 1,107 $ 1,099 $ 8 0.7 $ 2.35 $ 2.42 $ (0.07) (2.9)
--------- --------- --- --------- --------- --------- --------- ---------
--------- --------- --- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications Stock had been outstanding since January 1, 1994. For periods
prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
The Communications Group's 1995 normalized income was $1,107, an increase of
$8, or 0.7 percent, compared with $1,099 in 1994. The increase in normalized
income was attributable to revenue growth of 3.4 percent largely offset by
significantly higher costs incurred to improve customer service and meet greater
than expected business growth. Normalized pro forma earnings per Communications
share were $2.35, a decrease of $0.07, or 2.9 percent, from 1994. Earnings per
share in 1995 reflect approximately 17 million additional average common shares
outstanding, of which 12.8 million were issued in December 1994.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
MEDIA GROUP NET INCOME
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE(1)
------------------------------------------ ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income......................... $ 141 $ 276 $ (135) (48.9) $ 0.29 $ 0.61 $ (0.32) (52.5)
Adjustments to reported net income:
Sale of Paging operations(2).............. -- (41) 41 -- -- (0.09) 0.09 --
Partial sale and merger of joint venture
interest(2, 3).......................... (95) (105) 10 9.5 (0.20) (0.23) 0.03 13.0
Recapitalization costs.................... 9 -- 9 -- 0.02 -- 0.02 --
Early extinguishment of debt.............. 4 -- 4 -- 0.01 -- 0.01 --
--------- --------- --------- --------- --------- --------- --------- ---------
Normalized income......................... $ 59 $ 130 $ (71) (54.6) $ 0.12 $ 0.29 $ (0.17) (58.6)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Media Stock had been outstanding since January 1, 1995. For periods prior to
the recapitalization, the average common shares outstanding are assumed to
be equal to the average common shares outstanding for U S WEST.
(2) The 1994 gain relates to the partial sale of U S WEST's joint venture
interest in Telewest and the sale of U S WEST's paging operations.
(3) The 1995 gain relates to the merger of Telewest with SBC CableComms (UK).
A-12
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
During 1995, normalized income declined 54.6 percent, to $59, excluding the
effects of the one-time items. The decline is due primarily to higher equity
losses related to international growth initiatives and increased amortization
and interest expense.
During 1995, the Media Group incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by TWE and incurred
costs of $9 associated with the Recapitalization Plan.
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group......................................................... $ 9,484 $ 9,176 $ 308 3.4
Media Group.................................................................. 2,374 1,908 466 24.4
Intergroup eliminations...................................................... (112) (131) 19 14.5
--------- --------- --------- ---
Total sales and other revenues............................................... $ 11,746 $ 10,953 $ 793 7.2
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1995 1994 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service......................... $ 4,344 $ 4,067 $ 273 $ 35 $ (10) $ (21) $ 277
Interstate access..................... 2,378 2,269 191 (66) (2) (14) 109
Intrastate access..................... 747 729 36 (31) 8 5 18
Long-distance network................. 1,189 1,329 (54) (23) (1) (62) (140)
Other services........................ 826 782 -- -- -- 44 44
--------- --------- ----- --- --- --- ---------
Total................................. $ 9,484 $ 9,176 $ 446 $ (85) $ (5) $ (48) $ 308
--------- --------- ----- --- --- --- ---------
--------- --------- ----- --- --- --- ---------
<CAPTION>
%
---------
<S> <C>
Local service......................... 6.8
Interstate access..................... 4.8
Intrastate access..................... 2.5
Long-distance network................. (10.5)
Other services........................ 5.6
---------
Total................................. 3.4
---------
---------
</TABLE>
Local service revenues increased principally as a result of higher demand
for new and existing services, and demand for second lines. Reported total
access lines increased 496,000, or 3.5 percent, of which 161,000 were second
lines. Second line installations increased 25.5 percent compared with 1994.
Access line growth was 4.1 percent when adjusted for sales of rural telephone
access lines during 1995.
Higher revenues from interstate access services were driven by an increase
of 9.2 percent in interstate billed access minutes of use, which more than
offset the effects of price reductions and refunds. Intrastate access revenues
increased primarily due to the impact of increased business volumes and MTCPs,
partially offset by the impact of rate changes.
Long-distance revenues were impacted by the implementation of MTCPs in
Oregon and Washington in 1994. The 1995 impact of the MTCPs was a $62 reduction
in long-distance revenues, partially offset by increases in intrastate access
revenues of $12 and decreases in other operating expenses (i.e., access expense)
of $42. Excluding the effects of the MTCPs, long-distance revenues decreased by
5.9 percent during 1995, primarily due to the effects of competition and rate
reductions.
During 1995, revenues from other services increased primarily as a result of
continued market penetration in voice messaging services and sales of high-speed
data transmission services. Revenue growth
A-13
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
from other services was also attributed to inside wire maintenance services and
a large contract related to a wire installation project. These increases were
partially offset by a decrease in billing and collection service revenues.
MEDIA GROUP SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.................................................................... $ 1,058 $ 997 $ 61 6.1
International............................................................... 122 78 44 56.4
--------- --------- --------- ---------
1,180 1,075 105 9.8
Wireless communications:
Cellular service............................................................ 845 633 212 33.5
Cellular equipment.......................................................... 96 120 (24) (20.0)
Paging sales and service(1)................................................. -- 28 (28) --
--------- --------- --------- ---------
941 781 160 20.5
Cable and telecommunications.................................................. 215 18 197 --
Other......................................................................... 38 34 4 11.8
--------- --------- --------- ---------
Sales and other revenues...................................................... $ 2,374 $ 1,908 $ 466 24.4
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the six months ending June 30, 1994.
Media Group sales and other revenues increased 15 percent, to $2,374 in
1995, excluding the effects of the 1994 Atlanta Systems acquisition and paging
sale. The increase was primarily due to strong growth in cellular service
revenue.
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising increased 6.4 percent, to $1,026 in 1995. The increase was
a result of price increases of 4.5 percent, higher revenue per advertiser and an
increase in Yellow Pages advertising volume.
International directory publishing revenues increased $44 in 1995, primarily
due to U S WEST's May 1994 purchase of Thomson Directories. The remaining
increase is due to an increase in advertisers and revenue per advertiser.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 33.5 percent,
to $845 in 1995, due to a 51 percent increase in subscribers during the year
(with 20 percent of the additions occurring in December), partially offset by a
13 percent drop in average revenue per subscriber to $60.00 per month. The
increase in subscribers relates to continued growth in demand for wireless
services.
Cellular equipment revenues decreased 20 percent, to $96 in 1995, as a
result of lower cellular equipment costs. These lower equipment costs are being
passed on to retailers and to new customers.
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 in 1994.
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues increased $197 in 1995, due to the December 1994 acquisition of the
Atlanta Systems.
A-14
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications Group........................................................... $ 2,178 $ 2,118 $ 60 2.8
Media Group.................................................................... 467 389 78 20.1
--------- --------- --------- ---
Total operating income......................................................... $ 2,645 $ 2,507 $ 138 5.5
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS GROUP OPERATING INCOME
The Communications Group's operating income increased $60, or 2.8 percent,
to $2,178 during 1995. Revenue growth contributed $308 of the increase which was
largely offset by an increase of $248, or 3.5 percent, in operating costs. The
higher operating costs were incurred to improve customer service and meet
greater than expected business growth.
MEDIA GROUP OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.......................................................................... $ 399 $ 397 $ 2 0.5
International..................................................................... (1) (1) -- --
--------- --------- --- ---
398 396 2 0.5
Wireless communications:
Cellular.......................................................................... 147 82 65 79.3
Paging sales and service(1)....................................................... -- 6 (6) --
--------- --------- --- ---
147 88 59 67.0
Cable and telecommunications........................................................ 23 -- 23 --
Other(2)............................................................................ (101) (95) (6) (6.3)
--------- --------- --- ---
Operating income.................................................................... $ 467 $ 389 $ 78 20.1
--------- --------- --- ---
--------- --------- --- ---
</TABLE>
- ------------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
six months ending June 30, 1994.
(2) Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
During 1995, Media Group operating income increased 13 percent, to $467,
excluding the effects of the 1994 Atlanta Systems acquisition and sale of the
paging business. The increase was primarily due to strong growth in wireless
communications operations.
DIRECTORY AND INFORMATION SERVICES. During 1995, operating income related
to domestic Yellow Pages directory advertising increased $40. Revenue increases
of $61 and general cost savings of $15, including $8 associated with assuming
the management of certain data base services from the Communications Group,
contributed to the increase. The revenue gains and cost savings were partially
offset by operating cost increases of $36, primarily due to an 11 percent
increase in paper, printing, delivery and distribution costs. New product
development activities reduced domestic directory and information services
operating income by $104 in 1995, compared with a reduction of $66 in 1994.
A-15
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
WIRELESS COMMUNICATIONS. Cellular operating income increased 79.3 percent,
to $147 in 1995. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1995 decline in revenue per subscriber of 13 percent has
been more than offset by decreases in the cost incurred to acquire and support
customers.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications operating income
reflects the December 1994 acquisition of the Atlanta Systems. The Atlanta
Systems contributed operating income of $23 in 1995.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest expense................................................................... $ 527 $ 442 $ 85 19.2
Equity losses in unconsolidated ventures........................................... 207 121 86 71.1
Other expense (income) -- net...................................................... 36 (25) 61 --
</TABLE>
Interest expense increased primarily as a result of increased debt financing
at the Communications Group, the December 1994 acquisition of the Atlanta
Systems, new domestic and international investments and a reclassification of
debt from net investment in assets held for sale.
Equity losses increased $86 in 1995, primarily due to costs related to
expansion of the network and additional financing costs at Telewest; and
additional costs associated with the significant increase in customers at One 2
One. Start-up and other costs associated with new international cable and
telecommunications investments primarily located in the Czech Republic and
Malaysia also contributed to the increase. These increased losses were partially
offset by earnings in the European wireless operations and gains related to
movement in foreign currency exchange rates. Losses related to domestic
investments in TWE and PrimeCo also increased.
The increase in other expense is largely attributable to costs associated
with the Recapitalization Plan in 1995, increased minority interest expense
associated with the domestic cellular operations and a 1994 gain on sale of
nonstrategic operations.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
DECREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes......................................................... $ 825 $ 857 $ (32) (3.7)
Effective tax rate................................................................. 38.3% 37.5% -- --
</TABLE>
The increase in the effective tax rate reflects the impacts of goodwill
amortization related to the acquisition of the Atlanta Systems, higher state and
foreign income taxes, and expenses associated with the Recapitalization Plan.
Additionally, a tax benefit was recorded in 1994, related to the sale of paging
assets, which contributed to the increase in the effective tax rate. These
impacts were partially offset by lower pretax income and the effects of a
research and experimentation credit, and adjustments for prior periods.
A-16
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Communications Group................................................................. $ 3,306 $ 2,719 $ 2,509
Media Group.......................................................................... 692 640 551
Elimination(1)....................................................................... -- 61 187
--------- --------- ---------
Total cash provided by operating activities.......................................... $ 3,998 $ 3,420 $ 3,247
--------- --------- ---------
--------- --------- ---------
- ------------------------------
(1) Reflects an adjustment for the cash funding of postretirement benefits by Communications Group and the related
issuance of U S WEST common stock.
</TABLE>
During 1996, cash provided by operating activities increased $578 due
primarily to growth in Communications Group operations. The increase in
operating cash flows at the Communications Group reflects a $157 decrease in the
cash funding of postretirement benefits and lower restructuring plan
expenditures. Operating cash flow in Media Group increased due to growth in the
cellular and Yellow Pages businesses, in addition to the contributing effects of
the Continental Merger. See the U S WEST Consolidated Financial Statements --
Note 11 -- Restructuring Charge.
Cash provided by operating activities increased $173 in 1995. Business
growth in the Communications Group and a reduction in the cash funding of
postretirement benefit costs were partially offset by increases in restructuring
plan expenditures. Improvement in the Media Group operating cash flow resulted
from growth in the cellular business and the acquisition of the Atlanta Systems,
partially offset by higher income tax and interest payments.
INVESTING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Communications Group................................................................. $ 2,230 $ 2,268 $ 2,156
Media Group.......................................................................... 818 1,238 1,422
--------- --------- ---------
Total cash used for investing activities............................................. $ 3,048 $ 3,506 $ 3,578
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total capital expenditures were $3,071, $2,825 and $2,603 in 1996, 1995 and
1994, respectively. In 1997, capital expenditures are expected to approximate
$4.1 billion, of which $2.5 billion and $1.6 billion pertain to the
Communications Group and the Media Group, respectively. Included in the 1997
capital expenditure estimates are the Communications Group entry costs for
wireless PCS and the interLATA long-distance markets and interconnection costs
to meet the requirements of the Telecommunications Act of 1996. Also included
are costs for the Media Group to upgrade the domestic cable network and the
domestic cellular network.
In March 1995, PrimeCo, a wireless services joint venture in which Media
Group has a 24 percent interest, was awarded PCS licenses in 11 markets. The
Company's share of the cost of the licenses was approximately $268, all of which
was funded in 1995. In 1996, the Company invested an additional $132 to fund
network build activities.
A-17
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Investing activities of the Company include equity investments in
international ventures. The Company invested $243, $681 and $444 in
international ventures in 1996, 1995 and 1994, respectively. Investments in 1996
include loans provided to One 2 One, the purchase of a 23 percent interest in a
venture to provide wireless service in Poland and the purchase of a 28 percent
interest in a venture in Belgium to provide telephony services on the cable
network. In 1995, the Company invested $681 in international ventures in
Malaysia, the Netherlands, Czech Republic and United Kingdom. The Company
invested approximately $444 in developing international businesses in 1994,
including the acquisition of Thomson Directories. The Company anticipates that
investments in international ventures will approximate $420 in 1997. This
includes investments to provide digital wireless service in India and to fund
expansion at One 2 One. Additionally, in 1997, U S WEST may contribute equity to
ventures acquired from Continental.
In connection with its review of the financial and operating performance,
market value and capital requirements of its international investment portfolio,
management has identified certain investments it believes are appropriate to
sell or restructure under acceptable terms. Management expects that sales
proceeds could approximate $300 in 1997. In January 1997, the Company sold its 5
percent interest in a French wireless venture for proceeds of $82. Additionally,
U S WEST is pursuing a possible sale or restructuring of Continental's joint
venture interest in Optus Vision Pty Ltd, an Australian cable/telephony venture.
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Communications Group.................................................................. $ (1,168) $ (395) $ (293)
Media Group........................................................................... 227 525 993
Elimination(1)........................................................................ -- (61) (187)
--------- --------- ---------
Total cash (used for) provided by financing activities................................ $ (941) $ 69 $ 513
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Reflects an adjustment for the receipt of cash by the Media Group for the
funding of postretirement benefits by Communications Group and the related
issuance of U S WEST common stock.
Total debt at December 31, 1996, was $15,351, an increase of $6,496 compared
to December 31, 1995. The increase is primarily a result of assuming Continental
debt totaling $6,525 (at market value) on November 15, 1996. Concurrently, the
Company refinanced $3,657 of the assumed debt with commercial paper. In January
1997, the Company issued medium- and long-term debt totaling $4.1 billion, at a
weighted average rate of 7.47 percent. The proceeds were used to refinance the
commercial paper. Accordingly, such commercial paper is classified as long-term
debt in the accompanying U S WEST Consolidated Balance Sheet at December 31,
1996.
The assumption of Continental's debt, in conjunction with the Merger, has
resulted in a downgrading of U S WEST's credit ratings. Senior unsecured debt
and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps
were Baa1, BBB+ and BBB+, and P2, A2, and D-2, respectively.
The Continental Merger and the regulatory uncertainty surrounding the
Washington State Utilities and Transportation Commission's $91.5 rate reduction
order (see the U S WEST Consolidated Financial Statements -- Note 19 --
Commitments and Contingencies) have also resulted in a general downgrading of U
S WEST Communications' credit ratings. U S WEST Communications' senior unsecured
debt and
A-18
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps were
Aa3, A-plus and AA-minus, and P1, A1 and D-1-plus, respectively, at December 31,
1996.
In 1996, U S WEST issued $254 of exchangeable notes, or Debt Exchangeable
for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each DECS will be
mandatorily exchanged by U S WEST for shares of Financial Security Assurance
Holdings Ltd. ("FSA") held by the Company or, at U S WEST's option, redeemed at
the cash equivalent. The capital assets segment currently holds approximately 40
percent of the outstanding FSA common stock. On October 29, 1996, the Company
refinanced commercial paper through the issuance of 8.25 percent Preferred
Securities totaling $480. The payment of interest and redemption amounts to
holders of the Preferred Securities are fully and unconditionally guaranteed by
U S WEST.
During 1995, debt increased $917 primarily due to the increase in capital
expenditures at the Communications Group, Media Group investments in
international ventures, acquisition of PCS licenses, and a reclassification of
debt from net investment in assets held for sale. In addition, during
fourth-quarter 1995, U S WEST issued $130 of DECS due December 15, 1998. These
increases in debt were partially offset by reductions of debt in 1995 related to
the Media Group investment in TWE and a refinancing of commercial paper by
issuing $600 of Preferred Securities. The payment of interest and redemption
amounts to holders of the Preferred Securities are fully and unconditionally
guaranteed by U S WEST.
During 1995, U S WEST refinanced $2.6 billion of commercial paper to take
advantage of favorable long-term interest rates. In addition to the commercial
paper, U S WEST Communications refinanced $145 of long-term debt. Expenses
associated with the refinancing of long-term debt resulted in extraordinary
after-tax charges to income of $8, net of tax benefits of $5.
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Excluding debt associated with the capital assets segment, the Company's
percentage of debt to total capital at December 31, 1996, was 54.8 percent
compared with 50.7 percent at December 31, 1995. Including debt associated with
the capital assets segment, Preferred Securities and mandatorily redeemable
preferred stock, the Company's percentage of debt to total capital was 59.5
percent at December 31, 1996 and 56.4 percent at December 31, 1995. The increase
in debt related to total capital in 1996 is a result of the increase in debt
associated with the Continental Merger.
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. In addition, U S WEST maintains lines of credit aggregating
approximately $5.1 billion, all of which was available at December 31, 1996.
Under registration statements filed with the Securities and Exchange Commission
("SEC"), as of December 31, 1996, U S WEST is permitted to issue up to
approximately $940 of new debt securities.
U S WEST from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST. There is no assurance that any such discussions will result in the
consummation of any such transaction.
A-19
<PAGE>
U S WEST, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
RISK MANAGEMENT
The Company is exposed to market risks arising from changes in interest
rates and foreign exchange rates. Derivative financial instruments are used to
manage this risk. U S WEST does not use derivative financial instruments for
trading purposes.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the interest rate variability. This is
achieved through the use of interest rate swaps which adjust the ratio of fixed-
to variable-rate debt.
Notional amounts of interest rate swaps and cap agreements outstanding were
$2,649 and $1,609 at December 31, 1996 and 1995, respectively. This includes
notional amounts for interest rate swaps and cap agreements of $1,500, that were
assumed in connection with the Continental Merger. These contracts have various
maturities that extend to 2004. A 25 basis point increase in interest rates
would create a gain of $4 in the market value of interest rate contracts.
Likewise, a 25 basis point decrease in interest rates would create a loss of $4
in the market value of interest rate contracts.
During fourth-quarter 1996, U S WEST purchased put options for $1.5 billion
notional of U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. A deferred gain of $5 was
recognized in January 1997 at contract closing. The deferred gain will be
recognized as a yield adjustment over the life of the debt, which matures at
various dates through 2027.
FOREIGN EXCHANGE RISK MANAGEMENT
U S WEST enters into forward and zero-cost combination option contracts to
manage the market risks associated with fluctuations in foreign exchange rates
after consideration of offsetting foreign exposures among international
operations. The use of forward and option contracts allow U S WEST to fix or cap
the cost of firm foreign investment commitments and the repayment of foreign
currency denominated short-term receivables in countries with freely convertible
currencies. The market values of the foreign exchange positions, including the
hedging instruments, are continuously monitored and compared with predetermined
levels of acceptable risk.
As of December 31, 1996, 1995 and 1994, notional amounts of foreign exchange
forward and option contracts outstanding were $0, $456 and $170, respectively.
These contracts were primarily for the purchase of Dutch guilders and British
pounds in 1995 and British pounds in 1994. In January and February 1997, the
Company entered into foreign exchange forward contracts in notional amounts
totaling $170 for the purchase and/or sale of British pounds, Japanese yen and
French francs. All foreign exchange contracts have maturities of one year or
less.
The Company had British pound-denominated receivables in the translated
principal amounts of $250, $139 and $48 at December 31, 1996, 1995 and 1994,
respectively. The Company also had foreign exchange risks associated with a
Dutch guilder-denominated payable in the translated principal amount of $216 at
December 31, 1995, which was repaid in February 1996. These positions were
partially hedged in 1996 and 1995. In 1997, these positions are no longer
hedged.
COMPETITIVE AND REGULATORY ENVIRONMENT
For a complete discussion of the competitive and regulatory environment of
the Communications Group and the Media Group, see Management's Discussion and
Analysis of Financial Condition and Results of Operations -- "Competitive and
Regulatory Environment."
A-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Consolidated Balance Sheet of U S WEST,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996, and the
related Consolidated Statements of Operations and Cash Flows for the year then
ended. These consolidated financial statements and the Supplementary Selected
Proportionate Results of Operations referred to below are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and supplementary information based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of U S WEST, Inc.
and subsidiaries as of December 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
We have also audited the Supplementary Selected Proportionate Results of
Operations for the year ended December 31, 1996, presented on page A-69. The
Supplementary Selected Proportionate Results of Operations have been prepared by
management to present relevant financial information that is not provided by the
Consolidated Financial Statements and is not intended to be a presentation in
conformity with generally accepted accounting principles. In our opinion, the
Supplementary Selected Proportionate Results of Operations referred to above
fairly states, in all material respects, the information set forth therein on
the basis of accounting described on page A-69.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1997.
A-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Consolidated Balance Sheet of U S WEST, Inc. as of
December 31, 1995, and the related Consolidated Statements of Operations and
Cash Flows for each of the two years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of U S WEST, Inc.
as of December 31, 1995, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
A-22
<PAGE>
REPORT OF MANAGEMENT
The Consolidated Financial Statements of U S WEST have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis. The integrity and objectivity of information in these financial
statements, including estimates and judgments, are the responsibility of
management, as is all other financial information included in this report.
U S WEST maintains a system of internal accounting controls designed to
provide reasonable assurance as to the integrity and reliability of financial
statements, the safeguarding of assets and the prevention and detection of
material errors or fraudulent financial reporting. Monitoring of such systems
includes an internal audit program designed to objectively assess the
effectiveness of internal controls and recommend improvements therein.
Limitations exist in any system of internal accounting controls based upon
the recognition that the cost of the system should not exceed the benefits
derived. U S WEST believes that the Company's system does provide reasonable
assurance that transactions are executed in accordance with management's general
or specific authorizations and is adequate to accomplish the stated objectives.
The independent certified public accountants, whose reports are included
herein, were engaged to express an opinion on our Consolidated Financial
Statements. Their opinions are based on procedures performed in accordance with
generally accepted auditing standards, including examining, on a test basis,
evidence supporting the amounts and disclosures in the Consolidated Financial
Statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
In an attempt to assure objectivity, the financial information contained in
this report is subject to review by the Audit Committee of the Board of
Directors. The Audit Committee is composed of outside directors who meet
regularly with management, internal auditors and independent auditors to review
financial reporting matters, the scope of audit activities and the resolution of
audit findings.
Richard D. McCormick
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Michael P. Glinsky
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
February 12, 1997
A-23
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
DOLLARS IN MILLIONS
<S> <C> <C> <C>
Sales and other revenues......................................................... $ 12,911 $ 11,746 $ 10,953
Operating expenses:
Employee-related expenses...................................................... 4,412 4,071 3,779
Other operating expenses....................................................... 2,671 2,323 2,203
Taxes other than income taxes.................................................. 429 416 412
Depreciation and amortization.................................................. 2,544 2,291 2,052
--------- --------- ---------
Total operating expenses..................................................... 10,056 9,101 8,446
--------- --------- ---------
Operating income................................................................. 2,855 2,645 2,507
Interest expense................................................................. 612 527 442
Equity losses in unconsolidated ventures......................................... 346 207 121
Gains on asset sales:
Rural telephone exchanges...................................................... 59 136 82
Merger and partial sale of joint venture interest.............................. -- 157 164
Paging assets.................................................................. -- -- 68
Guaranteed minority interest expense............................................. 55 14 --
Other expense (income) -- net.................................................... 61 36 (25)
--------- --------- ---------
Income before income taxes, extraordinary item and cumulative
effect of change in accounting principle....................................... 1,840 2,154 2,283
Provision for income taxes....................................................... 696 825 857
--------- --------- ---------
Income before extraordinary item and cumulative effect of
change in accounting principle................................................. 1,144 1,329 1,426
Extraordinary item -- early extinguishment of debt -- net of tax................. -- (12) --
--------- --------- ---------
Income before cumulative effect of change in accounting principle................ 1,144 1,317 1,426
Cumulative effect of change in accounting principle -- net of tax................ 34 -- --
--------- --------- ---------
NET INCOME....................................................................... $ 1,178 $ 1,317 $ 1,426
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock..................................................... 9 3 --
--------- --------- ---------
EARNINGS AVAILABLE FOR COMMON STOCK.............................................. $ 1,169 $ 1,314 $ 1,426
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-24
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
IN THOUSANDS (EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE:
Income before extraordinary item and cumulative effect of change in accounting
principle.................................................................... $ 2.55 $ 2.52 $ 2.53
Extraordinary item -- early extinguishment of debt............................. -- (0.02) --
Cumulative effect of change in accounting principle............................ 0.07 -- --
--------- --------- ---------
COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE................................... $ 2.62 $ 2.50 $ 2.53
--------- --------- ---------
--------- --------- ---------
COMMUNICATIONS GROUP AVERAGE COMMON SHARES OUTSTANDING........................... 477,549 470,716 453,316
--------- --------- ---------
--------- --------- ---------
MEDIA GROUP EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item........................................ $ (0.16) $ 0.30 $ 0.61
Extraordinary item -- early extinguishment of debt............................. -- (0.01) --
--------- --------- ---------
MEDIA GROUP EARNINGS (LOSS) PER COMMON SHARE..................................... $ (0.16) $ 0.29 $ 0.61
--------- --------- ---------
--------- --------- ---------
MEDIA GROUP AVERAGE COMMON SHARES OUTSTANDING.................................... 491,924 470,549 453,316
--------- --------- ---------
--------- --------- ---------
U S WEST, INC. EARNINGS PER COMMON SHARE......................................... $ 3.14
---------
---------
U S WEST, INC. AVERAGE COMMON SHARES OUTSTANDING................................. 453,316
---------
---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-25
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 201 $ 192
Accounts and notes receivable, less allowance for
credit losses of $125 and $88, respectively............................................. 2,113 1,886
Inventories and supplies.................................................................. 159 227
Deferred directory costs.................................................................. 259 247
Deferred tax asset........................................................................ 213 282
Prepaid and other......................................................................... 167 75
--------- ---------
Total current assets........................................................................ 3,112 2,909
--------- ---------
Property, plant and equipment -- net........................................................ 18,281 14,677
Investment in Time Warner Entertainment..................................................... 2,477 2,483
Net investment in international ventures.................................................... 1,548 1,511
Intangible assets -- net.................................................................... 12,595 1,798
Net investment in assets held for sale...................................................... 409 429
Other assets................................................................................ 2,433 1,264
--------- ---------
Total assets................................................................................ $ 40,855 $ 25,071
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-26
<PAGE>
U S WEST, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt........................................................................... $ 1,051 $ 1,901
Accounts payable.......................................................................... 1,316 975
Due to Continental Cablevision shareowners................................................ 1,150 --
Employee compensation..................................................................... 470 385
Dividends payable......................................................................... 263 254
Current portion of restructuring charge................................................... 126 282
Other..................................................................................... 1,698 1,255
--------- ---------
Total current liabilities................................................................... 6,074 5,052
--------- ---------
Long-term debt.............................................................................. 14,300 6,954
Postretirement and other postemployment benefit obligations................................. 2,479 2,433
Deferred income taxes....................................................................... 4,349 1,071
Unamortized investment tax credits.......................................................... 173 199
Deferred credits and other.................................................................. 800 763
Commitments and Contingencies
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures...................................................... 1,080 600
Preferred stock subject to mandatory redemption............................................. 51 51
Shareowners' equity:
Series D Preferred Stock -- $1.00 per share par value, 20,000,000 shares authorized and
issued.................................................................................. 920 --
Common shares -- Communications Stock -- $0.01 per share par value, 2,000,000,000 shares
authorized, 480,460,536 and 482,877,097 issued and 480,457,336 and 473,635,025
outstanding, respectively. Media Stock -- $0.01 per share par value, 2,000,000,000
shares authorized, 624,782,710 and 481,556,451 issued and 608,863,327 and 472,314,379
outstanding, respectively............................................................... 10,741 8,228
Retained earnings (deficit)............................................................... 18 (115)
LESOP guarantee........................................................................... (91) (127)
Foreign currency translation adjustments.................................................. (39) (38)
--------- ---------
Total shareowners' equity................................................................... 11,549 7,948
--------- ---------
Total liabilities and shareowners' equity................................................... $ 40,855 $ 25,071
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-27
<PAGE>
U S WEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
OPERATING ACTIVITIES
Net income......................................................................... $ 1,178 $ 1,317 $ 1,426
Adjustments to net income:
Depreciation and amortization.................................................... 2,544 2,291 2,052
Equity losses in unconsolidated ventures......................................... 346 207 121
Gain on asset sales:
Rural telephone exchanges...................................................... (59) (136) (82)
Merger and partial sale of joint venture interest.............................. -- (157) (164)
Paging assets.................................................................. -- -- (68)
Cumulative effect of change in accounting principle.............................. (34) -- --
Deferred income taxes and amortization of investment tax credits................. 5 274 373
Changes in operating assets and liabilities:
Restructuring payments......................................................... (242) (334) (289)
Postretirement medical and life costs, net of cash fundings.................... 39 (24) (5)
Accounts and notes receivable.................................................. (56) (169) (104)
Inventories, supplies and other current assets................................. 31 (79) (81)
Accounts payable and accrued liabilities....................................... 225 45 (4)
Other -- net....................................................................... 21 185 72
--------- --------- ---------
Cash provided by operating activities.............................................. 3,998 3,420 3,247
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment................................... (3,071) (2,825) (2,603)
Investments in international ventures............................................ (243) (681) (350)
Cash from net investment in assets held for sale................................. 213 -- --
Investment in Atlanta Systems.................................................... -- -- (745)
Proceeds from sale of paging assets.............................................. -- -- 143
Proceeds from disposals of property, plant and equipment......................... 189 201 96
Other -- net..................................................................... (136) (201) (119)
--------- --------- ---------
Cash (used for) investing activities............................................. (3,048) (3,506) (3,578)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt -- net............................. 3,987 (1,281) 1,280
Repayments of long-term debt..................................................... (4,699) (1,058) (526)
Proceeds from issuance of Preferred Securities -- net............................ 465 581 --
Proceeds from issuance of long-term debt......................................... 383 2,732 251
Proceeds from issuance of common stock........................................... 168 87 364
Purchases of treasury stock...................................................... (297) (63) (20)
Dividends paid on common and preferred stock..................................... (948) (929) (886)
Proceeds from issuance of mandatorily redeemable preferred stock................. -- -- 50
--------- --------- ---------
Cash (used for) provided by financing activities................................. (941) 69 513
--------- --------- ---------
Cash (used for) provided by continuing operations................................ 9 (17) 182
Cash (to) discontinued operations................................................ -- -- (101)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease).............................................................. 9 (17) 81
Beginning balance................................................................ 192 209 128
--------- --------- ---------
Ending balance................................................................... $ 201 $ 192 $ 209
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Consolidated Financial
Statements.
A-28
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareowners of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors of U S WEST, Inc.
(the "Board") to reincorporate in Delaware and create two classes of common
stock that are intended to reflect separately the performance of the
communications and multimedia businesses. Under the Recapitalization Plan,
shareowners approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware corporation ("U S WEST" or the "Company"),
pursuant to which U S WEST continues as the surviving corporation. In connection
with the merger, the Certificate of Incorporation of U S WEST has been amended
and restated to designate two classes of common stock of U S WEST, one class of
which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado was converted into one share each of
Communications Stock and Media Stock.
The Communications Stock and Media Stock provide shareowners with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
The Communications Group is comprised of U S WEST Communications, Inc. ("U S
WEST Communications"), U S WEST Communications Services, Inc., U S WEST Federal
Services, Inc., U S WEST Advanced Technologies, Inc., U S WEST Business
Resources, Inc. and U S WEST Long Distance, Inc. The Communications Group
provides telecommunications services to more than 25 million residential and
business customers in the Communications Group region (the "Region"). The Region
includes the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming. Services offered by the Communications Group include local telephone
services, exchange access services (which connect customers to the facilities of
carriers, including long-distance providers and wireless operators), and
long-distance services within Local Access and Transport Areas ("LATAs") in the
Region. The Communications Group provides other products and services, including
high-speed data applications, customer premises equipment and certain other
communications services to business customers and governmental agencies both
inside and outside the Region.
The Media Group is comprised of Continental Cablevision, Inc., the third
largest cable television system operator in the United States, U S WEST
Multimedia Communications, Inc., which owns domestic cable television operations
and investments, U S WEST Dex, Inc. (formerly U S WEST Marketing Resources
Group, Inc.), which publishes White and Yellow Pages telephone directories, and
provides directory and information services, U S WEST NewVector Group, Inc.,
which provides communications and information products and services over
wireless networks and U S WEST International Holdings, Inc., which primarily
owns investments in international cable and telecommunications, wireless
communications and directory publishing operations.
Dividends to be paid on Communications Stock are initially $0.535 per share
per quarter. Dividends on the Communications Stock will be paid at the
discretion of the Board, based primarily on the financial condition, results of
operations and business requirements of the Communications Group and the Company
as a whole. With regard to the Media Stock, the Board currently intends to
retain future
A-29
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: RECAPITALIZATION PLAN (CONTINUED)
earnings, if any, for the development of the Media Group's businesses and does
not anticipate paying dividends on the Media Stock in the foreseeable future.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Consolidated Financial Statements include the
accounts of U S WEST and its majority-owned subsidiaries, except for the capital
assets segment, which is held for sale. All significant intercompany amounts and
transactions have been eliminated. Investments in less than majority-owned
ventures are accounted for using the equity method.
Certain reclassifications within the Consolidated Financial Statements have
been made to conform to the current year presentation.
INDUSTRY SEGMENTS. U S WEST consists of two Groups -- the Communications
Group and the Media Group. The Communications Group operates in one industry
segment (communications and related services) and the Media Group operates in
four industry segments (directory and information services, wireless
communications, cable and telecommunications and the capital assets segment,
which is held for sale) as defined in Statement of Financial Accounting
Standards ("SFAS") No. 14, "Financial Reporting for Segments of a Business
Enterprise."
Prior to January 1, 1995, the capital assets segment was accounted for as
discontinued operations. Effective January 1, 1995, the capital assets segment
has been accounted for as a net investment in assets held for sale, as discussed
in Note 20 -- Net Investment in Assets Held for Sale -- to the Consolidated
Financial Statements.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES. New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Nonreusable material is carried
at its estimated salvage value. Inventories of all other U S WEST subsidiaries
are carried at the lower of cost or market on a first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is carried at cost less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are expensed as
incurred.
U S WEST Communications and Continental provide for depreciation of
property, plant and equipment based on various straight-line group methods using
remaining useful (economic) lives based on industry-wide studies. U S WEST
Communications discontinued accounting for its regulated telephone
A-30
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
operations under SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," in 1993. The average depreciable lives used for the major
categories of telephone property, plant and equipment follow:
<TABLE>
<CAPTION>
AVERAGE LIFE
CATEGORY (YEARS)
- -------------------------------------------------------------------------- -------------------
<S> <C>
General purpose computers................................................. 6
Digital switch............................................................ 10
Digital circuit........................................................... 10
Aerial copper cable....................................................... 15
Underground copper cable.................................................. 15
Buried copper cable....................................................... 20
Fiber cable............................................................... 20
Buildings................................................................. 27-49
</TABLE>
When the depreciable property, plant and equipment of U S WEST
Communications and Continental is retired or sold, the original cost less the
net salvage value is generally charged to accumulated depreciation.
The other subsidiaries of U S WEST provide for depreciation using the
straight-line method. When such depreciable property, plant and equipment is
retired or sold, the resulting gain or loss is included in income. Media Group
depreciates buildings between 10 to 40 years, cable distribution systems between
3 to 15 years, cellular systems between 5 to 15 years, and general purpose
computer and other between 3 to 20 years.
Depreciation expense was $2,411, $2,215 and $2,029 in 1996, 1995 and 1994,
respectively.
Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. Amounts capitalized by U S WEST were $67, $72, and $44 in
1996, 1995 and 1994, respectively.
COMPUTER SOFTWARE. All subsidiaries of U S WEST, except Continental, charge
the cost of computer software, whether purchased or developed internally, to
expense with two exceptions. Initial operating systems software is capitalized
and amortized over the life of the related hardware, and initial network
applications software is capitalized and amortized over three years. Subsequent
upgrades to capitalized software are expensed. Continental capitalizes the cost
of computer software, whether purchased or developed internally.
Capitalized computer software of $223 and $190 at December 31, 1996 and
1995, respectively, is recorded in property, plant and equipment. The Company
amortized capitalized computer software costs of $83, $70 and $62 in 1996, 1995
and 1994, respectively.
INTANGIBLE ASSETS. Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets. The costs of
identified intangible assets and goodwill are amortized by the straight-line
method over periods ranging from five to forty years. These assets are evaluated
for impairment, with other related assets, using the methodology as prescribed
by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and equity securities are
classified as available for sale and are carried at fair market value with
unrealized gains and losses included in equity.
A-31
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of international
investments are translated at year-end exchange rates, and income statement
items are translated at average exchange rates for the year. Resulting
translation adjustments are recorded as a separate component of equity. Gains
and losses resulting from foreign currency transactions are included in income.
FINANCIAL INSTRUMENTS. Net interest accrued on interest rate swaps is
recognized over the life of the swaps as an adjustment to interest expense.
Foreign exchange contracts designated as hedges of firm equity investment
commitments are carried at market value, with gains and losses recorded in
equity until sale of the investment. Forward contracts designated as hedges of
foreign denominated loans are recorded at market value, with gains and losses
recorded in income.
REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS. Local telephone service,
cellular access and cable television services are generally billed monthly in
advance, and revenues are recognized the following month when services are
provided. Revenues derived from cable pay-per-view, advertising and other
telephone services, including exchange access, long-distance and wireless
airtime usage, are billed and recorded monthly as services are provided.
Directory advertising revenues and related directory costs of selling,
composition, printing and distribution are generally deferred and recognized
over the period during which directories are used, normally 12 months. For
international operations, directory advertising revenues and related directory
costs are deferred and recognized upon publication.
INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods. For financial statement purposes, investment tax credits of U S WEST
Communications are being amortized over the economic lives of the related
property, plant and equipment in accordance with the deferred method of
accounting for such credits.
EARNINGS PER COMMON SHARE. For 1995 and 1994, earnings per common share
("earnings per share") for Communications Stock and Media Stock have been
presented on a pro forma basis to reflect the two classes of stock as if they
had been outstanding since January 1, 1994. For periods prior to the
recapitalization, the average common shares outstanding are assumed to be equal
to the average common shares outstanding for U S WEST.
NEW ACCOUNTING STANDARDS. Effective January 1, 1996, U S WEST adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and
associated intangibles be written down to fair value whenever an impairment
review indicates that the carrying value cannot be recovered on an undiscounted
cash flow basis. SFAS No. 121 also requires that a company no longer record
depreciation expense on assets held for sale. See Note 7 -- Property, Plant and
Equipment -- to the Consolidated Financial Statements.
In 1996, U S WEST adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. U S
WEST has adopted the disclosure provisions of SFAS No. 123 but continues to
account for the stock incentive plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 16 -- Stock
Incentive Plans -- to the Consolidated Financial Statements.
A-32
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128 requires
presentation of basic and diluted earnings per share on the face of the income
statement. Adoption of the new standard will not have a material impact on
Communications Group or Media Group earnings per share.
NOTE 3: MERGER OF CABLE SYSTEMS
CONTINENTAL CABLEVISION, INC. On November 15, 1996, Continental
Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U
S WEST (the "Merger" or the "Continental Merger"). Continental is the third
largest cable television system operator in the United States. The aggregate
consideration paid by U S WEST to shareowners of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock with a market value of $920 million and $1.15
billion in cash. In connection with the Merger, U S WEST also assumed all of
Continental's outstanding indebtedness and other liabilities, which approximated
$7.0 billion at November 15, 1996, for a total purchase price of $11.7 billion.
Continental serves 4.5 million domestic customers, passes 7.4 million domestic
homes and holds significant other domestic and international properties.
U S WEST has accounted for the Merger by the purchase method of accounting.
Accordingly, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values. The $8.0 billion
excess of the purchase price over the net tangible assets acquired and the
goodwill related to a deferred income tax liability of $3.3 billion is being
amortized over 25 years, except for intangible assets allocated to Continental's
equity method investments, which are being amortized over 15 years. Amortization
related to Continental's equity method investments is recorded as a component of
equity losses in unconsolidated ventures. The intangible assets acquired consist
principally of the cable television franchises of Continental and goodwill.
Continental's results of operations have been included in the consolidated
results of operations since the Merger date.
Following are summarized, combined, unaudited pro forma results of
operations for U S WEST for the years ended December 31, 1996 and 1995, assuming
the Merger occurred as of the beginning of respective periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
SUMMARIZED RESULTS OF OPERATIONS 1996 1995
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues.................................................................... $ 14,618 $ 13,528
Income before extraordinary item and cumulative effect of
change in accounting principle............................................. 702 835
Net income.................................................................. 736 823
Communications Group earnings per common share*............................. 2.55 2.52
Media Group loss per common share*.......................................... (0.90) (0.64)
</TABLE>
- ------------------------------
* Before extraordinary items and accounting change.
Income before extraordinary item and cumulative effect of change in
accounting principle, net income and earnings (loss) per common share are before
nonrecurring items directly attributable to the Merger. The final allocation of
the purchase price is dependent upon certain valuations and other studies that
have
A-33
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MERGER OF CABLE SYSTEMS (CONTINUED)
not progressed to the stage where there is sufficient information to make a
final allocation in the Consolidated Financial Statements. Accordingly, the
purchase price allocations made in connection with the Consolidated Financial
Statements are preliminary.
The impact on the financial position of U S WEST from the disposition of
certain Continental properties as required by federal rules governing
cross-ownership by telephone companies of cable companies and provision of
interLATA services within the Communications Group Region is not expected to be
material.
ATLANTA SYSTEMS. On December 6, 1994, U S WEST acquired the stock of
Wometco Cable Corp. and subsidiaries, and the assets of Georgia Cable Partners
and Atlanta Cable Partners L.P. (the "Atlanta Systems"), for cash of $745 and
12,779,206 U S WEST common shares valued at $459, for a total purchase price of
approximately $1.2 billion. The Atlanta Systems' results of operations have been
included in the consolidated results of operations since the acquisition date.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated to assets acquired (primarily identified
intangibles) based on their estimated fair values. The identified intangibles
and goodwill are being amortized on a straight-line basis over 25 years.
NOTE 4: INDUSTRY SEGMENTS
U S WEST has two groups, the Communications Group and the Media Group, which
operate in five industry segments.
The businesses comprising the Communications Group operate in a single
industry segment -- communications and related services. Approximately 97
percent of the revenues of the Communications Group are attributable to the
operations of U S WEST Communications, of which approximately 60 percent are
derived from the states of Arizona, Colorado, Minnesota and Washington.
The Media Group operates in four industry segments: directory and
information services, wireless communications, cable and telecommunications and
capital assets, which is held for sale. The cable and telecommunications segment
consists of cable television properties serving 5.0 million domestic subscribers
and passing 8.3 million domestic homes. The directory and information services
segment consists of the publishing of White and Yellow Pages telephone
directories, database marketing services and interactive services in domestic
and international markets. The wireless communications segment provides
information products and services over wireless networks in 12 western and
midwestern states.
A-34
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
Industry segment financial information follows:
<TABLE>
<CAPTION>
COMMUNI-
CATIONS AND DIRECTORY AND WIRELESS CABLE AND
RELATED INFORMATION COMMUNI- TELECOMMUNI- CORPORATE AND INTERSEGMENT
SERVICES SERVICES(1) CATIONS CATIONS(2) OTHER(3) ELIMINATIONS
----------- ------------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1996
Sales and other revenues......... $ 10,079 $ 1,259 $ 1,183 $ 494 $ 19 $ (123)
Operating income (loss).......... 2,340 454 243 (20) (162) --
Identifiable assets.............. 16,915 685 1,579 15,504 6,293 (121)
Depreciation and amortization.... 2,122 48 147 212 15 --
Capital expenditures............. 2,806 36 264 353 15 --
1995
Sales and other revenues......... 9,484 1,180 941 215 38 (112)
Operating income (loss).......... 2,178 398 147 23 (101) --
Identifiable assets.............. 16,585 583 1,439 1,466 5,127 (129)
Depreciation and amortization.... 2,042 36 121 77 15 --
Capital expenditures............. 2,739 37 277 64 23 --
1994
Sales and other revenues......... 9,176 1,075 781 18 34 (131)
Operating income (loss).......... 2,118 396 88 -- (95) --
Identifiable assets.............. 15,944 613 1,286 1,459 4,036 (134)
Depreciation and amortization.... 1,908 30 102 6 6 --
Capital expenditures............. 2,477 42 274 2 25 --
<CAPTION>
CONSOLIDATED
-------------
<S> <C>
1996
Sales and other revenues......... $ 12,911
Operating income (loss).......... 2,855
Identifiable assets.............. 40,855
Depreciation and amortization.... 2,544
Capital expenditures............. 3,474
1995
Sales and other revenues......... 11,746
Operating income (loss).......... 2,645
Identifiable assets.............. 25,071
Depreciation and amortization.... 2,291
Capital expenditures............. 3,140
1994
Sales and other revenues......... 10,953
Operating income (loss).......... 2,507
Identifiable assets.............. 23,204
Depreciation and amortization.... 2,052
Capital expenditures............. 2,820
</TABLE>
- ------------------------------
(1) Includes revenues from directory publishing activities in Europe of $139,
$122 and $78, and identifiable assets of $154, $133 and $124 in 1996, 1995
and 1994, respectively.
(2) Results for Continental and the Atlanta Systems have been included since
the dates of Merger and acquisition. 1996 includes revenues of $6, operating
losses of $7, and identifiable assets of $133 from cable operations in the
Czech Republic.
(3) Identifiable assets include U S WEST's investments in debt and equity
securities, equity and cost method investments and the capital assets
segment, which has been discontinued and is held for sale.
Operating income (loss) represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other expense (income) and income taxes.
Corporate and Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Corporate and Other operating losses increased in 1996 primarily as a result of
a change in cost allocation policy. Beginning in 1996, other operating losses
include costs that are not specifically identifiable with an operating company.
Previously such costs were allocated to the operating companies.
Identifiable assets are those assets used in each segment's operations.
Corporate and Other assets consist primarily of cash, debt and equity
securities, investments in international ventures, the investment in Time Warner
Entertainment, the net investment in assets held for sale and other assets.
SIGNIFICANT CONCENTRATIONS. The largest volume of the Communications
Group's services is provided to AT&T Corp. ("AT&T"). During 1996, 1995 and 1994,
revenues related to those services provided to AT&T were $1,046, $1,085 and
$1,130, respectively. Related accounts receivable at December 31, 1996 and
A-35
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
1995, totaled $89 and $91, respectively. As of December 31, 1996, the
Communications Group is not aware of any other significant concentration of
business transacted with a particular customer, supplier or lender that could,
if suddenly eliminated, severely impact operations.
To ensure consistency and quality of service, the wireless segment uses
Motorola as its primary vendor for infrastructure equipment and cellular mobile
telephone equipment and accessories. In addition, Motorola provides ongoing
technological support for the infrastructure equipment. Approximately 75 percent
of the Media Group's major cellular markets is comprised of Motorola equipment.
WIRELESS COMMUNICATIONS SEGMENT. During 1994, U S WEST signed a definitive
agreement with AirTouch Communications, Inc. ("AirTouch") to combine their
domestic cellular properties into a partnership in a multi-phased transaction.
During Phase I, which commenced on November 1, 1995, the partners are operating
their cellular properties separately. A Wireless Management Company (the "WMC")
has been formed and is providing services to both companies on a contract basis.
In Phase II, the partners will combine their domestic properties subject to
obtaining certain authorizations and partnership approvals. The passage of the
Telecommunications Act of 1996 has removed significant regulatory barriers to
completion of Phase II. In February 1997, the King County Superior Court in
Washington state ruled that U S WEST violated the terms of its partnership
agreement with its minority partners in the Seattle market by entering into the
joint venture agreement with AirTouch. The Company has has obtained a stay of
the ruling pending its appeal. Similar litigation has been filed in other
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. The Company believes it will ultimately be
successful in all such litigation. U S WEST expects that Phase II closing will
occur in the second half of 1997.
Upon the implementation of Phase II, management expects the joint venture
interests will be approximately 74 percent AirTouch and 26 percent U S WEST
(assuming contribution of all domestic cellular properties). The actual
interests in the joint venture at commencement of Phase II depend, among other
things, on the timing of the Phase II closing and the ability of the partners to
combine their domestic properties. U S WEST's interest will further adjust
depending on the timing of the contribution of its investment in PrimeCo
Personal Communications L.P. ("PrimeCo"). The timing of such contribution is at
U S WEST's discretion and will occur either at the closing of Phase II or a date
selected by U S WEST, no later than mid-1998.
U S WEST has the right to convert its joint venture interest in the domestic
cellular properties into AirTouch stock ("Phase III"). U S WEST's interests will
be valued on a private market basis and the AirTouch common stock received by U
S WEST will be based on a fair public market value. In the event the value to be
received by U S WEST exceeds 19.9 percent of AirTouch's outstanding common
stock, U S WEST will receive the excess in the form of nonvoting preferred
stock. U S WEST has the right to initiate Phase III upon completion of Phase II
of the merger and contribution of both U S WEST's and AirTouch's interests in
PrimeCo to the joint venture.
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment") for an
aggregate purchase price of $2.553 billion. TWE owns and operates
A-36
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
substantially all of the entertainment assets previously owned by Time Warner
Inc. ("Time Warner"), consisting primarily of its filmed entertainment,
programming-HBO and cable businesses.
Upon U S WEST's admission to the partnership, certain wholly owned
subsidiaries of Time Warner ("General Partners") and subsidiaries of Toshiba
Corporation and ITOCHU Corporation held pro-rata priority capital and residual
equity interests of 63.27, 5.61 and 5.61 percent, respectively. In 1995, Time
Warner acquired the limited partnership interests previously held by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation.
U S WEST has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or part, between January 1, 1999, and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or U S WEST may elect that the exercise price for
the option be paid with partnership interests rather than cash.
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the General Partners); pro-rata priority capital (A preferred -- held pro
rata by the general and limited partners); junior priority capital (B preferred
- -- held by the General Partners); and common (residual equity interests held pro
rata by the general and limited partners). Of the $2.553 billion contributed by
U S WEST, $1.658 billion represents A preferred capital and $895 represents
common capital. The TWE Partnership Agreement provides for special allocations
of income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' common capital according to their residual partnership
interests. To the extent partnership income is insufficient to satisfy all
special allocations in a particular accounting period, the unearned portion is
carried over until satisfied out of future partnership income. Partnership
losses generally are allocated in reverse order, first to eliminate prior
allocations of partnership income, except senior preferred and special tax
income, next to reduce initial capital amounts, other than senior preferred,
then to reduce the senior preferred account and finally, to eliminate special
tax allocations.
A-37
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
PRIORITY OF PRIORITY CAPITAL TIME WARNER LIMITED PARTNERS
CONTRIBUTED CONTRIBUTED RATES OF GENERAL -----------------------------
CAPITAL CAPITAL(A) RETURN(B) PARTNERS TIME WARNER U S WEST
- ----------------- ------------- ----------------- ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
(% PER ANNUM
<CAPTION>
COMPOUNDED
QUARTERLY) (OWNERSHIP %)
<S> <C> <C> <C> <C> <C>
Senior
preferred....... $ 1,400(c) 8.00% 100.00% -- --
Pro-rata priority
capital......... 5,600 13.00%(d) 63.27% 11.22% 25.51%
Junior priority
capital......... 2,900 13.25%(e) 100.00% -- --
Residual equity
capital......... 3,300 -- 63.27% 11.22% 25.51%
</TABLE>
- ------------------------------
(a) Estimated fair value of net assets contributed excluding partnership income
or loss allocated thereto.
(b) Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c) The senior preferred is scheduled to be distributed to Time Warner in three
annual installments beginning July 1, 1997 with the initial distribution
expected to be $535 million.
(d) 11.00 percent to the extent concurrently distributed.
(e) 11.25 percent to the extent concurrently distributed.
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions were previously subject to
restrictions until July 1995, and are now paid to the partners on a current
basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the General Partners receive
their full share of distributions. No cash distributions have been made to U S
WEST.
U S WEST accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by U S WEST's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
The Company's recorded share of TWE operating results represents allocated TWE
net income or loss adjusted for the amortization of the excess of fair market
value over the book value of the partnership net assets. As a result of this
amortization and the special income allocations described above, the Company's
recorded pretax share of TWE operating results before extraordinary item was
$(4), $(31) and $(18) in 1996, 1995 and 1994, respectively. In addition, TWE
recorded an extraordinary loss for the early extinguishment of debt in 1995. The
Company's share of this extraordinary loss was $4, net of an income tax benefit
of $2.
As consideration for its expertise and participation in the cable operations
of TWE, U S WEST earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 were
recorded to other income in 1996, 1995 and 1994, respectively. The
A-38
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
U S WEST Consolidated Balance Sheets include management fee receivables of $56
and $50 at December 31, 1996 and 1995, respectively, and a note payable to TWE
of $169 at December 31, 1995.
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1996 1995 1994
- -------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................ $ 10,852 $ 9,517 $ 8,460
Operating expenses(1)............................................... 9,774 8,557 7,612
Interest and other expense, net(2).................................. 798 777 647
--------- --------- ---------
Income before income taxes and extraordinary item................... 280 183 201
Income before extraordinary item.................................... 210 97 161
Net income.......................................................... 210 73 161
</TABLE>
- ------------------------------
(1) Includes depreciation and amortization of $1,235, $1,039 and $943 in 1996,
1995 and 1994, respectively.
(2) Includes corporate services of $69, $64 and $60 in 1996, 1995 and 1994,
respectively, and minority interest expense of $207 and $133 in 1996 and
1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
SUMMARIZED FINANCIAL POSITION 1996 1995
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets(3)........................................................... $ 3,146 $ 2,909
Noncurrent assets(4)........................................................ 16,827 15,996
Current liabilities......................................................... 4,075 3,214
Noncurrent liabilities, including minority interest......................... 7,781 7,787
Senior preferred capital.................................................... 1,543 1,426
Partners' capital(5, 6)..................................................... 6,574 6,478
</TABLE>
- ------------------------------
(3) Includes cash of $216 and $209 at December 31, 1996 and 1995,
respectively.
(4) Includes a loan receivable from Time Warner of $400 at December 31, 1996
and 1995, respectively.
(5) Net of a note receivable from U S WEST of $169 at December 31, 1995.
(6) Contributed capital is based on the estimated fair value of the net assets
that each partner contributed to the partnership. The aggregate of such
amounts is significantly higher than TWE's partners' capital as reflected in
the Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
Time Warner has announced its intention to restructure TWE in a manner that
would decrease its interest in the cable businesses and increase its interest in
the entertainment and cable programming businesses of TWE. Any change in the
structure of TWE would require U S WEST's approval in addition to certain
creditors' and regulatory approvals.
A-39
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES
The significant components of net investment in international ventures
follow:
<TABLE>
<CAPTION>
NET INVESTMENT AT
DECEMBER 31,
LINE OF OWNERSHIP --------------------
VENTURE LOCATION BUSINESS PERCENTAGE 1996 1995
- -------------------------------------- ------------------- -------------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Telewest.............................. United Kingdom Cable & Telecom. 26.8 $ 454 $ 540
Binariang Sdn Bhd..................... Malaysia Cable & Telecom. 20 205 224
A2000 (KTA)........................... Netherlands Cable & Telecom. 50 96 218
All other............................. 793 529
--------- ---------
Total............................... $ 1,548 $ 1,511
--------- ---------
--------- ---------
</TABLE>
In connection with the 1996 Continental Merger, U S WEST acquired a 50
percent interest in Fintelco, S.A., a cable venture in Argentina and a 25
percent interest in a cable venture in Singapore. The purchase price assigned to
these ventures is preliminary.
At December 31, 1996, the difference between the carrying amount and U S
WEST's interest in the underlying equity of the international ventures was
approximately $365. This difference has been allocated primarily to licenses and
cable franchises and is being amortized over lives ranging from five to twenty
years.
The following table shows summarized combined financial information for U S
WEST's equity method investments in international ventures.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
COMBINED OPERATIONS 1996 1995 1994
- ---------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues.............................................................. $ 1,869 $ 1,163 $ 580
Operating loss........................................................ (540) (373) (244)
Net loss.............................................................. (857) (514) (308)
</TABLE>
- ------------------------------
Note: Results for Continental ventures have been included since the date of
Merger.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1996 1995
- ------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets................................................................. $ 1,126 $ 1,469
Property, plant and equipment -- net........................................... 5,105 3,545
Other assets................................................................... 2,226 1,644
--------- ---------
Total assets................................................................. $ 8,457 $ 6,658
--------- ---------
--------- ---------
Current liabilities............................................................ $ 1,275 $ 1,260
Long-term debt................................................................. 3,880 2,065
Other liabilities.............................................................. 478 58
Owners' equity................................................................. 2,824 3,275
--------- ---------
Total liabilities and equity................................................. $ 8,457 $ 6,658
--------- ---------
--------- ---------
</TABLE>
In November 1994, Telewest Communications plc ("Telewest") made an initial
public offering of its ordinary shares. Following the offering, in which U S
WEST sold part of its 50 percent joint venture
A-40
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
interest, U S WEST owned approximately 37.8 percent of Telewest. Net proceeds of
approximately $650 were used by Telewest to finance construction and operating
costs, invest in affiliated companies and repay debt. It is U S WEST's policy to
recognize in income any gains or losses related to the sale of stock to the
public. The Company recognized a gain of $105 in 1994, net of $59 in deferred
taxes, for the partial sale of its joint venture interest in Telewest.
On October 2, 1995, Telewest and SBC CableComms (UK) completed a merger of
their UK cable television and telecommunications interests, creating the largest
provider of combined cable and telecommunications services in the United
Kingdom. Following completion of the merger, U S WEST and Tele-Communications,
Inc., the major shareowners, each own 26.8 percent of the combined company. U S
WEST recognized a gain of $95 in 1995, net of $62 in deferred income taxes, in
conjunction with the merger.
Telewest, which is the only equity method investment of U S WEST for which a
quoted market price is available, had a market value of $786 and $914 at
December 31, 1996 and 1995, respectively.
A-41
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
FOREIGN CURRENCY TRANSACTIONS. U S WEST has entered into forward and
zero-cost combination option contracts to manage foreign currency risk. Under a
forward contract, U S WEST agrees with another party to exchange a foreign
currency and U.S. dollars at a specified price at a future date. Under the
combination options, U S WEST combined purchased options to cap the foreign
exchange rate to be paid at a future date with written options to finance the
premium on the purchased options. The commitments, forward contracts and
combination options are for periods of one year or less. For the years ended
December 31, 1996 and 1995, the notional amounts of foreign exchange contracts
outstanding were $0 and $489, respectively. In 1997, U S WEST entered into
foreign exchange forward contracts in notional amounts totaling $170 for the
purchase and/or sale of British pounds, Japanese yen and French francs.
Forward exchange contracts are carried at market value. Gains or losses on
the portion of the contracts designated as hedges of firm equity investment
commitments are deferred as a component of equity and are recognized in earnings
upon sale of the investment. Gains or losses on the portion of the contracts
designated to offset translation of investee net income were recorded in
earnings.
Forward contracts were also used to hedge foreign denominated receivables.
These contracts were carried at market value with gains or losses recorded in
earnings. Foreign currency transaction pretax gains of $27 and pretax hedging
losses of $24 were included in earnings in the year ended December 31, 1996.
Cumulative deferred gains on foreign exchange contracts of $9 and deferred
losses of $28, including deferred taxes (benefits) of $4 and $(11),
respectively, are included in equity at December 31, 1996. Cumulative deferred
gains on foreign exchange contracts of $9 and deferred losses of $25, including
deferred taxes (benefits) of $4 and $(10), respectively, are included in equity
at December 31, 1995.
The counterparties to these contracts are major financial institutions. U S
WEST is exposed to credit loss in the event of nonperformance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings.......................................................... $ 2,722 $ 2,627
Telephone network equipment................................................. 12,925 12,019
Telephone outside plant..................................................... 13,148 12,353
Cable distribution systems.................................................. 2,640 167
Cellular systems............................................................ 897 733
General purpose computers and other......................................... 4,414 4,051
Construction in progress.................................................... 1,010 934
--------- ---------
37,756 32,884
Less accumulated depreciation............................................... 19,475 18,207
--------- ---------
Property, plant and equipment -- net........................................ $ 18,281 $ 14,677
--------- ---------
--------- ---------
</TABLE>
A-42
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: PROPERTY, PLANT AND EQUIPMENT (CONTINUED)
During 1996, property, plant and equipment increased $2,635 as a result of
the Continental Merger. This increase was primarily attributed to cable and
distribution systems.
In 1996, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $243. Consideration received for the sales was $306, including
$174 in cash. In 1995 and 1994, U S WEST Communications sold certain rural
telephone exchanges with a cost basis of $258 and $122, respectively, and
received consideration of $388 (including $214 in cash) during 1995 and $204
(including $93 in cash) during 1994.
ADOPTION OF SFAS NO. 121
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires that long-lived assets and associated intangibles be
written down to fair value whenever an impairment review indicates that the
carrying value cannot be recovered on an undiscounted cash flow basis. SFAS No.
121 also requires that a company no longer record depreciation expense on assets
held for sale. Adoption of SFAS No. 121 resulted in income of $34 (net of tax of
$22) from the cumulative effect of reversing depreciation expense recorded in
prior years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date U S WEST formally committed to a plan to
dispose of the rural telephone exchange assets to January 1, 1996. The income
has been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying values of the rural telephone
exchange assets being held for sale approximates $144 and $338 at December 31,
1996 and 1995, respectively. As a result of adopting SFAS No. 121, depreciation
expense for 1996 was reduced by $24. The combined effects of lower depreciation
expense and the cumulative effect of adoption of the new standard will be
directly offset by lower recognized gains on future rural telephone exchange
sales.
NOTE 8: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value........................... $ 8,388 $ 1,183
Goodwill.................................................................... 4,465 743
--------- ---------
12,853 1,926
Less accumulated amortization............................................... 258 128
--------- ---------
Total intangible assets -- net.............................................. $ 12,595 $ 1,798
--------- ---------
--------- ---------
</TABLE>
During 1996, identified intangibles (primarily franchise value) increased
$7,203 and goodwill increased $3,710 as a result of the Continental Merger.
Amortization expense was $133, $76 and $23 in 1996, 1995 and 1994, respectively.
A-43
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper.......................................................... $ 842 $ 807
Bank loan................................................................. -- 216
Other..................................................................... 55 --
Current portion of long-term debt........................................... 300 1,029
Allocated to the capital assets segment -- net.............................. (146) (151)
--------- ---------
Total....................................................................... $ 1,051 $ 1,901
--------- ---------
--------- ---------
</TABLE>
The weighted-average interest rate on commercial paper was 5.73 percent and
5.79 percent at December 31, 1996 and 1995, respectively.
Other notes payable at December 31, 1996 includes $50 associated with U S
WEST's increase in ownership of a cable venture in the Czech Republic. This note
was paid in January 1997. At December 31, 1995, the bank loan, in the translated
principal amount of $216, was denominated in Dutch guilders. The loan was repaid
in February 1996.
In January 1997, U S WEST paid the cash portion of the Continental Merger
consideration totaling $1,150. This payment was financed with commercial paper.
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. U S WEST is permitted to borrow up to approximately $5.1 billion under
lines of credit, all of which was available at December 31, 1996.
LONG-TERM DEBT
On November 15, 1996, U S WEST assumed Continental debt totaling $6,525 (at
market value) in conjunction with the Merger. Concurrently, U S WEST refinanced
$3,657 of the assumed debt with commercial paper. In January 1997, U S WEST
issued medium- and long-term debt totaling $4.1 billion, at a weighted-average
interest rate of 7.47 percent. The net proceeds were used to refinance
outstanding commercial paper. Such commercial paper is classified as long-term
debt in the accompanying Consolidated Balance Sheet and the following tables.
A-44
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
The components of long-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Senior unsecured notes, debentures, medium-term notes and refinanced
commercial paper........................................................... $ 12,536 $ 6,484
Zero coupon subordinated notes, 7.3 percent yield to maturity convertible at
any time into equal shares of Communications Stock and Media Stock......... 1,529 1,569
Senior subordinated debt.................................................... 400 --
Debt exchangeable for common stock.......................................... 384 130
Insurance company notes..................................................... 68 --
Leveraged employee stock ownership plans (LESOP)............................ 53 91
Capital lease obligations................................................... 140 145
Other....................................................................... 134 69
Unamortized discount -- net................................................. (1,118) (1,178)
Unamortized premium -- net.................................................. 335 --
Allocated to the capital assets segment -- net.............................. (161) (356)
--------- ---------
Total..................................................................... $ 14,300 $ 6,954
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996, long-term debt includes senior unsecured notes and
debentures totaling $2.0 billion, senior subordinated debt of $400 and insurance
company notes of $68 assumed in connection with the Continental Merger. The
senior unsecured notes and debentures and the senior subordinated debt totaling
$2.4 billion are not guaranteed by U S WEST. The notes and debentures limit
Continental's ability to, among other things, pay dividends, create liens, incur
additional debt, dispose of property, investments and leases, and requires
certain minimum ratios of cash flow to debt and cash flow to related fixed
charges.
On May 13, 1996, U S WEST issued $254 of Debt Exchangeable for Common Stock
("DECS") due May 15, 1999, in the principal amount of $26.63 per note. The notes
bear interest at 7.625 percent. Upon maturity, each DECS will be mandatorily
redeemed by U S WEST for shares of Financial Security Assurance Holdings Ltd.
("FSA") held by U S WEST or the cash equivalent, at U S WEST's option. The
number of shares to be delivered at maturity varies based on the per share
market price of FSA. If the market price is $26.63 per share or less, one share
of FSA will be delivered for each note; if the market price is between $26.63
and $32.48 per share, a fractional share is delivered so that the value at
maturity is equal to $26.63; if the market value is greater than $32.48 per
share, .8197 shares are delivered for each note. The capital assets segment
currently owns approximately 40 percent of the outstanding FSA common stock.
In 1995, U S WEST issued $130 of DECS, due December 15, 1998, in the
principal amount of $24.00 per note. The notes bear interest at 7.625 percent.
Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of
Enhance Financial Services Group, Inc. ("Enhance") held by U S WEST or the cash
equivalent at U S WEST's option. The number of shares to be delivered at
maturity varies based on the per share market price of Enhance. If the market
price is $24.00 per share or less, one share of Enhance will be delivered for
each note; if the market price is between $24.00 and $28.32 per
A-45
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
share, a fractional share equal to $24.00 is delivered; if the market value is
greater than $28.32 per share, .8475 shares are delivered for each note. At
December 31, 1996, the capital assets segment owned 30.1 percent of the
outstanding Enhance common stock.
During 1995, U S WEST refinanced $2.6 billion of commercial paper to take
advantage of favorable long-term interest rates. In addition to the commercial
paper, U S WEST refinanced $145 of long-term debt. Expenses associated with the
refinancing of long-term debt resulted in extraordinary charges to income of $8,
net of income tax benefits of $5.
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- ------------------------------------------------ --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................ $ 36 $ -- $ 90 $ -- $ 155 $ 281 $ 275
Above 5% to 6%.................................. 430 -- -- 50 221 701 691
Above 6% to 7%.................................. -- 380 305 171 3,872 4,728 3,262
Above 7% to 8%.................................. -- -- 13 -- 5,885 5,898 3,230
Above 8% to 9%.................................. 42 11 -- 240 1,725 2,018 397
Above 9% to 10%................................. -- 15 200 10 525 750 254
Above 10%....................................... 34 35 2 2 434 507 2
Variable-rate debt indexed to three-month LIBOR
and two- and ten-year constant maturity
Treasury rates................................. -- 155 -- -- -- 155 180
--------- --------- --------- --------- ----------- --------- ---------
$ 542 $ 596 $ 610 $ 473 $ 12,817 15,038 8,291
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other............. 206 197
Unamortized discount -- net..................... (1,118) (1,178)
Unamortized premium -- net...................... 335 --
Allocated to the capital assets segment --
net............................................ (161) (356)
--------- ---------
Total........................................... $ 14,300 $ 6,954
--------- ---------
--------- ---------
</TABLE>
Interest payments, net of amounts capitalized, were $658, $518, and $523 for
1996, 1995 and 1994, respectively, of which $59, $87 and $134, respectively,
relate to the capital assets segment.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through the use of interest rate swaps, which adjust the ratio of
fixed-to variable-rate debt.
Under an interest rate swap, U S WEST agrees with another party to exchange
interest payments at specified intervals over a defined term. Interest payments
are calculated by reference to the notional amount based on the fixed- and
variable-rate terms of the swap agreements. The net interest accrued as part of
the interest rate swap is accounted for as an adjustment to interest expense.
A-46
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
In 1996, U S WEST assumed interest rate swaps in the notional amount of
$1,000 and interest cap agreements in the notional amount of $500 in connection
with the Continental Merger. The interest rate cap agreements protect against
large increases in interest rates and have various maturities through 1998.
Interest payments received under the terms of a cap agreement would be accounted
for as an adjustment to interest expense.
During 1995, U S WEST Communications entered into currency swaps to convert
Swiss franc-denominated debt to U.S. dollar-denominated debt. This allowed U S
WEST Communications to achieve interest savings over issuing fixed-rate,
dollar-denominated debt. The currency swap and foreign currency debt are
combined and accounted for as if fixed-rate, dollar-denominated debt were issued
directly.
The following table summarizes terms of swaps and interest rate contracts.
Variable rates are indexed to the three-month LIBOR, two- and ten-year constant
maturity Treasury and 30-day commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------------------
WEIGHTED AVERAGE RATE WEIGHTED AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed............... $ 1,235 1997-2004 5.70 6.89 $ 635 1996-2004 5.72 6.80
Currency........................ 204 1999-2001 -- 6.55 204 1999-2001 -- 6.55
</TABLE>
During fourth-quarter 1996, U S WEST purchased $1.5 billion notional of put
options on U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. The contracts closed in January
1997 and a deferred gain of $5 was recognized. In 1993, U S WEST Communications
executed forward U.S. Treasury Bond contracts to lock in the U.S. Treasury rate
component of future debt issues. At December 31, 1996, deferred credits of $8
and deferred charges of $50 on the closed forward contracts are included as part
of the carrying value of the underlying debt. The deferred gains or losses will
be recognized as yield adjustments over the life of the related debt, which
matures at various dates through 2027.
The counterparties to swaps or other interest rate contracts are major
financial institutions. U S WEST is exposed to credit loss in the event of
nonperformance by these counterparties. U S WEST manages this exposure by
monitoring the credit standing of the counterparty and establishing dollar and
term limitations which correspond to the respective credit rating of each
counterparty. U S WEST does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
The fair values of mandatorily redeemable preferred stock and long-term
receivables, based on quoted market prices or discounting future cash flows,
approximate the carrying values. The fair value of foreign exchange contracts
and interest rate cap agreements, based on estimated amounts U S WEST would
receive or pay to terminate such agreements, approximate the carrying values. It
is not practicable to
A-47
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
estimate the fair value of financial guarantees because there are no quoted
market prices for similar transactions.
The fair values of interest rate swaps, including swaps associated with the
capital assets segment, are based on estimated amounts U S WEST would receive or
pay to terminate such agreements taking into account current interest rates and
creditworthiness of the counterparties.
The fair values of long-term debt, including debt associated with the
capital assets segment and Preferred Securities, are based on quoted market
prices where available or, if not available, are based on discounting future
cash flows using current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1996 1995
-------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)...................... $ 15,832 $ 15,850 $ 9,651 $ 10,050
Interest rate swap agreements -- assets................. -- (22) -- (32)
Interest rate swap agreements -- liabilities............ 17 47 -- 51
--------- --------- ----------- ---------
Debt -- net............................................. $ 15,849 $ 15,875 $ 9,651 $ 10,069
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Preferred Securities.................................... $ 1,080 $ 1,074 $ 600 $ 636
--------- --------- ----------- ---------
--------- --------- ----------- ---------
</TABLE>
Investments in debt and equity securities are classified as available for
sale and are carried at market value. The debt securities have various maturity
dates through the year 2001. The market value of these securities is based on
quoted market prices where available or, if not available, is based on
discounting future cash flows using current interest rates.
Equity securities totaling $713 acquired in the Continental Merger are
included in the following table. The amortized cost and estimated market value
of debt and equity securities follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------------------- --------------------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED FAIR
SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
- ------------------------- --------- ------------- ------------- --------- --------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Equity securities........ $ 713 $ 2 $ -- $ 715 $ -- $ -- $ -- $ --
Corporate debt........... 20 -- -- 20 20 -- -- 20
Securitized loan......... 55 -- (6) 49 55 -- (5) 50
--------- ----- ----- --------- --------- ----- ----- ---------
Total.................... $ 788 $ 2 $ (6) $ 784 $ 75 $ -- $ (5) $ 70
--------- ----- ----- --------- --------- ----- ----- ---------
--------- ----- ----- --------- --------- ----- ----- ---------
</TABLE>
Net unrealized losses on marketable securities are included in equity. 1996
net unrealized gains are $1 (net of deferred taxes) and 1995 net unrealized
losses are $3 (net of a deferred tax benefit of $2).
NOTE 11: RESTRUCTURING CHARGE
In 1993, the Company incurred a $1 billion restructuring charge (pretax).
The related restructuring plan, which is expected to be substantially complete
by the end of 1997, is designed to provide faster, more
A-48
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: RESTRUCTURING CHARGE (CONTINUED)
responsive customer services, while reducing the costs of providing these
services. Following is a schedule of the incurred costs that were included in
the 1993 restructuring charge:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------------------ -----------
1993 1994 1995 1996 1997 TOTAL
--------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Employee separation........................... $ -- $ 19 $ 76 $ 102 $ 91 $ 288
Systems development........................... -- 127 145 106 22 400
Real estate................................... -- 50 66 8 6 130
Relocation.................................... -- 21 24 5 2 52
Retraining and other.......................... -- 16 23 21 5 65
--------- --------- --------- --------- ----- ---------
Total cash expenditures....................... -- 233 334 242 126 935
Asset writedown............................... 65 -- -- -- -- 65
--------- --------- --------- --------- ----- ---------
Total......................................... $ 65 $ 233 $ 334 $ 242 $ 126 $ 1,000
--------- --------- --------- --------- ----- ---------
--------- --------- --------- --------- ----- ---------
</TABLE>
NOTE 12: LEASING ARRANGEMENTS
U S WEST has entered into operating leases for office facilities, equipment
and real estate. Rent expense under operating leases was $245, $263 and $288 in
1996, 1995 and 1994, respectively. Minimum future lease payments as of December
31, 1996, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 191
1998............................................................................. 181
1999............................................................................. 160
2000............................................................................. 142
2001............................................................................. 136
Thereafter....................................................................... 872
---------
Total............................................................................ $ 1,682
---------
---------
</TABLE>
Minimum payments have not been reduced by minimum sublease rentals of $236
due in the future under noncancelable subleases.
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED
DEBENTURES
On October 29, 1996, U S WEST Financing II, a wholly owned subsidiary of U S
WEST ("Financing II") issued $480 of 8.25 percent Trust Originated Preferred
Securities (the "Preferred Securities") and $15 of common securities. U S WEST
holds all of the outstanding common securities of Financing II. Financing II
used the proceeds from such issuance to purchase from U S WEST Capital Funding,
Inc., a wholly owned subsidiary of U S WEST ("Capital Funding"), $495 principal
amount of Capital Funding's 8.25 percent Subordinated Deferrable Interest Notes
due 2036 (the "Subordinated Debt Securities"), the obligations under which are
fully and unconditionally guaranteed by U S WEST (the "Debt Guarantee"). The
sole assets of Financing II are and will be the Deferrable Notes and the Debt
Guarantee.
A-49
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED
DEBENTURES (CONTINUED)
On September 11, 1995, U S WEST Financing I, a wholly owned subsidiary of U
S WEST ("Financing I"), issued $600 million of 7.96 percent Preferred Securities
and $19 of common securities. U S WEST holds all of the outstanding common
securities of Financing I. Financing I used the proceeds from such issuance to
purchase from Capital Funding $619 principal amount of Capital Funding's 7.96
percent Subordinated Debt Securities due 2025, the obligations under which are
fully and unconditionally guaranteed by U S WEST. The sole assets of Financing I
are and will be the Subordinated Debt Securities and the Debt Guarantee.
U S WEST has guaranteed the payment of interest and redemption amounts to
holders of Preferred Securities when Financing I and II have funds available for
such payments (the "Payment Guarantee") as well as Capital Funding's undertaking
to pay all of Financing I and II's costs, expenses and other obligations (the
"Expense Undertaking"). The Payment Guarantee and the Expense Undertaking,
including U S WEST's guarantee with respect thereto, considered together with
Capital Funding's obligations under the indenture and Subordinated Debt
Securities and U S WEST's obligations under the indenture, declaration and Debt
Guarantee, constitute a full and unconditional guarantee by U S WEST of
Financing I and II's obligations under the Preferred Securities. The interest
and other payment dates on the Subordinated Debt Securities correspond to the
distribution and other payment dates on the Preferred Securities. Under certain
circumstances, the Subordinated Debt Securities may be distributed to the
holders of Preferred Securities and common securities in liquidation of
Financing I and II.
The 7.96 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after September 11, 2000, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing I is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1996
and 1995, 24,000,000 7.96 percent Preferred Securities were outstanding.
The 8.25 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after October 29, 2001, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing II is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1996,
19,200,000 8.25 percent Preferred Securities were outstanding.
NOTE 14: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative
Redeemable Preferred Stock for a total of $50. (See Note 20 -- Net Investment in
Assets Held for Sale -- to the Consolidated Financial Statements.) The preferred
stock was recorded at the fair market value of $51 at the issue date. Media
Group has the right, commencing September 2, 1999, to redeem the shares for one
thousand dollars per share plus unpaid dividends and a redemption premium. The
shares are mandatorily redeemable in 2004 at face value plus unpaid dividends.
At the option of FFC, the preferred stock also can be redeemed for common shares
of Financial Security Assurance, an investment held by the capital assets
segment. The market value of the option was $35 and $20 (based on the
Black-Scholes Model) at December 31, 1996 and 1995, respectively, with no
carrying value.
A-50
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15: SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
SERIES D COMMUNI-
PREFERRED CATIONS MEDIA COMMON RETAINED
STOCK STOCK STOCK U S WEST STOCK PREFERRED EARNINGS
SHARES SHARES SHARES SHARES AMOUNT STOCK AMOUNT (DEFICIT)
----------- ----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(SHARES IN THOUSANDS)
Balance December 31, 1993........... 441,140 $ 6,996 $ (857)
Issuance of common stock.......... 18,647 694
Settlement of litigation.......... 5,506 210
Benefit trust contribution
(OPEB).......................... 4,600 185
Purchase of treasury stock........ (550) (20)
Net income........................ 1,426
Common dividends declared ($2.14
per share)...................... (980)
Market value adjustment for debt
securities...................... (64)
Foreign currency translation......
Other............................. (9) 17
----------- ----------- --------- ----------- ----------- ----- -----------
Balance December 31, 1994........... 469,343 8,056 (458)
Issuance of common stock.......... 2,791 117
Benefit trust contribution
(OPEB).......................... 1,500 61
Purchase of treasury stock........ (1,705) (63)
Other............................. 3
November 1, 1995
Recapitalization Plan............. 471,929 471,922 (471,929)
Recapitalization Plan
dissenters(1)................... (6)
Issuance of Communications
Stock........................... 1,712 52
Issuance of Media Stock........... 392 7
Net income........................ 1,317
Common dividends declared ($2.14
per share)...................... (1,010)
Preferred dividends............... (3)
Market value adjustment for debt
securities...................... 36
Foreign currency translation......
Other............................. (5) 3
----------- ----------- --------- ----------- ----------- ----- -----------
Balance December 31, 1995........... 473,635 472,314 -- 8,228 (115)
Issuance of Communications
Stock........................... 6,822 216
Issuance of Media Stock for
Continental Merger.............. 150,615 2,590
Other issuances of Media Stock.... 1,853 38
Issuance of Series D Preferred
Stock........................... 20,000 $ 920
Purchase of treasury stock........ (15,919) (297)
Net income........................ 1,178
Common dividends declared ($2.14
per share)...................... (1,024)
Preferred dividends............... (9)
Market value adjustment for debt
and equity securities........... (6)
Foreign currency translation......
Other............................. (34) (6)
----------- ----------- --------- ----------- ----------- ----- -----------
Balance December 31, 1996........... 20,000 480,457 608,863 -- $ 10,741 $ 920 $ 18
----------- ----------- --------- ----------- ----------- ----- -----------
----------- ----------- --------- ----------- ----------- ----- -----------
<CAPTION>
FOREIGN
CURRENCY LESOP
TRANSLATION GUARANTEE
--------------- -------------
<S> <C> <C>
Balance December 31, 1993........... $ (35) $ (243)
Issuance of common stock..........
Settlement of litigation..........
Benefit trust contribution
(OPEB)..........................
Purchase of treasury stock........
Net income........................
Common dividends declared ($2.14
per share)......................
Market value adjustment for debt
securities......................
Foreign currency translation...... 6
Other............................. 56
--- -----
Balance December 31, 1994........... (29) (187)
Issuance of common stock..........
Benefit trust contribution
(OPEB)..........................
Purchase of treasury stock........
Other.............................
November 1, 1995
Recapitalization Plan.............
Recapitalization Plan
dissenters(1)...................
Issuance of Communications
Stock...........................
Issuance of Media Stock...........
Net income........................
Common dividends declared ($2.14
per share)......................
Preferred dividends...............
Market value adjustment for debt
securities......................
Foreign currency translation...... (9)
Other............................. 60
--- -----
Balance December 31, 1995........... (38) (127)
Issuance of Communications
Stock...........................
Issuance of Media Stock for
Continental Merger..............
Other issuances of Media Stock....
Issuance of Series D Preferred
Stock...........................
Purchase of treasury stock........
Net income........................
Common dividends declared ($2.14
per share)......................
Preferred dividends...............
Market value adjustment for debt
and equity securities...........
Foreign currency translation...... (1)
Other............................. 36
--- -----
Balance December 31, 1996........... $ (39) $ (91)
--- -----
--- -----
</TABLE>
- ------------------------------
(1) Under the Recapitalization Plan, Media Stock was not issued to shareowners
who elected to receive cash rather than Communications Stock and Media
Stock. Dissenting shareowners were paid $47.9375 per U S WEST share on
December 15, 1995.
A-51
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
PREFERRED STOCK. On November 15, 1996, U S WEST issued 20,000,000 shares of
4.5 percent, 20 year, Series D Convertible Preferred Stock (the "Preferred
Stock") to Continental shareowners. Dividends are payable quarterly on the
nonvoting Preferred Stock as and when declared by the Board of Directors out of
funds legally available. The Preferred Stock has a liquidation value of $50 per
share and is recorded at the November 15, 1996 market value of $46 per share.
The Preferred Stock is convertible, at the option of the holder, into shares of
Media Stock at $26.25 per share. Between November 15, 1999 and November 15,
2001, the Preferred Stock is redeemable at par, at the option of U S WEST, into
shares of Media Stock if the Media common shares have closed at $34.44 per share
for at least 20 of the 30 consecutive trading days prior to the notice of
redemption. After November 15, 2001, the Preferred Stock is redeemable at par,
at the option of U S WEST, in cash, Media Stock, or any combination of cash and
stock. If Media Stock is elected, the number of shares to be issued will be
determined based on the average market price for the ten consecutive trading
days ending on the third business day prior to redemption, reduced by five
percent. On November 15, 2016, U S WEST is required to redeem the Preferred
Stock, at its election, for cash, Media Stock, or any combination of cash and
stock. Upon certain events, including the disposition of all or substantially
all of the properties and assets attributed to the Media Group, the Preferred
Stock becomes mandatorily redeemable. The Preferred Stock ranks senior to all
classes of U S WEST common stock, is subordinated to any senior debt and ranks
pari passu with the Preferred Securities.
COMMON STOCK. In connection with the November 15, 1996, Continental Merger,
U S WEST issued 150,615,000 shares of Media Stock to Continental shareowners,
valued at $2,590. On December 6, 1994, 12,779,206 shares of U S WEST common
stock were issued to, or in the name of, the holders of Wometco Cable Corp. in
accordance with a merger agreement. (See Note 3 -- Merger of Cable Systems -- to
the Consolidated Financial Statements.) In connection with the settlement of
shareowner litigation ("Rosenbaum v. U S WEST, Inc. et al."), U S WEST issued
approximately 5.5 million shares of U S WEST common stock in March 1994 for net
proceeds of $210.
SHARE REPURCHASE. In connection with the November 15, 1996 Continental
Merger, U S WEST purchased and placed into treasury 15,916,000 shares of Media
Stock at an average price per share of $18.66. In first-quarter 1995, the
Company purchased 1,704,700 shares of U S WEST common stock at an average price
per share of $37.02. In December 1994, the Company purchased 550,400 shares of U
S WEST common stock at an average price per share of $36.30.
FOREIGN CURRENCY TRANSLATION. Included in U S WEST's cumulative foreign
currency translation adjustment are cumulative tax benefits of $24, $24 and $18
at December 31, 1996, 1995 and 1994, respectively.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). U S WEST maintains a
defined contribution savings plan for substantially all management and
occupational employees of the Company. U S WEST matches a percentage of eligible
employee contributions with shares of Communications Stock and/or Media Stock in
accordance with participant elections. Participants may also elect to reallocate
past Company contributions between Communications Stock and Media Stock. In
1989, U S WEST established two LESOPs to provide Company stock for matching
contributions to the savings plan. Shares in the LESOP are released as principal
and interest are paid on the debt. At December 31, 1996, 11,019,157 shares each
of Communications Stock and Media Stock had been allocated from the LESOP to
participants' accounts, while 1,865,494 and 2,132,291 shares of Communications
Stock and Media Stock, respectively, remained unallocated.
A-52
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: SHAREOWNERS' EQUITY (CONTINUED)
The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are included in the accompanying Consolidated Balance
Sheets and corresponding amounts have been recorded as reductions to
shareowners' equity. Contributions from U S WEST as well as dividends on
unallocated shares held by the LESOP ($5, $8 and $11 in 1996, 1995 and 1994,
respectively) are used for debt service. Beginning with the dividend paid in
fourth-quarter 1995, dividends on allocated shares are being paid annually to
participants. Previously, dividends on allocated shares were used for debt
service with participants receiving additional shares from the LESOP in lieu of
dividends.
U S WEST recognizes expense based on the cash payments method. Total Company
contributions to the plan (excluding dividends) were $77, $86 and $80 in 1996,
1995 and 1994, respectively, of which $10, $15 and $19, respectively, have been
classified as interest expense.
SHAREHOLDER RIGHTS PLAN. The Board has adopted a shareholder rights plan
which, in the event of a takeover attempt, would entitle existing shareowners to
certain preferential rights. The rights expire on April 6, 1999, and are
redeemable by the Company at any time prior to the date they would become
effective.
NOTE 16: STOCK INCENTIVE PLANS
U S WEST maintains stock incentive plans for executives and other employees
and non employees, primarily members of the Board. The Amended 1994 Stock Plan
(the "Plan") was approved by shareowners on October 31, 1995, in connection with
the Recapitalization Plan. The Plan is a successor plan to the U S WEST, Inc.
Stock Incentive Plan and the U S WEST 1991 Stock Incentive Plan (the
"Predecessor Plans"). No further grants of options or restricted stock may be
made under the Predecessor Plans. The Plan is administered by the Human
Resources Committee of the Board of Directors with respect to officers,
executive officers and outside directors and by a special committee with respect
to all other eligible employees and eligible non employees.
Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Communications Group and one Media Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
The maximum aggregate number of shares of Communications Stock and Media
Stock that may be granted in any calendar year for all purposes under the Plan
is nine-tenths of one percent (0.90 percent) and three-quarters of one percent
(0.75 percent), respectively, of the shares of such class outstanding (excluding
shares held in U S WEST's treasury) on the first day of such calendar year. In
the event that fewer than the full aggregate number of shares of either class
available for issuance in any calendar year are issued in any such year, the
shares not issued shall be added to the shares of such class available for
issuance in any subsequent year or years. Options granted may be exercised no
later than 10 years after the grant date.
During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in income in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," was $3 and $7 in 1996 and 1995,
respectively, all of which related to the Plan modifications. No compensation
expense was recognized in 1994.
A-53
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but continues to account for the Plan under APB
Opinion No. 25. Had compensation cost for the Plan been determined consistent
with the fair value based accounting method under SFAS No. 123, the pro forma
net income and earnings per share for U S WEST and both the Communications and
Media Groups would have been the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996
---------------------------- 1995
EARNING (LOSS) --------------------------
NET INCOME PER EARNINGS PER
(LOSS) SHARE NET INCOME SHARE
----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
U S WEST, INC.:
As reported.............................. $ 1,178 $ -- $ 1,317 $ --
Pro forma............................... 1,165 -- 1,318 --
COMMUNICATIONS GROUP:
As reported.............................. 1,249 2.62 1,176 2.50
Pro forma............................... 1,247 2.61 1,178 2.50
MEDIA GROUP:
As reported.............................. (71) (0.16) 141 0.29
Pro forma............................... (82) (0.18) 140 0.29
</TABLE>
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
in 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
COMMUNICATIONS GROUP:
Risk-free interest rate.................................................. 6.50% 6.00%
Expected dividend yield................................................. 6.70% 6.70%
Expected life........................................................... 4.5 years 4.5 years
Expected volatility..................................................... 19.6% 19.6%
MEDIA GROUP:
Risk-free interest rate.................................................. 6.30% 6.00%
Expected life........................................................... 5.0 years 5.0 years
Expected volatility..................................................... 28.5% 28.5%
</TABLE>
A-54
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP MEDIA GROUP U S WEST, INC.
------------------------ ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES PRICE SHARES* PRICE
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1, 1994.............. 5,301,539 $ 39.76
---------- -----------
Granted................................ 2,438,409 36.15
Exercised.............................. (139,762) 33.72
Canceled or expired.................... (214,149) 40.71
---------- -----------
Outstanding December 31, 1994............ 7,386,037 $ 38.66
---------- -----------
Granted(1)............................. 4,814,856 41.12
Exercised.............................. (430,631) 34.03
Canceled or expired(1)................. (1,927,083) 37.02
---------- -----------
Outstanding October 31, 1995............. 9,843,179 $ 40.39
---------- -----------
Recapitalization Plan.................... 9,843,179 $ 24.11 9,843,179 $ 16.28 (9,843,179) $ (40.39)
----------- ----------- ----------- ----------- ---------- -----------
---------- -----------
Granted................................ 138,309 32.16 71,580 18.51
Exercised.............................. (543,037) 21.23 (191,243) 14.71
Canceled or expired.................... (15,350) 24.91 (15,350) 16.82
----------- ----------- ----------- -----------
Outstanding December 31, 1995............ 9,423,101 $ 24.39 9,708,166 $ 16.33
----------- ----------- ----------- -----------
Granted................................ 3,624,602 30.97 5,523,728 19.36
Exercised.............................. (1,205,730) 22.37 (507,329) 14.93
Canceled or expired.................... (429,058) 25.01 (610,471) 17.86
----------- ----------- ----------- -----------
Outstanding December 31, 1996............ 11,412,915 $ 26.67 14,114,094 $ 17.49
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- ------------------------------
* Includes options granted in tandem with SARs.
(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e. stock grant).
A-55
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
The number of exercisable options under the Plan and the weighted-average
exercise prices follow:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP MEDIA GROUP
----------------------- -----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
EXERCISABLE OPTIONS AT: OF SHARES PRICE OF SHARES PRICE
- --------------------------------------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1995............................ 2,672,666 $ 22.22 3,021,166 $ 14.89
December 31, 1996............................ 3,881,100 25.71 4,867,207 16.74
</TABLE>
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ------------------------------ ------------ --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
COMMUNICATIONS GROUP
$14.96 - $21.41............. 2,560,778 7.27 $ 21.26 505,430 $ 20.64
$21.41 - $24.62............. 1,241,669 5.42 22.87 1,037,785 22.74
$24.92 - $26.11............. 2,750,886 8.59 26.08 932,931 26.06
$26.34 - $30.63............. 2,334,141 7.86 29.82 1,313,137 29.29
$30.88 - $35.88............. 2,525,441 9.02 31.74 91,817 32.57
------------ --- ----------- ---------- -----------
Total..................... 11,412,915 7.89 $ 26.67 3,881,100 $ 25.71
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
MEDIA GROUP
$10.10 - $14.46............. 3,009,307 6.81 $ 14.23 937,900 $ 13.73
$14.51 - $16.93............. 2,920,683 6.86 15.75 1,608,658 15.38
$16.98 - $17.88............. 2,827,829 8.63 17.64 928,958 17.63
$17.94 - $20.50............. 2,938,175 8.10 19.85 1,391,691 19.74
$20.63 - $21.13............. 2,418,100 9.24 20.63 -- --
------------ --- ----------- ---------- -----------
Total..................... 14,114,094 7.87 $ 17.49 4,867,207 $ 16.74
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 3,624,602 and 4,953,165 Communications Group options and
5,523,728 and 4,886,436 Media Group options were granted in 1996 and 1995,
respectively. Included in the total grants were 198,027 and 1,751,936 of
modified Communications Group options and 249,827 and 1,751,936 of modified
Media Group options revalued as new grants during 1996 and 1995, respectively.
The weighted-average grant date fair value of Communications Group and Media
Group options granted during the year, inclusive of modified options, using the
Black-Scholes option-pricing model was $3.87 and $7.10, respectively, for 1996
and $3.19 and $6.07, respectively, for 1995. Excluding the modifications, the
weighted-average grant date fair value was $3.67 and $7.23, respectively, for
1996, and $2.92 and $6.45, respectively, for 1995. The exercise price of
Communications Group and Media Group stock options, excluding modified options,
equals the market price on the grant date. The exercise prices of modified stock
options may be greater or less than the market price on the revaluation date.
A-56
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STOCK INCENTIVE PLANS (CONTINUED)
Approximately 2,950,000 and 2,050,000 shares of Communications Stock and
2,200,000 and 1,420,000 of Media Stock were available for grant under the plans
in effect at December 31, 1996 and 1995, respectively. Approximately 14,360,000
shares of Communications Stock and 16,314,000 shares of Media Stock were
reserved for issuance under the Plan at December 31, 1996.
NOTE 17: EMPLOYEE BENEFITS
PENSION PLAN
U S WEST sponsors a defined benefit pension plan covering substantially all
management and occupational employees of the Company. Effective January 1, 1997,
Continental's defined benefit pension plan was merged into the U S WEST plan.
Management benefits are based on a final pay formula, while occupational
benefits are based on a flat benefit formula. U S WEST uses the projected unit
credit method for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. U S WEST's policy
is to fund amounts required under the Employee Retirement Income Security Act of
1974 ("ERISA") and no funding was required in 1996, 1995 or 1994.
The composition of the net pension cost (credit) and the actuarial
assumptions of the plan follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period............ $ 203 $ 173 $ 197
Interest cost on projected benefit obligation................ 575 558 561
Actual return on plan assets................................. (1,509) (1,918) 188
Net amortization and deferral................................ 726 1,185 (946)
--------- --------- ---------
Net pension cost (credit)...................................... $ (5) $ (2) $ 0
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1996, 1995 and 1994.
The funded status of the plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $6,544 and
$5,839, respectively........................................................ $ 7,446 $ 6,617
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds........................ $ 10,958 $ 9,874
Less: Projected benefit obligation........................................... 8,310 8,450
--------- ---------
Plan assets in excess of projected benefit obligation........................ 2,648 1,424
Unrecognized net (gain)...................................................... (1,502) (101)
Prior service cost not yet recognized in net periodic pension cost........... 31 (62)
Balance of unrecognized net asset at January 1, 1987......................... (626) (705)
--------- ---------
Prepaid pension cost......................................................... $ 551 $ 556
--------- ---------
--------- ---------
</TABLE>
A-57
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
Weighted-average rate of compensation increase........................... 5.50% 5.50%
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
U S WEST and most of its subsidiaries provide certain health care and life
insurance benefits to retired employees. In conjunction with the Company's 1992
adoption of SFAS No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," U S WEST elected to immediately recognize the accumulated
postretirement benefit obligation for current and future retirees. However, the
Federal Communications Commission ("FCC") and certain state jurisdictions permit
amortization of the transition obligation over the average remaining service
period of active employees for regulatory accounting purposes with most
jurisdictions requiring funding as a stipulation for rate recovery.
U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period....................... $ 70 $ 65 $ 75
Interest on accumulated benefit obligation.............................. 259 267 260
Actual return on plan assets............................................ (231) (415) 4
Net amortization and deferral........................................... 68 286 (99)
--------- --------- ---------
Net postretirement benefit costs........................................ $ 166 $ 203 $ 240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1996, 1995 and 1994.
A-58
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees................................................................... $ 2,255 $ 2,137
Fully eligible plan participants........................................... 347 327
Other active plan participants............................................. 1,289 1,224
--------- ---------
Total accumulated postretirement benefit obligation.......................... 3,891 3,688
Unrecognized net gain........................................................ 534 539
Unamortized prior service cost............................................... 32 (34)
Fair value of plan assets, primarily stocks, bonds and life insurance(1)..... (2,063) (1,845)
--------- ---------
Accrued postretirement benefit obligation.................................... $ 2,394 $ 2,348
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155
and $94, respectively, in 1996, and $210 and $112, respectively, in 1995.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
Medical cost trend rate*................................................. 8.00% 9.00%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5.5
percent in 2011.
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1996 net postretirement benefit cost by approximately $27 and
increased the 1996 accumulated postretirement benefit obligation by
approximately $299.
For U S WEST, the annual funding amount is based on its cash requirements,
with the funding at U S WEST Communications based on regulatory accounting
requirements.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
A-59
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 18: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................................................. $ 601 $ 481 $ 418
Deferred................................................................ 5 225 337
Investment tax credits -- net........................................... (28) (38) (47)
--------- --------- ---------
578 668 708
--------- --------- ---------
State and local:
Current................................................................. 75 64 52
Deferred................................................................ 11 54 83
--------- --------- ---------
86 118 135
--------- --------- ---------
Foreign:
Current................................................................. 2 6 --
Deferred................................................................ 30 33 14
--------- --------- ---------
32 39 14
--------- --------- ---------
Provision for income taxes................................................ $ 696 $ 825 $ 857
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST paid $693, $566 and $313 for income taxes in 1996, 1995 and 1994,
respectively, inclusive of the capital assets segment.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN PERCENT)
Federal statutory tax rate......................................... 35.0 35.0 35.0
Investment tax credit amortization................................. (0.9) (1.2) (1.3)
State income taxes -- net of federal effect........................ 3.0 3.5 3.9
Foreign taxes -- net of federal effect............................. 1.1 1.2 0.4
Other.............................................................. (0.4) (0.2) (0.5)
--- --- ---
Effective tax rate................................................. 37.8 38.3 37.5
--- --- ---
--- --- ---
</TABLE>
A-60
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................. $ 1,891 $ 1,540
Leases......................................................................... 679 668
State deferred taxes -- net of federal effect.................................. 1,141 358
Intangible assets.............................................................. 2,414 112
Investments.................................................................... 373 213
Other.......................................................................... 126 74
--------- ---------
Deferred tax liabilities..................................................... 6,624 2,965
--------- ---------
Postemployment benefits, including pension..................................... 698 697
Restructuring, assets held for sale and other.................................. 301 329
Unamortized investment tax credit.............................................. 61 70
Net operating loss and tax credit carryforwards................................ 466 --
Valuation allowance............................................................ (387) --
State deferred taxes -- net of federal effect.................................. 223 166
Other.......................................................................... 455 229
--------- ---------
Deferred tax assets.......................................................... 1,817 1,491
--------- ---------
Net deferred tax liability..................................................... $ 4,807 $ 1,474
--------- ---------
--------- ---------
</TABLE>
In connection with the Continental Merger, U S WEST acquired net operating
loss carryforwards of approximately $1,164 for federal income tax purposes,
expiring in various years through 2011. U S WEST also acquired investment tax
credit carryforwards of approximately $50, expiring in various years through
2005. A valuation allowance of $387 has been established for the carryforwards
due to limitations on utilization which exist for U S WEST. If in future periods
the realization of the carryforwards becomes more likely than not, any reduction
in the valuation allowance will be allocated to reduce goodwill and acquired
intangible assets.
The current portion of the deferred tax asset was $213 and $282 at December
31, 1996 and 1995, respectively, resulting primarily from restructuring charges
and compensation-related items.
The net deferred tax liability includes $671 and $686 in 1996 and 1995,
respectively, related to the capital assets segment.
In 1996 and 1995 foreign operations contributed pretax losses of $315 and
$35, repsectively. In 1994 foreign operations contributed pretax earnings of
$43.
NOTE 19: COMMITMENTS AND CONTINGENCIES
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for hearing, thereby establishing two
exceptions to the rule against retroactive ratemaking: (1) unforeseen and
extraordinary events, and (2) misconduct. The PSC's initial order denied a
refund request from interexchange carriers and other
A-61
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: COMMITMENTS AND CONTINGENCIES (CONTINUED)
parties related to the Tax Reform Act of 1986. The range of possible risk is $0
to $155 at December 31, 1996.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995
rate request. In February 1995, U S WEST Communications sought to increase
revenues by raising rates for basic residential services over a four-year
period. The two major issues in this proceeding involve U S WEST Communications'
requests for improved capital recovery and elimination of the imputation of
Yellow Pages revenue. Instead of granting U S WEST Communications' rate request,
the Commission ordered approximately $91.5 in annual revenue reductions,
effective May 1, 1996. Based on the above ruling, U S WEST Communications filed
a lawsuit with the King County Superior Court (the "Court") for an appeal of the
order, a temporary stay of the ordered rate reduction and an authorization to
implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending its decision on U S WEST Communications'
appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. On November 25, 1996, the Court ruled in favor
of the WUTC. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which, on January 22,
1997, granted a stay of the order, pending the State Supreme Court's full review
of the appeal. U S WEST Communications expects the State Supreme Court's review
to begin in the second quarter of 1997.
U S WEST Communications expects its appeal to be successful and has not
accrued any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on the future results of operations.
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Continental and the FCC have entered into a "social contract" as an
alternative form of rate regulation for cable operators. The social contract is
a six-year agreement covering all of Continental franchises. The social contract
requires Continental to, among other things, invest at least $1.7 billion in
domestic system rebuilds and upgrades through 2000 to expand channel capacity
and improve system reliability and picture quality. At December 31, 1996, $870
is remaining on this commitment.
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE
The Consolidated Financial Statements include the discontinued operations of
the capital assets segment. During the second quarter of 1993, the U S WEST
Board approved a plan to dispose of the capital assets segment through the sale
of segment assets and businesses. The capital assets segment includes activities
related to financial services and financial guarantee insurance operations. Also
included in the segment is U S WEST Real Estate, Inc., for which disposition was
announced in 1991.
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
and Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a "net investment in assets held for sale." The net
realizable value of the assets is reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, charged to continuing
A-62
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
operations. No such adjustment was required in 1996 or 1995. Prior to January 1,
1995, the entire capital assets segment was accounted for as discontinued
operations in accordance with APB Opinion No. 30.
Through a series of transactions in 1995 and 1994, U S WEST reduced its
ownership in FSA to 50.3 percent and its voting interest to 41.7 percent. During
the second quarter of 1996, U S WEST received $98 from the sale of 3,750,000
shares of FSA common stock. This sale reduced U S WEST's ownership in FSA to
approximately 40 percent. Also in second-quarter 1996, U S WEST issued DECS due
May 15, 1999. The shares of FSA to be delivered upon maturity of the DECS,
combined with the exercise of outstanding options held by Fund American
Enterprises Holdings, Inc. to purchase FSA shares would, if consummated, result
in a complete disposition of U S WEST's ownership in FSA. (See Note 9 -- Debt --
to the Consolidated Financial Statements.)
In fourth-quarter 1995, U S WEST issued DECS to reduce its investment in
Enhance Financial Services Group, Inc. ("Enhance") by December 1998. The shares
of Enhance to be delivered upon maturity of the DECS would, if consummated,
result in a complete disposition of U S WEST's ownership in Enhance. (See Note 9
- -- Debt -- to the Consolidated Financial Statements.)
U S WEST Real Estate, Inc. has sold various assets for proceeds of $156,
$120 and $327 in each of the three years ended December 31, 1996, respectively.
The sales proceeds were in line with estimates. Proceeds from sales were
primarily used to repay related debt. U S WEST expects to substantially complete
the liquidation of this portfolio by 1998. The remaining balance of assets
subject to sale is approximately $287, net of reserves, as of December 31, 1996.
Building sales and operating revenues of the capital assets segment were
$223, $237 and $553 in 1996, 1995 and 1994, respectively. Subsequent to June 1,
1993, income (loss) from the capital assets segment is being deferred and is
included within the reserve for assets held for sale.
The assets and liabilities of the capital assets segment have been
separately classified on the Consolidated Balance Sheets as net investment in
assets held for sale.
A-63
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................................. $ 21 $ 38
Finance receivables -- net................................................. 869 953
Investment in real estate -- net of valuation allowance.................... 182 368
Bonds, at market value..................................................... 146 149
Investment in FSA.......................................................... 326 384
Other assets............................................................... 165 177
--------- ---------
Total assets............................................................... $ 1,709 $ 2,069
--------- ---------
--------- ---------
LIABILITIES
Debt....................................................................... $ 481 $ 796
Deferred income taxes...................................................... 671 686
Accounts payable, accrued liabilities and other............................ 137 148
Minority interests......................................................... 11 10
--------- ---------
Total liabilities.......................................................... 1,300 1,640
--------- ---------
Net investment in assets held for sale..................................... $ 409 $ 429
--------- ---------
--------- ---------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases that U S WEST intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
nonrecourse debt which is netted against the related lease receivable.
The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Receivables................................................................ $ 821 $ 921
Unguaranteed estimated residual values..................................... 444 447
--------- ---------
1,265 1,368
Less: Unearned income...................................................... 380 390
Credit loss and other allowances......................................... 16 25
--------- ---------
Finance receivables -- net................................................. $ 869 $ 953
--------- ---------
--------- ---------
</TABLE>
Investments in debt securities are classified as available for sale and are
carried at market value. Any resulting unrealized holding gains or losses, net
of applicable deferred income taxes, are reflected as a component of equity.
The amortized cost of $147 and $149 at December 31, 1996 and 1995,
respectively, of investments in debt securities approximates market value. 1996
net unrealized losses of $7 (net of deferred taxes of $5) and 1995 net
unrealized gains of $39 (net of deferred taxes of $21), are included in equity.
A-64
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
DEBT
Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
----------------------------------------------------- TOTAL
INTEREST RATES 1997 1998 1999 2000 2001 1996
- ---------------------------------------------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Above 5% to 6%............................................ $ -- $ -- $ -- $ -- $ -- $ --
Above 6% to 7%............................................ 15 -- -- -- -- 15
Above 7% to 8%............................................ -- -- -- -- -- --
Above 8% to 9%............................................ -- -- 150 4 -- 154
Above 9% to 10%........................................... -- 5 -- -- -- 5
Above 10% to 11%.......................................... -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
$ 15 $ 5 $ 150 $ 4 $ -- 174
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allocated to the capital assets segment -- net............ 307
---------
Total..................................................... $ 481
---------
---------
<CAPTION>
TOTAL
INTEREST RATES 1995
- ---------------------------------------------------------- ---------
<S> <C>
Above 5% to 6%............................................ $ 10
Above 6% to 7%............................................ 54
Above 7% to 8%............................................ 5
Above 8% to 9%............................................ 138
Above 9% to 10%........................................... 53
Above 10% to 11%.......................................... 29
---------
289
Allocated to the capital assets segment -- net............ 507
---------
Total..................................................... $ 796
---------
---------
</TABLE>
Debt of $71 at December 31, 1995, was collateralized by first deeds of trust
on associated real estate and assignment of rents from leases.
The following table summarizes terms of swaps associated with the capital
assets segment. Variable rates are indexed to three- and six-month LIBOR.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
DECEMBER 31,
--------------------------------------------------
1995
1996 -------------------------------------
-------------------------------------------------- WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE RATE RATE
NOTIONAL ---------------------- NOTIONAL -----------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE
----------- ------------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed(1).............. $ 350 1997 5.55 9.01 $ 380 1996-1997 5.96
Fixed to variable(1).............. 350 1997 7.32 5.61 380 1996-1997 7.29
Variable-rate basis
adjustment(2).................... 10 1997 6.42 5.81 10 1997 5.92
<CAPTION>
PAY
---------
<S> <C>
Variable to fixed(1).............. 9.03
Fixed to variable(1).............. 5.87
Variable-rate basis
adjustment(2).................... 5.85
</TABLE>
- ------------------------------
(1) The fixed to variable swaps have the same terms as the variable to fixed
swaps and were entered into to terminate the variable to fixed swaps. The
net loss on the swaps is deferred and amortized over the remaining life of
the swaps and is included in the reserve for assets held for sale.
(2) Variable-rate debt based on U.S. Treasury rates is swapped to a
LIBOR-based interest rate.
A-65
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK -- FINANCIAL GUARANTEES
U S WEST retained certain risks in asset-backed obligations related to the
commercial real estate portfolio. The principal amounts insured on the
asset-backed obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TERMS TO MATURITY 1996 1995
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
0 to 5 Years..................................................................... $ 416 $ 639
5 to 10 Years.................................................................... 436 450
10 to 15 Years................................................................... 8 10
--------- ---------
Total............................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1996 1995
- --------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate......................................................... $ 341 $ 442
Corporate secured.............................................................. 519 657
--------- ---------
Total............................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</TABLE>
ADDITIONAL FINANCIAL INFORMATION
Information for U S WEST Financial Services, Inc., a member of the capital
assets segment, follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED FINANCIAL INFORMATION 1996 1995 1994
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................... $ 26 $ 44 $ 54
Net finance receivables.......................................... 859 931 981
Total assets..................................................... 1,058 1,085 1,331
Total debt....................................................... 236 274 533
Total liabilities................................................ 998 1,024 1,282
Equity........................................................... 60 61 49
</TABLE>
A-66
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Sales and other revenues................................................... $ 3,050 $ 3,124 $ 3,179 $ 3,558
Income before income taxes and cumulative effect of change in accounting
principle................................................................ 489 519 494 338
Income before cumulative effect of change in accounting principle.......... 297 313 304 230
Net income................................................................. 331 313 304 230
Earnings per common share:
Communications Group earnings per common share before cumulative effect
of change in accounting principle...................................... 0.62 0.68 0.60 0.65
Communications Group earnings per common share........................... 0.69 0.68 0.60 0.65
Media Group earnings (loss) per common share............................. -- (0.03) 0.04 (0.16)
1995
Sales and other revenues................................................... $ 2,828 $ 2,894 $ 2,964 $ 3,060
Income before income taxes and extraordinary item.......................... 538 514 538 564
Income before extraordinary item........................................... 330 318 325 356
Net income................................................................. 330 318 316 353
Earnings per common share:
Communications Group earnings per common share before extraordinary
item................................................................... 0.67 0.62 0.62 0.60
Communications Group earnings per common share........................... 0.67 0.62 0.61 0.59
Media Group earnings per common share before extraordinary item.......... 0.03 0.05 0.07 0.15
Media Group earnings per common share.................................... 0.03 0.05 0.06 0.15
</TABLE>
- ------------------------------
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock. Earnings
per common share for 1995 have been presented on a pro forma basis to reflect
the two classes of stock as if they had been outstanding since January 1, 1995.
For periods prior to the recapitalization, the average common shares outstanding
for the two classes of stock are assumed to be equal to the average common
shares outstanding for U S WEST, Inc.
1996 first-quarter net income includes the cumulative and current effects of
$34 ($0.07 per Communications share) and $5 ($0.01 per Communications share),
respectively, from adopting SFAS No. 121. 1996 second-quarter net income
includes $30 ($0.06 per Communications share) from gains on the sales of certain
rural telephone exchanges, a charge of $19 ($0.04 per Media share) related to
the sale of the Company's cable television interests in Norway, Sweden and
Hungary and current effects of $5 ($0.01 per Communications share) from adopting
SFAS No. 121. 1996 third-quarter net income includes $1 (no share impact) from
gains on the sales of certain rural telephone exchanges and current effects of
$3 ($0.01 per Communications share) from adopting SFAS No. 121. 1996
fourth-quarter net income includes $5 ($0.01 per Communications share) from
gains on the sales of certain rural telephone exchanges, net losses of $71 and
losses available for common stock of $77 ($0.15 per Media share) related to the
November 15, 1996 Continental Merger and current effects of $2 ($0.01 per
Communications share) from adopting SFAS No. 121.
1995 first-quarter net income includes $39 ($0.08 per Communications share)
from gains on the sales of certain rural telephone exchanges. 1995
second-quarter net income includes $10 ($0.02 per Communications share) from
gains on the sales of certain rural telephone exchanges. 1995 third-quarter net
income includes $21 ($0.04 per Communications share) from gains on the sales of
certain rural telephone exchanges and $10 ($0.01 per Communications share and
$0.01 per Media share) for expenses associated with the Recapitalization Plan.
1995 third-quarter net income also includes charges of $9 ($0.01 per
Communications share and $0.01 per Media share) for the early extinguishment of
debt. 1995 fourth-quarter net income includes $15 ($0.03 per Communications
share) from gains on the sales of certain rural telephone exchanges and $95
($0.20 per Media share) from the merger of U S WEST's joint venture interest in
Telewest. 1995 fourth-quarter net income also includes other charges of $10
($0.01 per Communications share and $0.01 per Media share), including $7 for
expenses associated with the Recapitalization Plan and an extraordinary charge
of $3 for the early extinguishment of debt.
A-67
<PAGE>
U S WEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- --------------------------------------------------------------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C>
(WHOLE DOLLARS)
1996
Communications Stock
First quarter...................................................... $ 37.500 $ 30.250 $ 32.375 $ 0.535
Second quarter..................................................... 34.625 31.125 32.000 0.535
Third quarter...................................................... 32.250 27.250 29.875 0.535
Fourth quarter..................................................... 33.625 29.250 32.250 0.535
Media Stock
First quarter...................................................... $ 23.000 $ 18.875 $ 20.625 $ --
Second quarter..................................................... 21.000 16.875 18.250 --
Third quarter...................................................... 18.875 14.375 16.875 --
Fourth quarter..................................................... 19.875 15.375 18.375 --
1995
U S WEST Stock
First quarter...................................................... $ 41.375 $ 35.125 $ 40.125 $ 0.535
Second quarter..................................................... 42.875 39.125 41.625 0.535
Third quarter...................................................... 48.375 40.875 47.125 0.535
Fourth quarter (through October 31, 1995).......................... 48.375 45.625 47.875 --
Communications Stock
Fourth (November 1, 1995 through December 31, 1995)................ $ 36.375 $ 28.375 $ 35.625 $ 0.535
Media Stock
Fourth (November 1, 1995 through December 31, 1995)................ $ 20.000 $ 17.375 $ 19.000 $ --
</TABLE>
A-68
<PAGE>
U S WEST, INC.
(DOLLARS IN MILLIONS)
SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
U S WEST believes that proportionate financial data facilitates the
understanding and assessment of its Consolidated Financial Statements. The
following proportionate accounting table reflects the relative weight of U S
WEST's ownership interest in its domestic and international investments in cable
and telecommunications, wireless and directory and information services
operations. The proportionate data for each of the three years ended December
31, 1996 are derived from the Supplementary Selected Proportionate Results of
Operations of the Media Group and the Communications Group Combined Financial
Statements. The financial information included below departs materially from
generally accepted accounting principles ("GAAP") because it aggregates the
revenues and operating income of entities not controlled by U S WEST with those
of the consolidated operations of U S WEST. This table is not intended to
replace the Consolidated Financial Statements prepared in accordance with GAAP.
<TABLE>
<CAPTION>
COMMUNICATIONS MEDIA
GROUP GROUP ELIMINATIONS TOTAL
--------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
1996
Sales and other revenues.................... $ 10,079 $ 6,367 $ (123) $ 16,323
Operating expenses.......................... 5,617 4,894 (123) 10,388
------- --------- ----- ---------
EBITDA(1)................................... 4,462 1,473 -- 5,935
Depreciation and amortization............... 2,122 1,014 -- 3,136
------- --------- ----- ---------
Operating income............................ 2,340 459 -- 2,799
Income (loss) before cumulative effect of
change in accounting principle............ 1,215 (71) -- 1,144
Net income (loss)........................... $ 1,249 $ (71) $ -- $ 1,178
------- --------- ----- ---------
------- --------- ----- ---------
1995 (UNAUDITED)
Sales and other revenues.................... $ 9,484 $ 5,115 $ (112) $ 14,487
Operating expenses.......................... 5,264 3,966 (112) 9,118
------- --------- ----- ---------
EBITDA(1)................................... 4,220 1,149 -- 5,369
Depreciation and amortization............... 2,042 673 -- 2,715
------- --------- ----- ---------
Operating income............................ 2,178 476 -- 2,654
Income before extraordinary item............ 1,184 145 -- 1,329
Net income.................................. $ 1,176 $ 141 $ -- $ 1,317
------- --------- ----- ---------
------- --------- ----- ---------
1994 (UNAUDITED)
Sales and other revenues.................... $ 9,176 $ 4,213 $ (131) $ 13,258
Operating expenses.......................... 5,150 3,311 (131) 8,330
------- --------- ----- ---------
EBITDA(1)................................... 4,026 902 -- 4,928
Depreciation and amortization............... 1,908 501 -- 2,409
------- --------- ----- ---------
Operating income............................ 2,118 401 -- 2,519
Net income.................................. $ 1,150 $ 276 $ -- $ 1,426
------- --------- ----- ---------
------- --------- ----- ---------
</TABLE>
- ------------------------------
(1) Earnings before interest, taxes, depreciation, amortization and other
("EBITDA"). EBITDA also excludes gains on asset sales, equity losses and
guaranteed minority interest expense.
A-69
<PAGE>
U S WEST COMMUNICATIONS GROUP
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Operating revenues......................................... $ 10,079 $ 9,484 $ 9,176 $ 8,870 $ 8,530
Net income (loss)(1)....................................... 1,249 1,176 1,150 (2,809) (815)
Earnings per common share(2)............................... 2.62 2.50 2.53 -- --
Dividends per common share(2).............................. 2.14 2.14 2.14 -- --
EBITDA(3).................................................. 4,462 4,220 4,026 3,743 3,553
EBITDA margin(3)........................................... 44.3% 44.5% 43.9% 42.2% 41.7%
Total assets............................................... $ 16,915 $ 16,585 $ 15,944 $ 15,423 $ 20,655
Total debt................................................. 6,498 6,754 6,124 5,673 5,181
Communications Group equity(4)............................. 3,917 3,476 3,179 2,722 6,003
Return on Communications Group equity(4), (5).............. 32.0% 35.6% 39.0% 22.5% 13.7%
Percentage of debt to total capital(4)..................... 62.4% 66.0% 65.8% 67.6% 46.3%
Ratio of earnings to fixed charges (telephone company)..... 4.95 4.86 5.22 2.56 3.97
Capital expenditures....................................... $ 2,806 $ 2,739 $ 2,477 $ 2,226 $ 2,385
Telephone network access lines in service (thousands)(6)... 15,424 14,795 14,299 13,803 13,301
Billed access minutes of use -- interstate (millions)...... 52,039 47,801 43,768 40,594 37,413
Billed access minutes of use -- intrastate (millions)...... 10,451 9,504 8,507 7,529 6,956
Communications Group employees............................. 48,037 50,825 51,402 52,598 55,352
Telephone company employees................................ 45,427 47,934 47,493 49,668 52,423
Telephone company employees per ten thousand access
lines(6).................................................. 29.5 32.4 33.2 36.0 39.4
Average common shares outstanding
(thousands)(2)............................................ 477,549 470,716 453,316 -- --
Common shares outstanding (thousands)(2)................... 480,457 473,635 469,343 -- --
</TABLE>
- ------------------------------
(1) 1996 net income includes a gain of $36 ($0.08 per share) on the sales of
certain rural telephone exchanges and the cumulative and current effects of
$34 ($0.07 per share) and $15 ($0.03 per share), respectively, from adopting
Statement of Financial Accounting Standards ("SFAS") No. 121. 1995 net
income includes a gain of $85 ($0.18 per share) on the sales of certain
rural telephone exchanges and other charges of $16 ($0.03 per share),
including an extraordinary charge of $8 for the early extinguishment of debt
and $8 for costs associated with the November 1, 1995 recapitalization. 1994
net income includes a gain of $51 ($0.11 per share) on the sales of certain
rural telephone exchanges. 1993 net income was reduced by $534 for a
restructuring charge and $54 for the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates. 1993 net income
was also reduced by extraordinary charges of $3,123 for the discontinuance
of SFAS No. 71 and $77 for the early extinguishment of debt. 1992 net income
was reduced by $1,745 for the cumulative effect of change in accounting
principles.
(2) Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of U S WEST Communications Group common stock
and U S WEST Media Group common stock. Earnings per common share and
dividends per common share for 1995 and 1994 have been presented on a pro
forma basis to reflect the two classes of stock as if they had been
outstanding since January 1, 1994. For periods prior to the
recapitalization, the average and common shares outstanding are assumed to
be equal to the average and common shares outstanding for U S WEST, Inc.
(3) Earnings before interest, taxes, depreciation, amortization and other
("EBITDA"). EBITDA also excludes gains on sales of rural telephone exchanges
and a restructuring charge. The Communications Group considers EBITDA an
important indicator of the operating performance of its businesses. EBITDA,
however, should not be considered as an alternative to operating or net
income as an indicator of performance or as an alternative to cash flows
from operating activities as a measure of liquidity, in each case determined
in accordance with generally accepted accounting principles ("GAAP").
B-1
<PAGE>
U S WEST COMMUNICATIONS GROUP
FINANCIAL HIGHLIGHTS (CONTINUED)
(4) The increases in the percentage of debt to total capital and return on
Communications Group equity, and the decrease in Communications Group equity
since 1992, are primarily due to the effects of discontinuing SFAS No. 71 in
1993 and the cumulative effect of change in accounting principles in 1992.
(5) 1996 return on Communications Group equity is based on income before the
cumulative effect of a change in accounting principle. 1995 return on
Communications Group equity is based on income before extraordinary item.
1993 return on Communications Group equity is based on income excluding
extraordinary items, a restructuring charge and the cumulative effect on
deferred taxes of the 1993 federally mandated increase in income tax rates.
1992 return on Communications Group equity is based on income before the
cumulative effect of change in accounting principles.
(6) Access lines from 1992 through 1995 have been restated to conform to the
current year presentation.
B-2
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) different than
anticipated competition from new entrants into the local exchange and intraLATA
toll markets, (ii) changes in demand for the Company's products and services,
including optional custom calling features, (iii) different than anticipated
employee levels, capital expenditures, and operating expenses as a result of
unusually rapid, in-region growth, (iv) the gain or loss of significant
customers, (v) pending regulatory actions in state jurisdictions, and (vi)
regulatory changes affecting the telecommunications industry, including changes
that could have an impact on the competitive environment in the local exchange
market.
THE RECAPITALIZATION PLAN
On October 31, 1995, the shareowners of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate in
Delaware and create two classes of common stock. Under the Recapitalization
Plan, shareowners approved an Agreement and Plan of Merger between U S WEST
Colorado and U S WEST, Inc., a Delaware corporation ("U S WEST" or the
"Company"), pursuant to which U S WEST continues as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST has
been amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock") and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock").
The Communications Stock and Media Stock provide shareowners with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
The Combined Financial Statements of the Communications Group include: (i)
the combined historical balance sheets, results of operations and cash flows of
the businesses that comprise the Communications Group; (ii) corporate assets and
liabilities and related transactions of U S WEST identified with the
Communications Group; and (iii) an allocated portion of the corporate expenses
of U S WEST. All significant intra group financial transactions have been
eliminated. Transactions between the Communications Group and the Media Group
have not been eliminated. For a more complete discussion of U S WEST's corporate
allocation policies, see the U S WEST Communications Group Combined Financial
Statements -- Note 2 -- Summary of Significant Accounting Policies.
THE COMMUNICATIONS GROUP
The Communications Group provides telecommunications services to more than
25 million residential and business customers in the Communications Group region
(the "Region"). The Region includes the states of Arizona, Colorado, Idaho,
Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South
Dakota, Utah, Washington and Wyoming. Services offered by the Communications
Group include local telephone services, exchange access services (which connect
customers to the facilities of carriers, including long-distance providers and
wireless operators), and long-distance services within Local Access and
Transport Areas ("LATAs") in the Region. The Communications Group provides other
products and services, including high-speed data applications, customer premises
equipment ("CPE") and
B-3
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
certain other communications services to business customers and governmental
agencies both inside and outside the Region.
The Telecommunications Act of 1996, enacted into law on February 8, 1996,
will dramatically alter the competitive landscape of the telecommunications
industry by permitting competition among local telephone companies,
long-distance companies and cable companies. The Communications Group believes
that its competitors will initially target high-volume business customers in
densely populated urban areas. The resulting loss of local service customers
could affect multiple revenue streams and could have a material, adverse effect
on the Communications Group's operations. Court and state regulatory commission
deliberations on interconnection rates, as well as the Federal Communications
Commission's (the "FCC") current deliberations on access charge reform and
universal service, could also result in significant changes in revenues received
from interexchange carriers and other competitors. However, the Communications
Group expects to counter this competitive threat by expanding services to
include new retail as well as wholesale markets. Planned future service
offerings include interLATA long-distance services, wireless Personal
Communications Services ("PCS"), and interconnection services provided to
competing providers of local services. The Communications Group's ability to
bundle local, long-distance, wireless PCS and other services will also provide a
competitive advantage against emerging local service competitors.
The following discussion is based on the U S WEST Communications Group
Combined Financial Statements prepared in accordance with generally accepted
accounting principles ("GAAP"). The discussion should be read in conjunction
with the U S WEST, Inc. Consolidated Financial Statements.
RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
Following are details of the Communications Group reported net income and
earnings per common share ("earnings per share") for 1996 and 1995, normalized
to exclude the effects of certain nonoperating items.
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE
------------------------------------------ ------------------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
-------------------- --------------------
1996 1995 $ % 1996 1995(1) $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income..................... $ 1,249 $ 1,176 $ 73 6.2 $ 2.62 $ 2.50 $ 0.12 4.8
Adjustments to reported net income:
Gains on sales of rural telephone
exchanges........................... (36) (85) 49 57.6 (0.08) (0.18) 0.10 55.6
Cumulative effect of change in
accounting principle(2)............. (34) -- (34) -- (0.07) -- (0.07) --
Current year effect of change in
accounting principle(2)............. (15) -- (15) -- (0.03) -- (0.03) --
Recapitalization costs................ -- 8 (8) -- -- 0.01 (0.01) --
Early extinguishment of debt.......... -- 8 (8) -- -- 0.02 (0.02) --
--------- --------- --------- --------- --------- --------- --------- ---------
Normalized income....................... $ 1,164 $ 1,107 $ 57 5.1 $ 2.44 $ 2.35 $ 0.09 3.8
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications Stock had been outstanding since January 1, 1995. For periods
prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
(2) Effective January 1, 1996, U S WEST adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." See the U S
WEST Communications Group Combined Financial Statements -- Note 3 --
Property, Plant and Equipment.
B-4
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The Communications Group's 1996 normalized income was $1,164, an increase of
$57, or 5.1 percent, compared with $1,107 in 1995. Normalized earnings per share
were $2.44, an increase of $0.09, or 3.8 percent, as compared to 1995. The
increase in normalized income is primarily attributable to demand for services,
evidenced by revenue growth of 6.3 percent. Partially offsetting the increased
demand are higher costs incurred to address business growth, service-improvement
initiatives and costs related to new business opportunities.
The Communications Group expects net income growth in the core business to
be partially offset by cost increases related to growth initiatives such as
wireless PCS and interLATA long-distance service. Net income growth could also
be impacted by costs related to implementing the interconnection requirements
and other provisions of the Telecommunications Act of 1996. However, the net
income impact will depend on the nature and timing of the requirements, and the
type of recovery mechanisms provided for by the FCC and state commissions. (See
"Regulatory Environment.")
Increased demand for services resulted in growth in earnings before
interest, taxes, depreciation, amortization and other ("EBITDA") of 5.7 percent
in 1996. EBITDA also excludes gains on sales of certain rural telephone
exchanges in 1996 and 1995. The Communications Group believes EBITDA is an
important indicator of the operational strength of its businesses. EBITDA,
however, should not be considered as an alternative to operating or net income
as an indicator of the performance of the Communications Group's business or as
an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with GAAP.
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," which, among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted
in a one-time gain of $34 (net of tax of $22), or $0.07 per share, related to
the cumulative effect of change in accounting principle. See the U S WEST
Communications Group Combined Financial Statements -- Note 3 -- Property, Plant
and Equipment.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
OPERATING REVENUES
An analysis of operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1996 1995 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service.......................... $ 4,770 $ 4,344 $ 413 $ 27 $ 8 $ (22) $ 426
Interstate access...................... 2,507 2,378 250 (48) (69) (4) 129
Intrastate access...................... 770 747 45 (16) -- (6) 23
Long-distance network.................. 1,100 1,189 (53) (7) (1) (28) (89)
Other services......................... 932 826 -- -- -- 106 106
--------- --------- ----- ----- ----- ----- ---------
Total.................................. $ 10,079 $ 9,484 $ 655 $ (44) $ (62) $ 46 $ 595
--------- --------- ----- ----- ----- ----- ---------
--------- --------- ----- ----- ----- ----- ---------
<CAPTION>
%
---------
<S> <C>
Local service.......................... 9.8
Interstate access...................... 5.4
Intrastate access...................... 3.1
Long-distance network.................. (7.5)
Other services......................... 12.8
---
Total.................................. 6.3
---
---
</TABLE>
Approximately 97 percent of the Communications Group's revenues are
attributable to the operations of U S WEST Communications, Inc. ("U S WEST
Communications"), of which approximately 60 percent are derived from the states
of Arizona, Colorado, Minnesota and Washington. Approximately 29 percent
B-5
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
of the access lines in service are devoted to providing services to business
customers. The access line growth rate for business customers, who tend to be
heavier users of the network, has consistently exceeded the growth rate of
residential customers. During 1996, business access lines grew 7.6 percent while
residential access lines increased 4.0 percent, when adjusted for the 1996 sales
of rural telephone access lines.
The primary factors that influence changes in revenues are customer demand
for products and services, price changes (including those related to regulatory
proceedings) and refunds. During 1996, revenues from new product and service
offerings were approximately $840, an increase of 57 percent as compared with
1995. These revenues primarily consist of caller identification, voice
messaging, digital switched services and high-speed data network transmission
services.
Local service revenues include local telephone exchange, local private line
and public telephone services. The 9.8 percent increase in local service
revenues is primarily attributable to growth in access lines and increased
demand for new product and service offerings, and existing central office
features. Total reported access lines increased 629,000 during 1996, or 4.3
percent, of which 244,000 is attributed to second lines. Second line
installations increased 30.5 percent compared with 1995. Access lines grew by
742,000, or 5.0 percent, when adjusted for sales of approximately 113,000 rural
telephone access lines during 1996.
Access charges are collected primarily from interexchange carriers for their
use of the local exchange network. For interstate access services there is also
a fee collected directly from telephone customers. Approximately 30 percent of
access revenues and 10 percent of total revenues are derived from providing
access services to AT&T Corp. ("AT&T").
Higher revenues from interstate access services were driven by access line
growth and an increase of 8.9 percent in interstate billed access minutes of
use. The increased business volume was partially offset by the effects of price
reductions and sharing related accrued refunds to interexchange carriers. The
Communications Group reduced prices for interstate access services in both 1996
and 1995 as a result of FCC orders and competitive pressures. Intrastate access
revenues increased primarily due to higher demand partially offset by the
effects of price reductions.
Long-distance revenues are derived from calls made within the LATA
boundaries of the Region. During 1996, long-distance revenues decreased 7.5
percent, primarily due to the effects of competition and the implementation of
multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in May and October
1996, respectively. The MTCPs essentially allow independent telephone companies
to act as toll carriers. The 1996 impact of the MTCPs was a $27 reduction in
long-distance revenues, offset by increases in intrastate access revenues of $5
and decreases in other operating expenses (i.e., access expense) of $21. Similar
changes in other states are scheduled to occur in 1997, though the impact on
1997 net income is not expected to be material.
Excluding the effects of the MTCPs, long-distance revenues decreased 5.2
percent. Long-distance revenues have declined over the last several years as
customers have migrated to interexchange carriers that have the ability to offer
long-distance services on both an intraLATA and interLATA basis. A portion of
revenues lost to competition, however, is recovered through access charges paid
by the interexchange carriers. The Communications Group expects erosion in
long-distance revenue to continue in 1997 due to the loss of exclusivity of 1+
dialing in Minnesota and Arizona, effective in February and April 1996,
respectively, and continued dial-around activity in other states within the
Region, though management expects the decline to be less than in 1996. The
Communications Group is partially mitigating competitive
B-6
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
losses through competitive pricing of intraLATA long-distance services and
increased promotional efforts to retain customers.
Revenues from other services primarily consist of voice messaging services,
inside wire maintenance services, billing and collection services provided to
interexchange carriers, high-speed data transmission services, and the provision
of CPE.
During 1996, revenues from other services increased $106, or 12.8 percent,
primarily as a result of continued market penetration in voice messaging
services and increased inside wire maintenance services. Also contributing to
other services revenue growth were increased contract revenues related to a
large wire installation project and CPE sales.
Future revenues at U S WEST Communications may be affected by pending
regulatory actions in federal and local regulatory jurisdictions. (See
"Regulatory Environment.")
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE
----------------------
1996 1995 $ %
--------- --------- --------- -----
<S> <C> <C> <C> <C>
Employee-related expenses....................................................... $ 3,594 $ 3,341 $ 253 7.6
Other operating expenses........................................................ 1,634 1,543 91 5.9
Taxes other than income taxes................................................... 389 380 9 2.4
Depreciation and amortization................................................... 2,122 2,042 80 3.9
Interest expense................................................................ 445 427 18 4.2
Other expense -- net............................................................ 41 41 -- --
</TABLE>
Employee-related expenses include salaries and wages (including both basic
and performance-based pay), overtime, benefits (including pension and health
care), payroll taxes and contract labor. During 1996, total employee-related
expenses increased $253 primarily due to continued efforts to address increased
business growth, service-improvement initiatives and new business opportunities.
Salaries and wages and contract labor, which increased by $117 and $172,
respectively, in 1996, are the two primary factors that impact employee-related
expenses. Salaries and wages increased primarily due to inflation-driven and
contractual wage increases. The contract labor increase supported the increased
business growth and the additional marketing organization costs related to the
launch of new products and services. Employee-related expenses also include
approximately $15 for contract labor and overtime as a result of flooding in
Washington and Oregon in first-quarter 1996. Partially offsetting these
increases was a reduction in postretirement benefits costs due to changes in
actuarial assumptions and favorable costs trends, lower conference and travel
expenses and decreased overtime as a result of accelerated cost reduction
efforts in the latter half of 1996.
The Communications Group will add a certain number of employees to address
the needs of new business opportunities such as wireless PCS and interLATA
long-distance service. Costs related to these work force additions could
partially offset the benefits of employee separations achieved through
restructuring. (See "Restructuring Charge.")
Other operating expenses include access charges paid to independent local
exchange carriers (incurred for the routing of long-distance traffic through
their facilities), network software expenses and other general and
administrative costs, including allocated costs from U S WEST. During 1996,
other operating expenses increased primarily due to higher advertising and bad
debt expenses and costs
B-7
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
associated with greater sales of CPE. Also contributing to the increase was a
reserve adjustment associated with billing and collection activities performed
for interexchange carriers and a charge related to the discontinuance of the
Omaha broadband video service trial. Reduced access expense (a portion of which
relates to the 1996 implementation of the MTCPs in Iowa and Nebraska) and a
reduction in allocated costs from U S WEST partially offset these increases.
Allocated costs from U S WEST were $88 and $116 in 1996 and 1995, respectively.
Taxes other than income taxes, which consist primarily of property taxes,
were relatively flat as compared with 1995. In fourth-quarter 1996, taxes other
than income taxes increased by $24, or 32.4 percent, due to favorable property
tax valuations and mill levies recognized during fourth-quarter 1995.
The increase in depreciation and amortization expense is attributed to the
effects of a higher depreciable asset base, partially offset by the effects of
1995 sales of certain rural telephone exchanges and the adoption of SFAS No.
121.
Interest expense increased primarily due to higher average debt levels and a
decrease in the amount of interest capitalized resulting from a lower average
balance of telecommunications plant under construction. The average borrowing
cost was 7.0 percent in 1996, compared with 6.9 percent in 1995. (See "Liquidity
and Capital Resources.")
Other expense was flat in 1996 as compared with 1995. However, other expense
increased $8 in fourth-quarter 1996, primarily as a result of a $13 adjustment
related to the Communications Group's equity investment in Bell Communications
Research, Inc. ("Bellcore"), of which U S WEST Communications has a one-seventh
ownership interest. Partially offsetting the increase were costs incurred in
1995 associated with the Recapitalization Plan.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
-------------
1996 1995 $ %
--------- --------- ----- -----
<S> <C> <C> <C> <C>
Provision for income taxes......................................................... $ 698 $ 662 $ 36 5.4
Effective tax rate................................................................. 36.5% 35.9% -- --
</TABLE>
The increase in the effective tax rate resulted primarily from the effects
of lower investment tax credit amortization.
RESTRUCTURING CHARGE
In 1993, the Communications Group incurred an $880 restructuring charge
(pretax). The related restructuring plan (the "Restructuring Plan"), which is
expected to be substantially complete by the end of 1997, is designed to provide
faster, more responsive customer services, while reducing the costs of
B-8
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
providing these services. Following is a schedule of the incurred costs that
were included in the 1993 restructuring charge:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation..................................................... $ 19 $ 76 $ 102 $ 86 $ 283
Systems development..................................................... 118 129 91 22 360
Real estate............................................................. 50 66 8 6 130
Relocation.............................................................. 21 21 5 -- 47
Retraining and other.................................................... 8 23 20 9 60
--------- --------- --------- ----- ---------
Total................................................................... $ 216 $ 315 $ 226 $ 123 $ 880
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Under the Restructuring Plan, the
Communications Group anticipates the separation of 10,000 employees. Annual
employee separations and employee-separation amounts under the Restructuring
Plan follow:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separations................................................ 2,180 2,325 2,667 2,828 10,000
Employee-separation amounts......................................... $ 75 $ 76 $ 102 $ 86 $ 339
</TABLE>
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
Following are details of the Communications Group reported net income and
earnings per share for 1995 and 1994, normalized to exclude the effects of
certain nonoperating items.
<TABLE>
<CAPTION>
NET INCOME EARNINGS PER SHARE(1)
------------------------------------------ ------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
-------------------- --------------------
1995 1994 $ % 1995 1994 $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reported net income..................... $ 1,176 $ 1,150 $ 26 2.3 $ 2.50 $ 2.53 $ (0.03) (1.2)
Adjustments to reported net income:
Gains on sales of rural telephone
exchanges........................... (85) (51) (34) (66.7) (0.18) (0.11) (0.07) (63.6)
Recapitalization costs................ 8 -- 8 -- 0.01 -- 0.01 --
Early extinguishment of debt.......... 8 -- 8 -- 0.02 -- 0.02 --
--------- --------- --------- --------- --------- --------- --------- ---------
Normalized income....................... $ 1,107 $ 1,099 $ 8 0.7 $ 2.35 $ 2.42 $ (0.07) (2.9)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings per share have been presented on a pro forma basis as if the
Communications Stock had been outstanding since January 1, 1994. For periods
prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
B-9
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Communications Group's 1995 normalized income was $1,107, an increase of
$8, or 0.7 percent, compared with $1,099 in 1994. The increase in normalized
income was attributable to revenue growth of 3.4 percent largely offset by
significantly higher costs incurred to improve customer service and meet greater
than expected business growth. Normalized pro forma earnings per share were
$2.35, a decrease of $0.07, or 2.9 percent, from 1994. Earnings per share in
1995 reflect approximately 17 million additional average common shares
outstanding, of which 12.8 million were issued in December 1994.
During 1995, the Communications Group refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in extraordinary charges of
$8, net of tax benefits of $5.
Revenue growth, partially offset by higher operating costs, provided a 4.8
percent increase in EBITDA in 1995.
OPERATING REVENUES
An analysis of changes in operating revenues follows:
<TABLE>
<CAPTION>
INCREASE
LOWER (DECREASE)
PRICE (HIGHER) ---------
1995 1994 DEMAND CHANGES REFUNDS OTHER $
--------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Local service......................... $ 4,344 $ 4,067 $ 273 $ 35 $ (10) $ (21) $ 277
Interstate access..................... 2,378 2,269 191 (66) (2) (14) 109
Intrastate access..................... 747 729 36 (31) 8 5 18
Long-distance network................. 1,189 1,329 (54) (23) (1) (62) (140)
Other services........................ 826 782 -- -- -- 44 44
--------- --------- ----- ----- ----- ----- ---------
Total................................. $ 9,484 $ 9,176 $ 446 $ (85) $ (5) $ (48) $ 308
--------- --------- ----- ----- ----- ----- ---------
--------- --------- ----- ----- ----- ----- ---------
<CAPTION>
%
---------
<S> <C>
Local service......................... 6.8
Interstate access..................... 4.8
Intrastate access..................... 2.5
Long-distance network................. (10.5)
Other services........................ 5.6
---------
Total................................. 3.4
---------
---------
</TABLE>
Local service revenues increased principally as a result of higher demand
for new and existing services, and demand for second lines. Reported total
access lines increased 496,000, or 3.5 percent, of which 161,000 were second
lines. Second line installations increased 25.5 percent compared with 1994.
Access line growth was 4.1 percent when adjusted for sales of rural telephone
access lines during 1995.
Higher revenues from interstate access services were driven by an increase
of 9.2 percent in interstate billed access minutes of use, which more than
offset the effects of price reductions and refunds. Intrastate access revenues
increased primarily due to the impact of increased business volumes and MTCPs,
partially offset by the impact of rate changes.
Long-distance revenues were impacted by the implementation of MTCPs in
Oregon and Washington in 1994. The 1995 impact of the MTCPs was a $62 reduction
in long-distance revenues, partially offset by increases in intrastate access
revenues of $12 and decreases in other operating expenses (i.e., access expense)
of $42. Excluding the effects of the MTCPs, long-distance revenues decreased by
5.9 percent during 1995, primarily due to the effects of competition and rate
reductions.
During 1995, revenues from other services increased primarily as a result of
continued market penetration in voice messaging services and sales of high-speed
data transmission services. Revenue growth from other services was also
attributed to inside wire maintenance services and a large contract related to a
wire installation project. These increases were partially offset by a decrease
in billing and collection service revenues. Revenues for services provided to
Media Group were $20 in 1995 and $29 in 1994.
B-10
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses..................................................... $ 3,341 $ 3,215 $ 126 3.9
Other operating expenses...................................................... 1,543 1,547 (4) (0.3)
Taxes other than income taxes................................................. 380 388 (8) (2.1)
Depreciation and amortization................................................. 2,042 1,908 134 7.0
Interest expense.............................................................. 427 376 51 13.6
Other expense -- net.......................................................... 41 21 20 95.2
</TABLE>
During 1995, improving customer service was the Communications Group's first
priority. Overtime payments and contract labor expense associated with customer
service initiatives increased employee-related costs by approximately $168 in
1995. The increase in employee-related expenses was also attributable to the
hiring of additional employees in 1995 and 1994 to handle the higher than
anticipated volume of business and to meet new business opportunities. Partially
offsetting these cost increases was a reduction in the accrual for
postretirement benefits, a decrease in travel expense and reduced expenses
related to employee separations under reengineering and streamlining
initiatives.
Other operating expenses decreased during 1995 primarily due to the effects
of the MTCPs and a reduction in expenses related to project funding at Bellcore.
These decreases were partially offset by increases in costs associated with
increased sales, including bad debt expense. Allocated costs from U S WEST were
$116 and $110 in 1995 and 1994, respectively.
Taxes other than income taxes decreased 2.1 percent in 1995, primarily due
to favorable property tax valuations and mill levies as compared with 1994. As a
result of these valuations and mill levies, 1995 fourth-quarter accruals
decreased by $20 compared with fourth-quarter 1994.
The increase in depreciation and amortization expense was attributable to
the effects of a higher depreciable asset base, partially offset by the effects
of the sales of certain rural telephone exchanges.
Interest expense increased primarily as a result of an increased use of debt
financing. The average borrowing cost was 6.9 percent in 1995, compared with 6.8
percent in 1994. The increase in other expense was largely attributable to $8 of
costs associated with the Recapitalization Plan.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Provision for income taxes...................................................... $ 662 $ 653 $ 9 1.4
Effective tax rate.............................................................. 35.9% 36.2% -- --
</TABLE>
The decrease in the effective tax rate resulted primarily from the effects
of a research and experimentation credit and adjustments for prior periods.
B-11
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES. Cash provided by operating activities was $3,306,
$2,719, and $2,509 in 1996, 1995 and 1994, respectively. During 1996, cash
provided by operating activities increased $587 to $3,306. The increase was
primarily attributable to business growth, a $157 decrease in the cash funding
of postretirement benefits, and lower restructuring expenditures. These
increases were partially offset by higher 1996 income tax payments. Cash from
operations increased $210 in 1995 compared with 1994, primarily due to increased
business growth and a decrease in the cash funding for postretirement benefits,
partially offset by higher payments for restructuring activities.
The future cash needs could increase with the pursuit of new business
opportunities, including interLATA long-distance service and wireless PCS.
Future cash needs could also increase as the Communications Group begins
implementing the interconnection requirements and other provisions of the
Telecommunications Act of 1996. However, the impact will depend on the nature
and timing of the requirements and the type of recovery mechanisms provided for
by the FCC and state commissions. (See "Regulatory Environment.")
INVESTING ACTIVITIES. Total capital expenditures were $2,419, $2,462 and
$2,254 in 1996, 1995 and 1994, respectively. The 1996 capital expenditures
exceeded 1995 and 1994 levels due to efforts to address strong access line
growth and entry into the wireless PCS market. In 1997, capital expenditures are
expected to approximate $2.5 billion. Included in the 1997 capital expenditures
estimate are additional costs for wireless PCS, entry costs for the interLATA
long-distance market and interconnection costs related to the Telecommunications
Act of 1996. In January 1997, the Communications Group purchased PCS licenses in
the FCC D&E spectrum block auction for approximately $57.
The Communications Group received cash proceeds of $174, $214 and $93 during
1996, 1995 and 1994, respectively, for the sales of certain rural telephone
exchanges. Since implementing its rural telephone exchange sales program, the
Communications Group has sold approximately 268,000 access lines. Estimated
aggregate sales of rural exchanges for 1997 and beyond approximate 70,000 lines.
FINANCING ACTIVITIES. Debt decreased $256 in 1996 and the percentage of
debt to total capital declined to 62.4 percent at year-end 1996 from 66.0
percent at year-end 1995. The decline in the percentage of debt to total capital
is primarily a result of increased net income and equity issuances for the
dividend reinvestment plan, the employee savings plan and the exercise of stock
options. During 1995, debt increased $630, primarily due to the increase in
capital expenditures.
During 1995, U S WEST Communications refinanced $1.5 billion of commercial
paper to take advantage of favorable long-term interest rates. In addition to
the commercial paper, U S WEST Communications refinanced $145 of long-term debt.
Expenses associated with the refinancing of long-term debt resulted in
extraordinary after-tax charges of $8, net of tax benefits of $5.
U S WEST and U S WEST Communications maintain commercial paper programs to
finance short-term cash flow requirements, as well as to maintain a presence in
the short-term debt market. In addition, U S WEST Communications is permitted to
borrow up to $600 under short-term lines of credit, all of which was available
at December 31, 1996. Additional lines of credit aggregating approximately $4.5
billion are available to both the Media Group and the nonregulated subsidiaries
in the Communications Group in accordance with their borrowing needs. Under
registration statements filed with the Securities and Exchange Commission
("SEC"), as of December 31, 1996, U S WEST Communications is permitted to issue
up to $320 of new debt securities. An additional $620 in securities is permitted
to be issued under registration statements filed with the SEC to support the
requirements of the Media Group and the nonregulated subsidiaries in the
Communications Group.
B-12
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On November 15, 1996, Continental Cablevision, Inc. was merged into a wholly
owned subsidiary of U S WEST (the "Merger" or the "Continental Merger"). The
Continental Merger and the regulatory uncertainty surrounding the Washington
State Utilities and Transportation Commission's $91.5 rate reduction order (see
U S WEST Communications Group Combined Financial Statements -- Note 13 --
Contingencies) have resulted in a general downgrading of U S WEST
Communications' credit ratings. U S WEST Communications' senior unsecured debt
and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps
were Aa3, A-plus and AA-minus, and P1, A1 and D-1-plus, respectively, at
December 31, 1996.
Communications Group from time to time engages in preliminary discussions
regarding restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST and the Communications Group. There is no assurance that any such
discussions will result in the consummation of any such transaction.
INTEREST RATE RISK MANAGEMENT. The Communications Group is exposed to
market risk arising from changes in interest rates. Derivative financial
instruments are used to manage this risk. U S WEST does not use derivative
financial instruments for trading purposes.
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
Notional amounts of interest rate swaps outstanding were $384 and $784 at
December 31, 1996 and 1995, respectively, with various maturities extending to
2001. A 50 basis point increase in interest rates would create a gain of $1 in
the market value of interest rate swaps. Likewise, a 50 basis point decrease in
interest rates would create a loss of $1 in the market value of interest rate
swaps.
REGULATORY ENVIRONMENT
THE TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act of 1996 (the
"Telecommunications Act") replaces the Modification of Final Judgment, the
antitrust consent decree entered into in 1984 in connection with the divestiture
by AT&T of its local telephone business and the formation of U S WEST and the
other Regional Bell Operating Companies ("RBOCs"). The Telecommunications Act
permits local telephone companies, long-distance carriers and cable television
companies to enter each others' lines of business. The RBOCs will be permitted
to provide interLATA long-distance services by opening their local networks to
facilities-based competition and satisfying a detailed list of requirements,
including providing interconnection and number portability. The
Telecommunications Act also lifts the ban on cross-ownership between cable
television and telephone companies, thereby permitting the RBOCs to enter into
the cable business within their respective service regions so long as such entry
is not achieved through the purchase of existing cable companies, except in
rural communities. The Telecommunications Act also reaffirms the concept of
universal service and directs the FCC and state regulators to determine
universal service funding policy. The FCC and state regulators have been given
the responsibility to interpret and oversee implementation of large portions of
the Telecommunications Act.
On August 8, 1996, the FCC issued an order (the "FCC Order") establishing a
framework of minimum national rules that will enable the states and the FCC to
begin implementing the local
B-13
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
competition provisions of the Telecommunications Act. Key provisions that relate
to U S WEST Communications and other local exchange carriers ("LECs") include:
- Providing interconnection to any requesting telecommunications carrier at
any technically feasible point, equal in quality to that provided by the
incumbent LEC.
- Providing unrestricted access to network services on an unbundled basis.
- Providing physical collocation of equipment necessary for interconnection
at the incumbent LEC, unless physical collocation is not practical for
technical reasons or because of space limitations.
- Offering for resale any telecommunications services that the LEC provides
at retail to subscribers who are not telecommunications carriers.
- Reciprocal compensation arrangements for wireline and wireless local
service providers.
The FCC Order also established rigid costing and pricing rules which, from U
S WEST's perspective, significantly impede negotiations with new entrants to the
local exchange market, state public utility commission ("PUC") interconnection
rulemakings, and interconnection arbitration proceedings. U S WEST appealed the
FCC Order and sought a stay of certain of its provisions, including certain
pricing provisions, pending appellate review. On October 15, 1996, the Eighth
Circuit Court of Appeals ("Eighth Circuit") issued its order granting a stay of
all the pricing provisions of the FCC Order. The stay does not postpone
implementation of the Telecommunications Act. Rather, the effect of the stay is
to have interconnection and network unbundled element pricing be resolved
through negotiations or state PUC arbitration proceedings without the PUCs being
limited in their consideration of relevant costs.
Subsequently, the FCC and certain interexchange carriers requested the
United States Supreme Court (the "Supreme Court") to review and vacate the
Eighth Circuit stay. On October 31, 1996, the Supreme Court denied these
requests. Thereafter, the FCC and certain interexchange carriers petitioned the
Supreme Court for further consideration of vacating the stay. On November 12,
1996, the Supreme Court rejected these further petitions. Thus, the Eighth
Circuit stay will remain in effect until modified by that court or until the
appeal is resolved. A decision on the appeal is expected by May 1997.
The Telecommunications Act will drive key public policy initiatives of U S
WEST Communications in 1997. These include:
- INTERCONNECTION PROCEEDINGS. Despite the FCC Order being stayed by the
Eighth Circuit, interconnection proceedings throughout local regulatory
jurisdictions are continuing. At December 31, 1996, U S WEST
Communications had completed 25 state arbitrations in 11 states. An
additional 32 arbitrations were pending throughout the Region and 41
parties were still in negotiations with U S WEST Communications. U S WEST
Communications advocates that LECs have the right to recover fully the
costs of providing interconnection services and that they must not be
placed at a competitive disadvantage as local and long-distance markets
are opened to competition. U S WEST Communications is aggressively
defending its views in arbitrations and, when necessary, in the courts. U
S WEST Communications cannot provide assurance that it will be able to
fully recover its costs related to providing interconnection services.
- FEDERAL ACCESS REFORM. In December 1996, the FCC issued a Notice of
Proposed Rulemaking related to the pricing, terms and conditions for
long-distance carriers to access LEC networks. The FCC has alternatively
proposed a regulatory approach that entails scheduled fee reductions or a
market-based approach that would allow competition to determine access
pricing. U S WEST Communications advocates a market-based approach that
would permit LECs to gradually reduce access charges as new sources of
revenue are developed through the expansion of wholesale and retail
services and in conjunction with interstate and intrastate rate
rebalancing that would
B-14
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
eliminate implicit subsidies. U S WEST Communications expects new rules to
be issued by May 1997, with implementation of the new rules to occur over
a three- to four-year period.
- UNIVERSAL SERVICE. The Telecommunications Act requires the FCC and state
jurisdictions to preserve universally available and affordable local
telephone service for low-income and high-cost area customers through an
explicit subsidy. A federal-state joint board issued recommendations on
universal service policy during fourth-quarter 1996. Funding
recommendations include an assessment on service providers' gross
telecommunications service revenues net of payments to other carriers. U S
WEST Communications advocates that universal service support be based on
the smallest, high-cost geographic areas that are reasonably identifiable
and that funding occur through a pass-through surcharge on retail
revenues. U S WEST Communications expects new FCC rules on universal
service to be issued by May 1997.
- LEGISLATIVE INITIATIVES. Key legislative initiatives in local regulatory
jurisdictions in 1997 include: (1) achieving accelerated capital recovery;
(2) rebalancing local service prices to cover actual costs; and (3)
eliminating subsidies.
Due to legal and regulatory uncertainties, the impact of the
Telecommunications Act on U S WEST's future results is unknown.
OTHER REGULATORY ISSUES. The Communications Group's interstate services
have been subject to price cap regulation since January 1991. Price caps are an
alternative form of regulation designed to limit prices rather than profits. The
FCC's price cap plan (the "Price Cap Plan") includes sharing of earnings in
excess of authorized levels. The Price Cap Plan has resulted in reduced access
prices paid by interexchange carriers to LECs.
The price cap index for most services is annually adjusted for inflation,
productivity level and exogenous costs. The Price Cap Plan provides for three
productivity options, including a no-sharing option, and for increased
flexibility for adjusting prices downward in response to competition. In 1996
and 1995, the Communications Group selected the lowest productivity option in
determining prices. Current FCC deliberations on access charge reform and
universal service will likely impact the nature and duration of the interim
rules on price cap regulation.
At U S WEST Communications there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for hearing, thereby establishing two
exceptions to the rule against retroactive ratemaking: (1) unforeseen and
extraordinary events, and (2) misconduct. The PSC's initial order denied a
refund request from interexchange carriers and other parties related to the Tax
Reform Act of 1986. The range of possible risk is $0 to $155 at December 31,
1996.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995
rate request. In February 1995, U S WEST Communications sought to increase
revenues by raising rates for basic residential services over a four-year
period. The two major issues in this proceeding involve U S WEST Communications'
request for improved capital recovery and elimination of the imputation of
Yellow Pages revenue. Instead of granting U S WEST Communications' rate request,
the Commission ordered approximately $91.5 in annual revenue reductions,
effective May 1, 1996. Based on the above ruling, U S WEST Communications filed
a lawsuit with the King County Superior Court (the "Court") for an appeal of the
order, a temporary stay of the ordered rate reduction and an authorization to
implement a revenue increase.
B-15
<PAGE>
U S WEST COMMUNICATIONS GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending its decision on U S WEST Communications'
appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. On November 25, 1996, the Court ruled in favor
of the WUTC. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which, on January 22,
1997, granted a stay of the order, pending the State Supreme Court's full review
of the appeal. U S WEST Communications expects the State Supreme Court's review
to begin in the second quarter of 1997.
U S WEST Communications expects its appeal to be successful and has not
accrued any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on the future results of operations.
B-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Combined Balance Sheet of U S WEST
Communications Group (as described in Note 2 to the Combined Financial
Statements) as of December 31, 1996, and the related Combined Statements of
Operations and Cash Flows for the year then ended. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U S WEST Communications
Group as of December 31, 1996, and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1997.
B-17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Combined Balance Sheet of U S WEST Communications Group
(as described in Note 2 to the Combined Financial Statements) as of December 31,
1995, and the related Combined Statements of Operations and Cash Flows for each
of the two years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of U S WEST
Communications Group as of December 31, 1995, and the combined results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As more fully discussed in Note 2, the Combined Financial Statements of U S
WEST Communications Group should be read in connection with the audited
Consolidated Financial Statements of U S WEST, Inc.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
B-18
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
Operating revenues:
Local service.................................................................. $ 4,770 $ 4,344 $ 4,067
Interstate access service...................................................... 2,507 2,378 2,269
Intrastate access service...................................................... 770 747 729
Long-distance network services................................................. 1,100 1,189 1,329
Other services................................................................. 932 826 782
--------- --------- ---------
Total operating revenues..................................................... 10,079 9,484 9,176
Operating expenses:
Employee-related expenses...................................................... 3,594 3,341 3,215
Other operating expenses....................................................... 1,634 1,543 1,547
Taxes other than income taxes.................................................. 389 380 388
Depreciation and amortization.................................................. 2,122 2,042 1,908
--------- --------- ---------
Total operating expenses..................................................... 7,739 7,306 7,058
--------- --------- ---------
Operating income................................................................. 2,340 2,178 2,118
Interest expense................................................................. 445 427 376
Gains on sales of rural telephone exchanges...................................... 59 136 82
Other expense -- net............................................................. 41 41 21
--------- --------- ---------
Income before income taxes, extraordinary item and cumulative
effect of change in accounting principle....................................... 1,913 1,846 1,803
Provision for income taxes....................................................... 698 662 653
--------- --------- ---------
Income before extraordinary item and cumulative effect of
change in accounting principle................................................. 1,215 1,184 1,150
Extraordinary item -- early extinguishment of debt -- net of tax................. -- (8) --
--------- --------- ---------
Income before cumulative effect of change in accounting principle................ 1,215 1,176 1,150
Cumulative effect of change in accounting principle -- net of tax................ 34 -- --
--------- --------- ---------
NET INCOME....................................................................... $ 1,249 $ 1,176 $ 1,150
--------- --------- ---------
--------- --------- ---------
Earnings per common share:
Income before extraordinary item and cumulative effect of
change in accounting principle............................................... $ 2.55 $ 2.52 $ 2.53
Extraordinary item -- early extinguishment of debt............................. -- (0.02) --
Cumulative effect of change in accounting principle............................ 0.07 -- --
--------- --------- ---------
EARNINGS PER COMMON SHARE........................................................ $ 2.62 $ 2.50 $ 2.53
--------- --------- ---------
--------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING (thousands).................................... 477,549 470,716 453,316
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
B-19
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................. $ 80 $ 172
Accounts and notes receivable, less allowance for
credit losses of $40 and $30, respectively.............................................. 1,622 1,617
Inventories and supplies.................................................................. 144 193
Deferred tax asset........................................................................ 171 259
Prepaid and other......................................................................... 65 51
--------- ---------
Total current assets........................................................................ 2,082 2,292
--------- ---------
Gross property, plant and equipment......................................................... 32,645 31,178
Less accumulated depreciation............................................................... 18,639 17,649
--------- ---------
Property, plant and equipment -- net........................................................ 14,006 13,529
Other assets................................................................................ 827 764
--------- ---------
Total assets................................................................................ $ 16,915 $ 16,585
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt........................................................................... $ 834 $ 1,065
Accounts payable.......................................................................... 989 851
Employee compensation..................................................................... 342 316
Dividends payable......................................................................... 257 254
Current portion of restructuring charge................................................... 123 270
Advanced billing and customer deposits.................................................... 250 223
Accrued property taxes.................................................................... 193 194
Other..................................................................................... 479 434
--------- ---------
Total current liabilities................................................................... 3,467 3,607
--------- ---------
Long-term debt.............................................................................. 5,664 5,689
Postretirement and other postemployment benefit obligations................................. 2,387 2,351
Deferred income taxes....................................................................... 749 689
Unamortized investment tax credits.......................................................... 173 199
Deferred credits and other.................................................................. 558 574
Contingencies
Communications Group equity................................................................. 3,917 3,476
--------- ---------
Total liabilities and equity................................................................ $ 16,915 $ 16,585
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
B-20
<PAGE>
U S WEST COMMUNICATIONS GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
OPERATING ACTIVITIES
Net income...................................................................... $ 1,249 $ 1,176 $ 1,150
Adjustments to net income:
Depreciation and amortization................................................. 2,122 2,042 1,908
Gains on sales of rural telephone exchanges................................... (59) (136) (82)
Cumulative effect of change in accounting principle........................... (34) -- --
Deferred income taxes and amortization of investment tax credits.............. 91 172 226
Changes in operating assets and liabilities:
Restructuring payments........................................................ (226) (315) (272)
Postretirement medical and life costs, net of cash fundings................... 28 (90) (197)
Accounts receivable........................................................... (5) (117) (64)
Inventories, supplies and other current assets................................ 27 (51) (29)
Accounts payable and accrued liabilities...................................... 98 7 (147)
Other -- net.................................................................. 15 31 16
--------- --------- ---------
Cash provided by operating activities........................................... 3,306 2,719 2,509
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (2,419) (2,462) (2,254)
Proceeds from sales of rural telephone exchanges................................ 174 214 93
Proceeds from (payments on) disposals of property, plant and equipment.......... 15 (18) 3
Other -- net.................................................................... -- (2) 2
--------- --------- ---------
Cash (used for) investing activities............................................ (2,230) (2,268) (2,156)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt -- net............................ 96 (832) 344
Proceeds from issuance of long-term debt........................................ 23 1,647 326
Repayments of long-term debt.................................................... (482) (334) (285)
Dividends paid on common stock.................................................. (939) (926) (886)
Proceeds from issuance of common stock.......................................... 134 50 208
--------- --------- ---------
Cash (used for) financing activities............................................ (1,168) (395) (293)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................. (92) 56 60
Beginning balance............................................................... 172 116 56
--------- --------- ---------
Ending balance.................................................................. $ 80 $ 172 $ 116
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
B-21
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareowners of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors of U S WEST, Inc.
(the "Board") to reincorporate in Delaware and create two classes of common
stock that are intended to reflect separately the performance of the
communications and multimedia businesses. Under the Recapitalization Plan,
shareowners approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware corporation ("U S WEST" or "Company"), pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger, the Certificate of Incorporation of U S WEST has been amended and
restated to designate two classes of common stock of U S WEST, one class of
which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado was converted into one share each of
Communications Stock and Media Stock.
The Communications Stock and Media Stock provide shareowners with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
The Communications Group is comprised of U S WEST Communications, Inc. ("U S
WEST Communications"), U S WEST Communications Services, Inc., U S WEST Federal
Services, Inc., U S WEST Advanced Technologies, Inc., U S WEST Business
Resources, Inc. and U S WEST Long Distance, Inc. The Communications Group
provides telecommunications services to more than 25 million residential and
business customers in the Communications Group region (the "Region"). The Region
includes the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming. Services offered by the Communications Group include local telephone
services, exchange access services (which connect customers to the facilities of
carriers, including long-distance providers and wireless operators), and
long-distance services within Local Access and Transport Areas ("LATAs") in the
Region. The Communications Group provides other products and services, including
high-speed data applications, customer premises equipment ("CPE") and certain
other communications services to business customers and governmental agencies
both inside and outside the Region.
The Media Group is comprised of Continental Cablevision, Inc., the third
largest cable television system operator in the United States, U S WEST
Multimedia Communications, Inc., which owns domestic cable television operations
and investments, U S WEST Dex, Inc. (formerly U S WEST Marketing Resources
Group, Inc.), which publishes White and Yellow Pages telephone directories, and
provides directory and information services, U S WEST NewVector Group, Inc.,
which provides communications and information products and services over
wireless networks and U S WEST International Holdings, Inc., which primarily
owns investments in international cable and telecommunications, wireless
communications and directory publishing operations.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Combined Financial Statements of the Groups
comprise all of the accounts included in the corresponding Consolidated
Financial Statements of U S WEST. Investments in less than majority-owned
ventures are generally accounted for using the equity method. The separate
B-22
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Group Combined Financial Statements have been prepared on a basis that
management believes to be reasonable and appropriate and include: (i) the
combined historical balance sheets, results of operations and cash flows of the
businesses that comprise each of the Groups, with all significant intra-group
amounts and transactions eliminated; (ii) in the case of the Communications
Group Combined Financial Statements, certain corporate assets and liabilities of
U S WEST and related transactions identified with the Communications Group;
(iii) in the case of the Media Group Combined Financial Statements, all other
corporate assets and liabilities and related transactions of U S WEST; and (iv)
an allocated portion of the corporate expense of U S WEST. Transactions between
the Communications Group and the Media Group have not been eliminated.
Notwithstanding the allocation of assets and liabilities (including
contingent liabilities) and shareowners' equity between the Communications Group
and the Media Group for the purpose of preparing the respective financial
statements of such Group, owners of Communications Stock and Media Stock are
subject to risks associated with an investment in a single company and all of U
S WEST's businesses, assets and liabilities. Financial effects arising from
either Group that affect U S WEST's results of operations or financial condition
could, if significant, affect the results of operations or financial position of
the other Group or the market price of the class of common stock relating to the
other Group. Any net losses of the Communications Group or the Media Group, and
dividends or distributions on, or repurchases of Communications Stock, Media
Stock or preferred stock, will reduce the funds of U S WEST legally available
for payment of dividends on both the Communications Stock and Media Stock.
Accordingly, the Communications Group Combined Financial Statements should be
read in conjunction with U S WEST's Consolidated Financial Statements and the
Media Group Combined Financial Statements.
The accounting policies described herein applicable to the preparation of
the Combined Financial Statements of the Communications Group may be modified or
rescinded at the sole discretion of the Board without approval of the
shareowners, although there is no present intention to do so. The Board may also
adopt additional policies depending on the circumstances. Any determination of
the Board to modify or rescind such policies, or to add additional policies,
including any decision that would have disparate impacts upon owners of
Communications Stock and Media Stock, would be made by the Board in good faith
and in the honest belief that such decision is in the best interests of all U S
WEST shareowners, including the owners of Communications Stock and the owners of
Media Stock. In making such determination, the Board may also consider
regulatory requirements imposed on U S WEST Communications by the public utility
commissions of various states and the Federal Communications Commission. In
addition, generally accepted accounting principles require that any change in
accounting policy be preferable (in accordance with such principles) to the
policy previously established.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
ALLOCATION OF SHARED SERVICES. Certain costs relating to U S WEST's general
and administrative services (including certain executive management, legal, tax,
accounting and auditing, treasury, strategic planning and public policy
services) are directly assigned by U S WEST to each Group based on actual
utilization or are allocated based on each Group's operating expenses, number of
employees, external revenues, average capital and/or average equity. U S WEST
charges each Group for such services at fully distributed cost. These direct and
indirect allocations were $88, $116 and $110 in 1996, 1995 and 1994,
respectively. In 1996, the direct allocations comprised approximately 65 percent
of the total shared corporate services allocated to the Communications Group. It
is not practicable to provide a detailed
B-23
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
estimate of the expenses which would be recognized if the Communications Group
were a separate legal entity. However, U S WEST believes that under the
Recapitalization Plan, each Group benefits from synergies with the other,
including having lower operating costs than might be incurred if each Group were
a separate legal entity.
ALLOCATION OF INCOME TAXES. Federal, state and local income taxes, which
are determined on a consolidated or combined basis, are allocated to each Group
in accordance with tax sharing agreements between U S WEST and the entities
within the Groups. The allocations will generally reflect each Group's
contribution (positive or negative) to consolidated taxable income and
consolidated tax credits. A Group will be compensated only at such time as, and
to the extent that, its tax attributes are utilized by U S WEST in a combined or
consolidated income tax filing. Federal and state tax refunds and carryforwards
or carrybacks of tax attributes will generally be allocated to the Group to
which such tax attributes relate.
GROUP FINANCING. Financing activities for the nonregulated Communications
Group businesses and the Media Group, including the issuance, repayment and
repurchase of short-term and long-term debt, and the issuance and repurchase of
preferred securities and preferred stock are managed by U S WEST on a
centralized basis. Financing activities for U S WEST Communications are
separately identified and accounted for in U S WEST's records and U S WEST
Communications conducts its own borrowing activities. Debt incurred and
investments made by U S WEST and its subsidiaries on behalf of the nonregulated
Communications Group businesses and all debt incurred and investments made by U
S WEST Communications are specifically allocated to and reflected on the
financial statements of the Communications Group. All debt incurred and
investments made by U S WEST and its subsidiaries on behalf of the Media Group
are specifically allocated to and reflected on the financial statements of the
Media Group. Debt incurred by U S WEST or a subsidiary on behalf of a Group is
charged to such Group at the borrowing rate of U S WEST or such subsidiary.
As of November 1, 1995, the effective date of the Recapitalization Plan, U S
WEST does not intend to transfer funds between the Groups, except for certain
short-term, ordinary course advances of funds at market rates associated with U
S WEST's centralized cash management program for the nonregulated businesses.
Such short-term transfers of funds will be accounted for as short-term loans
between the Groups bearing interest at the market rate at which management
determines the borrowing Group could obtain funds on a short-term basis. If the
Board, in its sole discretion, determines that a transfer of funds between the
Groups should be accounted for as a long-term loan, the Board would establish
the terms on which such loan would be made, including the interest rate,
amortization schedule, maturity and redemption terms. Such terms would generally
reflect the then prevailing terms upon which management determines such Group
could borrow funds on a similar basis. The financial statements of the lending
Group and the financial statements of the borrowing Group will reflect the
amount of any such loan and the periodic interest accruing thereon. The Board
may determine that a transfer of funds from the Communications Group to the
Media Group should be accounted for as an equity contribution, in which case an
inter-group interest (determined by the Board based on the then current market
value of shares of Media Stock) will either be created or increased, as
applicable. Similarly, if an inter-group interest exists, the Board may
determine that a transfer of funds from the Media Group to the Communications
Group should be accounted for as a reduction in the inter-group interest.
DIVIDENDS. Dividends on the Communications Stock will be paid at the
discretion of the Board based primarily upon the financial condition, results of
operations and business requirements of the Communications Group and U S WEST as
a whole. Dividends will be payable out of the lesser of: 1) the funds of
B-24
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
U S WEST legally available for the payment of dividends; and 2) the
Communications Group Available Dividend Amount.
The Communications Group Available Dividend Amount on any date shall mean
the excess, if any, of: 1) the amount equal to the fair market value of the
total assets attributed to the Communications Group less the total amount of the
liabilities attributed to the Communications Group (provided that preferred
stock shall not be treated as a liability), in each case, as of such date and
determined on a basis consistent with that applied in determining the
Communications Group net earnings (loss) over; 2) the aggregate par value of, or
any greater amount determined to be capital in respect of, all outstanding
shares of Communications Stock and each class or series of preferred stock
attributed to the Communications Group.
EARNINGS PER COMMON SHARE. Earnings per common share ("earnings per share")
for 1995 and 1994 have been presented on a pro forma basis to reflect the
Communications Stock as if it had been outstanding since January 1, 1994. For
periods prior to the recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
INDUSTRY SEGMENT. The businesses comprising the Communications Group
operate in a single industry segment as defined in Statement of Financial
Accounting Standards ("SFAS") No. 14, "Financial Reporting for Segments of a
Business Enterprise." Approximately 97 percent of the Communications Group's
revenues are attributable to the operations of U S WEST Communications, of which
approximately 60 percent are derived from the states of Arizona, Colorado,
Minnesota and Washington.
SIGNIFICANT CONCENTRATIONS. The largest volume of the Communications
Group's services is provided to AT&T. During 1996, 1995 and 1994, revenues
related to those services provided to AT&T were $1,046, $1,085 and $1,130,
respectively. Related accounts receivable at December 31, 1996 and 1995, totaled
$89 and $91, respectively. As of December 31, 1996, the Communications Group is
not aware of any other significant concentration of business transacted with a
particular customer, supplier or lender that could, if suddenly eliminated,
severely impact operations.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES. New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Nonreusable material is carried
at its estimated salvage value. Inventories of the Communications Group's
nontelephone operations are carried at the lower of cost or market on a
first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is carried at cost less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are expensed as
incurred. U S WEST Communications' provision for depreciation of property, plant
and equipment is based on various straight-
B-25
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
line group methods using remaining useful (economic) lives based on
industry-wide studies. U S WEST Communications discontinued accounting for its
regulated telephone operations under SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation," in 1993. The average depreciable lives used for
the major categories of telephone property, plant and equipment follow:
<TABLE>
<CAPTION>
AVERAGE LIFE
CATEGORY (YEARS)
- ---------------------------------------------------------------- -------------------
<S> <C>
General purpose computers....................................... 6
Digital switch.................................................. 10
Digital circuit................................................. 10
Aerial copper cable............................................. 15
Underground copper cable........................................ 15
Buried copper cable............................................. 20
Fiber cable..................................................... 20
Buildings....................................................... 27-49
</TABLE>
When the depreciable property, plant and equipment of U S WEST
Communications is retired or sold, the original cost less the net salvage value
is generally charged to accumulated depreciation. The nontelephone operations of
the Communications Group provide for depreciation using the straight-line
method. When such depreciable property, plant and equipment is retired or sold,
the resulting gain or loss is included in income.
Interest related to qualifying construction projects is capitalized and
reflected as a reduction of interest expense. Amounts capitalized by the
Communications Group were $31, $39 and $36 in 1996, 1995 and 1994, respectively.
COMPUTER SOFTWARE. The cost of computer software, whether purchased or
developed internally, is charged to expense with two exceptions. Initial
operating systems software is capitalized and amortized over the life of the
related hardware, and initial network applications software is capitalized and
amortized over three years. Subsequent upgrades to capitalized software are
expensed. Capitalized computer software costs of $187 and $183 at December 31,
1996 and 1995, respectively, are recorded in property, plant and equipment.
Amortization of capitalized computer software costs totaled $81, $69 and $61 in
1996, 1995 and 1994, respectively.
FINANCIAL INSTRUMENTS. Net interest accrued on interest rate swaps is
recognized over the life of the swaps as an adjustment to interest expense.
Gains and losses incurred on executed forward U.S. Treasury Bond contracts, used
to lock in the U.S. Treasury rate component of future debt issues, are deferred
and recognized as an adjustment to interest expense over the life of the
underlying debt. At December 31, 1996, deferred credits of $8 and deferred
charges of $50 on the closed forward contracts are included as part of the
carrying value of the underlying debt. The deferred credits and charges are
being recognized as a yield adjustment over the life of the debt, which matures
at various dates through 2043.
Currency swaps entered into to convert foreign debt to dollar-denominated
debt are combined with the foreign currency debt and accounted for as if
fixed-rate, dollar-denominated debt were issued directly.
REVENUE RECOGNITION. Local telephone service revenues are generally billed
monthly in advance, and revenues are recognized the following month when
services are provided. Revenues derived from exchange access and long-distance
network services are billed and recorded monthly as services are provided.
B-26
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods. For financial statement purposes, investment tax credits of U S WEST
Communications are being amortized over the economic lives of the related
property, plant and equipment in accordance with the deferred method of
accounting for such credits.
NEW ACCOUNTING STANDARDS. Effective January 1, 1996, U S WEST adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and
associated intangibles be written down to fair value whenever an impairment
review indicates that the carrying value cannot be recovered on an undiscounted
cash flow basis. SFAS No. 121 also requires that a company no longer record
depreciation expense on assets held for sale. See Note 3 -- Property, Plant and
Equipment -- to the Communications Group Combined Financial Statements.
In 1996, U S WEST adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. U S
WEST has adopted the disclosure provisions of SFAS No. 123 but continues to
account for the stock incentive plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 9 -- Stock
Incentive Plans -- to the Communications Group Combined Financial Statements.
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128 requires
presentation of basic and diluted earnings per share on the face of the income
statement. Adoption of the new standard will not have a material impact on
Communications Group earnings per share.
B-27
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings...................................................... $ 2,415 $ 2,459
Telephone network equipment............................................. 12,925 12,019
Telephone outside plant................................................. 13,148 12,353
General purpose computers and other..................................... 3,558 3,580
Construction in progress................................................ 599 767
--------- ---------
32,645 31,178
--------- ---------
Less accumulated depreciation
Buildings............................................................. 703 686
Telephone network equipment........................................... 7,756 7,221
Telephone outside plant............................................... 8,221 7,851
General purpose computers and other................................... 1,959 1,891
--------- ---------
18,639 17,649
--------- ---------
Property, plant and equipment -- net.................................... $ 14,006 $ 13,529
--------- ---------
--------- ---------
</TABLE>
In 1996, U S WEST Communications sold certain rural telephone exchanges with
a cost basis of $243. Consideration received for the sales was $306, including
$174 in cash. In 1995 and 1994, U S WEST Communications sold certain rural
telephone exchanges with a cost basis of $258 and $122, respectively, and
received consideration of $388 (including $214 in cash) during 1995 and $204
(including $93 in cash) during 1994.
ADOPTION OF SFAS NO. 121
Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires that long-lived assets and associated intangibles be
written down to fair value whenever an impairment review indicates that the
carrying value cannot be recovered on an undiscounted cash flow basis. SFAS No.
121 also requires that a company no longer record depreciation expense on assets
held for sale. Adoption of SFAS No. 121 resulted in income of $34 (net of tax of
$22) from the cumulative effect of reversing depreciation expense recorded in
prior years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date U S WEST formally committed to a plan to
dispose of the rural telephone exchange assets to January 1, 1996. The income
has been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying values of the rural telephone
exchange assets being held for sale approximates $144 and $338 at December 31,
1996 and 1995, respectively. As a result of adopting SFAS No. 121, depreciation
expense for 1996 was reduced by $24. The combined effects of lower depreciation
expense and the cumulative effect of adoption of the new standard will be
directly offset by lower recognized gains on future rural telephone exchange
sales.
B-28
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper........................................................... $ 701 $ 542
Other...................................................................... -- 62
Current portion of long-term debt............................................ 133 461
--------- ---------
Total........................................................................ $ 834 $ 1,065
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.57 percent and
5.79 percent at December 31, 1996 and 1995, respectively.
U S WEST and U S WEST Communications maintain commercial paper programs to
finance short-term cash flow requirements, as well as to maintain a presence in
the short-term debt market. In addition, U S WEST Communications, which conducts
its own borrowing activities, is permitted to borrow up to $600 under short-term
lines of credit, all of which was available at December 31, 1996. Additional
lines of credit aggregating approximately $4.5 billion are available to both the
Media Group and the nonregulated subsidiaries of the Communications Group in
accordance with their borrowing needs.
LONG-TERM DEBT
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- --------------------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................... $ 36 $ - $ 90 $ - $ 149 $ 275 $ 275
Above 5% to 6%..................................... 300 - - 50 211 561 561
Above 6% to 7%..................................... - 71 257 133 1,783 2,244 2,244
Above 7% to 8%..................................... - - - - 2,457 2,457 2,493
Above 8% to 9%..................................... - - - - 250 250 250
Above 9% to 10%.................................... - - 175 - - 175 175
Variable-rate debt indexed to three-month LIBOR and
two- and ten-year constant maturity Treasury
rates............................................ - 155 - - - 155 180
--------- --------- --------- --------- ----------- --------- ---------
$ 336 $ 226 $ 522 $ 183 $ 4,850 6,117 6,178
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other................ 194 195
Unamortized discount -- net........................ (647) (684)
--------- ---------
Total.............................................. $ 5,664 $ 5,689
--------- ---------
--------- ---------
</TABLE>
Long-term debt consists principally of debentures, medium-term notes and
zero coupon subordinated notes convertible at any time into equal shares of
Communications Stock and Media Stock. The zero
B-29
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: DEBT (CONTINUED)
coupon notes have a yield to maturity of approximately 7.3 percent. The zero
coupon notes are recorded at a discounted value of $289 and $276 at December 31,
1996 and 1995, respectively.
During 1995, U S WEST Communications refinanced $1.5 billion of commercial
paper to take advantage of favorable long-term interest rates. In addition to
the commercial paper, U S WEST Communications refinanced $145 of long-term debt.
Expenses associated with the refinancing of long-term debt resulted in
extraordinary charges to income of $8, net of tax benefits of $5.
Interest payments by the Communications Group, net of amounts capitalized,
were $425, $378 and $356 in 1996, 1995 and 1994, respectively.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
Under an interest rate swap, U S WEST Communications agrees with another
party to exchange interest payments at specified intervals over a defined term.
Interest payments are calculated by reference to the notional amount based on
the fixed- and variable-rate terms of the swap agreements. The net interest
accrued under the interest rate swap is accounted for as an adjustment to
interest expense.
During 1995, U S WEST Communications entered into currency swaps to convert
Swiss franc-denominated debt to U.S. dollar-denominated debt. This allowed U S
WEST Communications to achieve interest savings over issuing fixed-rate,
dollar-denominated debt. The currency swap and foreign currency debt are
combined and accounted for as if fixed-rate, dollar-denominated debt was issued
directly.
The following table summarizes terms of swaps pertaining to U S WEST
Communications as of December 31, 1996 and 1995. Variable rates are indexed to
three-month LIBOR and two- and ten-year constant maturity Treasury and 30-day
commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE RATE AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed.............. $ 180 1997-1999 5.51 5.91 $ 580 1996-1999 5.70 6.56
Currency....................... 204 1999-2001 -- 6.55 204 1999-2001 -- 6.55
</TABLE>
The counterparties to swaps or other interest rate contracts are major
financial institutions. U S WEST Communications is exposed to credit loss in the
event of nonperformance by these counterparties. U S WEST manages this exposure
by monitoring the credit standing of the counterparty and establishing dollar
and term limitations which correspond to the respective credit rating of each
counterparty. U S WEST Communications does not have significant exposure to an
individual counterparty and does not anticipate nonperformance by any
counterparty.
B-30
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable and short-term debt approximate carrying values due to their short-term
nature.
The fair values of interest rate swaps are based on estimated amounts U S
WEST Communications would receive or pay to terminate such agreements taking
into account current interest rates and creditworthiness of the counterparties.
The fair values of long-term debt are based on quoted market prices where
available or, if not available, are based on discounting future cash flows using
current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................................... $ 6,498 $ 6,450 $ 6,754 $ 7,050
Interest rate swap agreements -- assets.................................. -- (17) -- (19)
Interest rate swap agreements -- liabilities............................. -- 10 -- 17
----------- --------- ----------- ---------
Debt -- net.............................................................. $ 6,498 $ 6,443 $ 6,754 $ 7,048
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
NOTE 6: RESTRUCTURING CHARGE
In 1993, the Communications Group incurred an $880 restructuring charge
(pretax). The related restructuring plan, which is expected to be substantially
complete by the end of 1997, is designed to provide faster, more responsive
customer services, while reducing the costs of providing these services.
Following is a schedule of the incurred costs that were included in the 1993
restructuring charge:
<TABLE>
<CAPTION>
ACTUAL ESTIMATE
------------------------------- -----------
1994 1995 1996 1997 TOTAL
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation..................................................... $ 19 $ 76 $ 102 $ 86 $ 283
Systems development..................................................... 118 129 91 22 360
Real estate............................................................. 50 66 8 6 130
Relocation.............................................................. 21 21 5 -- 47
Retraining and other.................................................... 8 23 20 9 60
--------- --------- --------- ----- ---------
Total................................................................... $ 216 $ 315 $ 226 $ 123 $ 880
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>
B-31
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: LEASING ARRANGEMENTS
Certain subsidiaries within the Communications Group have entered into
operating leases for office facilities, equipment and real estate. Rent expense
under operating leases was $189, $210 and $235 in 1996, 1995 and 1994,
respectively. Minimum future lease payments as of December 31, 1996, under
noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- -------------------------------------------------------------------------------------
<S> <C>
1997................................................................................. $ 131
1998................................................................................. 131
1999................................................................................. 122
2000................................................................................. 113
2001................................................................................. 120
Thereafter........................................................................... 815
---------
Total................................................................................ $ 1,432
---------
---------
</TABLE>
Minimum payments have not been reduced by minimum sublease rentals of $236
due in the future under noncancelable subleases.
NOTE 8: COMMUNICATIONS GROUP EQUITY
Following is a reconciliation of Communications Group equity:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................................ $ 3,476 $ 3,179 $ 2,722
Net income.................................................... 1,249 1,176 1,150
Dividends declared............................................ (1,024) (1,010) (980)
Communications Stock issuances................................ 216 52 --
Equity issuances prior to Recapitalization Plan............... -- 79 287
--------- --------- ---------
Balance at end of period...................................... $ 3,917 $ 3,476 $ 3,179
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST issued 1.7 million shares of Communications Stock during 1995,
subsequent to the November 1, 1995 recapitalization. An additional 6.8 million
shares were issued during 1996. These share issuances were primarily related to
the dividend reinvestment plan, the employee savings plan and the exercise of
stock options. At December 31, 1996 and 1995, there were 480,457,336 and
473,635,025 shares of Communications Stock outstanding, respectively.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). The Communications Group
and the Media Group participate in the defined contribution savings plan
sponsored by U S WEST. Substantially all employees of the Communications Group
are covered by the plan. U S WEST matches a percentage of eligible employee
contributions with shares of Communications Stock and/or Media Stock in
accordance with participant elections. Participants may also elect to reallocate
past Company contributions between Communications Stock and Media Stock. In
1989, U S WEST established two LESOPs to provide Company stock for matching
contributions to the savings plan. Shares in the LESOP are released as
B-32
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: COMMUNICATIONS GROUP EQUITY (CONTINUED)
principal and interest are paid on the debt. At December 31, 1996, 11,019,157
shares each of Communications Stock and Media Stock had been allocated from the
LESOP to participants' accounts while 1,865,494 and 2,132,291 shares of
Communications Stock and Media Stock, respectively, remained unallocated.
The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are reflected in the Media Group Combined Financial
Statements. Contributions from the Communications Group and the Media Group, as
well as dividends on unallocated shares held by the LESOP ($5, $8 and $11 in
1996, 1995 and 1994, respectively), are used for debt service. Beginning with
the dividend paid in fourth-quarter 1995, dividends on allocated shares are
being paid annually to participants. Previously, dividends on allocated shares
were used for debt service with participants receiving additional shares from
the LESOP in lieu of dividends. Tax benefits related to dividend payments on
eligible shares in the savings plan have been allocated to the Communications
Group, which paid the dividends.
U S WEST recognizes expense based on the cash payments method. Contributions
to the plan related to the Communications Group, excluding dividends, were $65,
$70 and $68 in 1996, 1995 and 1994, respectively, of which $8, $12 and $16,
respectively, have been classified as interest expense.
NOTE 9: STOCK INCENTIVE PLANS
The Communications Group and Media Group participate in the stock incentive
plans maintained by U S WEST for executives and other employees and
nonemployees, primarily members of the Board. The Amended 1994 Stock Plan (the
"Plan") was approved by shareowners on October 31, 1995, in connection with the
Recapitalization Plan. The Plan is a successor plan to the U S WEST, Inc. Stock
Incentive Plan and the U S WEST 1991 Stock Incentive Plan (the "Predecessor
Plans"). No further grants of options or restricted stock may be made under the
Predecessor Plans. The Plan is administered by the Human Resources Committee of
the Board of Directors with respect to officers, executive officers and outside
directors and by a special committee with respect to all other eligible
employees and eligible nonemployees.
Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Communications Group and one Media Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
The maximum aggregate number of shares of Communications Stock that may be
granted in any calendar year for all purposes under the Plan is nine-tenths of
one percent (0.90 percent) of the shares of such class outstanding (excluding
shares held in U S WEST's treasury) on the first day of such calendar year. In
the event that fewer than the full aggregate number of shares of either class
available for issuance in any calendar year are issued in any such year, the
shares not issued shall be added to the shares of such class available for
issuance in any subsequent year or years. Options granted may be exercised no
later than 10 years after the grant date.
During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in income in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," was $2 and $4 in 1996 and 1995,
respectively, all of which related to the Plan modifications. No compensation
expense was recognized in 1994.
B-33
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK INCENTIVE PLANS (CONTINUED)
U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but continues to account for the Plan under APB
Opinion No. 25. Had compensation cost for the Plan been determined consistent
with the fair value based accounting method under SFAS No. 123, Communications
Group pro forma net income and earnings per share would have been the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995
------------------------ ------------------------
EARNINGS EARNINGS
NET INCOME PER SHARE NET INCOME PER SHARE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
As reported.................................. $ 1,249 $ 2.62 $ 1,176 $ 2.50
Pro forma.................................... 1,247 2.61 1,178 2.50
</TABLE>
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
in 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Risk-free interest rate............................................... 6.50% 6.00%
Expected dividend yield............................................... 6.70% 6.70%
Expected life......................................................... 4.5 years 4.5 years
Expected volatility................................................... 19.6% 19.6%
</TABLE>
B-34
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP U S WEST, INC.
--------------------------- ---------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES* PRICE
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Outstanding January 1, 1994.................... 5,301,539 $ 39.76
------------ -------------
Granted...................................... 2,438,409 36.15
Exercised.................................... (139,762) 33.72
Canceled or expired.......................... (214,149) 40.71
------------ -------------
Outstanding December 31, 1994.................. 7,386,037 $ 38.66
------------ -------------
Granted(1)................................... 4,814,856 41.12
Exercised.................................... (430,631) 34.03
Canceled or expired(1)....................... (1,927,083) 37.02
------------ -------------
Outstanding October 31, 1995................... 9,843,179 $ 40.39
------------ -------------
Recapitalization Plan.......................... 9,843,179 $ 24.11 (9,843,179) $ (40.39)
------------ ------ ------------ -------------
------------ -------------
Granted...................................... 138,309 32.16
Exercised.................................... (543,037) 21.23
Canceled or expired.......................... (15,350) 24.91
------------ ------
Outstanding December 31, 1995.................. 9,423,101 $ 24.39
------------ ------
Granted...................................... 3,624,602 30.97
Exercised.................................... (1,205,730) 22.37
Canceled or expired.......................... (429,058) 25.01
------------ ------
Outstanding December 31, 1996.................. 11,412,915 $ 26.67
------------ ------
------------ ------
</TABLE>
- ------------------------------
(*) Includes options granted in tandem with SARs.
(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e. stock grant).
Options to purchase 3,881,100 and 2,672,666 shares of Communications stock
at weighted-average exercise prices of $25.71 and $22.22 were exercisable at
December 31, 1996 and 1995, respectively.
B-35
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------- ------------ ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$14.96 - $21.41.................................... 2,560,778 7.27 $ 21.26 505,430 $ 20.64
$21.41 - $24.62.................................... 1,241,669 5.42 22.87 1,037,785 22.74
$24.92 - $26.11.................................... 2,750,886 8.59 26.08 932,931 26.06
$26.34 - $30.63.................................... 2,334,141 7.86 29.82 1,313,137 29.29
$30.88 - $35.88.................................... 2,525,441 9.02 31.74 91,817 32.57
------------ --- ----------- ---------- -----------
Total............................................ 11,412,915 7.89 $ 26.67 3,881,100 $ 25.71
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 3,624,602 and 4,953,165 Communications Group options were granted
in 1996 and 1995, respectively, of which 198,027 and 1,751,936 were modified
options revalued as new grants. The weighted-average grant date fair value of
Communications Group options granted during the year, inclusive of modified
options, using the Black-Scholes option-pricing model was $3.87 and $3.19 for
1996 and 1995, respectively. Excluding the modifications, the weighted-average
grant date fair value was $3.67 and $2.92, respectively. The exercise price of
Communications Group stock options, excluding modified options, equals the
market price on the grant date. The exercise prices of modified stock options
may be greater or less than the market price on the revaluation date.
Approximately 2,950,000 and 2,050,000 shares of Communications Stock were
available for grant under the plans in effect at December 31, 1996 and 1995,
respectively. Approximately 14,360,000 shares of Communications Stock were
reserved for issuance under the Plan at December 31, 1996.
NOTE 10: EMPLOYEE BENEFITS
PENSION PLAN
The Communications Group and the Media Group participate in the defined
benefit pension plan sponsored by U S WEST. Substantially all management and
occupational employees of the Communications Group are covered by the plan.
Since plan assets are not segregated into separate accounts or restricted to
providing benefits to employees of the Communications Group, assets of the plan
may be used to provide benefits to employees of both the Communications Group
and the Media Group. In the event the single employer pension plan sponsored by
U S WEST would be separated into two or more plans, guidelines in the Internal
Revenue Code dictate how assets of the plan must be allocated to the new plans.
U S WEST currently has no intention to split the plan. Because of these factors,
U S WEST believes there is no reasonable basis to attribute plan assets to the
Communications Group as if it had funded separately its actuarially determined
obligation.
Management benefits are based on a final pay formula while occupational
benefits are based on a flat benefit formula. U S WEST uses the projected unit
credit method for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. U S WEST's policy
is to fund amounts required under the Employee Retirement Income Security Act of
1974 ("ERISA") and no funding was required in 1996, 1995 or 1994. Should funding
be required in the future, funding amounts
B-36
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
would be allocated to the Communications Group based upon the ratio of service
cost of the Communications Group to total service cost of plan participants.
The composition of the net pension cost (credit) and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period................. $ 203 $ 173 $ 197
Interest cost on projected benefit obligation..................... 575 558 561
Actual return on plan assets...................................... (1,509) (1,918) 188
Net amortization and deferral..................................... 726 1,185 (946)
--------- --------- ---------
Net pension cost (credit)........................................... $ (5) $ (2) $ 0
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1996, 1995 and 1994.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $6,544 and
$5,839, respectively........................................................ $ 7,446 $ 6,617
---------- ---------
---------- ---------
Plan assets at fair value, primarily stocks and bonds........................ $ 10,958 $ 9,874
Less: Projected benefit obligation........................................... 8,310 8,450
---------- ---------
Plan assets in excess of projected benefit obligation........................ 2,648 1,424
Unrecognized net (gain)...................................................... (1,502) (101)
Prior service cost not yet recognized in net periodic pension cost........... 31 (62)
Balance of unrecognized net asset at January 1, 1987......................... (626) (705)
---------- ---------
Prepaid pension cost......................................................... $ 551 $ 556
---------- ---------
---------- ---------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
Weighted-average rate of compensation increase........................... 5.50% 5.50%
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
ALLOCATION OF PENSION COSTS. U S WEST's allocation policy is to: 1) offset
the Company-wide service cost, interest cost and amortization by the return on
plan assets and 2) allocate the remaining net pension cost to the Communications
Group based on the ratio of actuarially determined service cost of the
Communications Group to total service cost of plan participants. U S WEST
believes allocating net
B-37
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
pension cost based on service cost is reasonable since service cost is a primary
factor in determining pension cost. Net pension costs allocated to the
Communications Group were $(5), $(2) and $0 in 1996, 1995 and 1994,
respectively. The service and interest costs attributed to the Communications
Group for 1996 were $178 and $503, respectively, and the projected benefit
obligation at December 31, 1996, was $7,229.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Communications Group and the Media Group participate in plans sponsored
by U S WEST which provide certain health care and life insurance benefits to
retired employees. In conjunction with U S WEST's 1992 adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," U S
WEST elected to immediately recognize the accumulated postretirement benefit
obligation for current and future retirees. However, the Federal Communications
Commission and certain state jurisdictions permit amortization of the transition
obligation over the average remaining service period of active employees for
regulatory accounting purposes, with most jurisdictions requiring funding as a
stipulation for rate recovery.
U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.............. $ 70 $ 65 $ 75
Interest on accumulated benefit obligation..................... 259 267 260
Actual return on plan assets................................... (231) (415) 4
Net amortization and deferral.................................. 68 286 (99)
--------- --------- ---------
Net postretirement benefit costs............................... $ 166 $ 203 $ 240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1996, 1995 and 1994.
B-38
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees................................................................... $ 2,255 $ 2,137
Fully eligible plan participants........................................... 347 327
Other active plan participants............................................. 1,289 1,224
---------- ---------
Total accumulated postretirement benefit obligation.......................... 3,891 3,688
Unrecognized net gain........................................................ 534 539
Unamortized prior service cost............................................... 32 (34)
Fair value of plan assets, primarily stocks, bonds and life insurance(1)..... (2,063) (1,845)
---------- ---------
Accrued postretirement benefit obligation.................................... $ 2,394 $ 2,348
---------- ---------
---------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155
and $94, respectively, in 1996, and $210 and $112, respectively, in 1995.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate............................................................ 7.50% 7.00%
Medical cost trend rate*................................................. 8.00% 9.00%
</TABLE>
- ------------------------------
(*) Medical cost trend rate gradually declines to an ultimate rate of 5.5
percent in 2011.
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1996 net postretirement benefit cost by approximately $27 and
increased the 1996 accumulated postretirement benefit obligation by
approximately $299.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
PLAN ASSETS. Assets of the postretirement medical and life plans may be
used to provide benefits to employees of both the Communications Group and the
Media Group since plan assets are not legally restricted to providing benefits
to either Group. In the event that either plan sponsored by U S WEST would be
separated into two or more plans, there are no guidelines in the Internal
Revenue Code for allocating assets of the plan. U S WEST currently has no
intention to split the plans. For purposes of determining benefit costs, U S
WEST allocates the assets based on historical contributions for postretirement
medical costs, and on the ratio of Group to total salaries for life plan
participants.
POSTRETIREMENT MEDICAL AND LIFE COSTS. The service and interest components
of net postretirement medical benefit costs are calculated for the
Communications Group based on the population characteristics of the Group. Since
funding of postretirement medical costs is voluntary, return on assets is
attributed to the Communications Group based on historical funding. The
Communications Group's annual funding
B-39
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: EMPLOYEE BENEFITS (CONTINUED)
amount is based on its cash requirements with the funding at U S WEST
Communications based on regulatory accounting requirements.
Net postretirement life costs and funding requirements, if any, are
allocated to the Communications Group in the same manner as pension costs. U S
WEST will generally fund the amount allowed for tax purposes. No funding of
postretirement life insurance occurred in 1996, 1995 and 1994. U S WEST believes
its method of allocating postretirement life costs is reasonable.
Net postretirement medical benefit and life costs recognized by the
Communications Group for 1996, 1995 and 1994 were $154, $189 and $226,
respectively. The percentage of postretirement medical assets attributed to the
Communications Group at December 31, 1996 and 1995, based on historical
voluntary contributions was 96 percent. The aggregate accumulated postretirement
medical and life benefit obligation attributable to the Communications Group was
$3,692 at December 31, 1996.
NOTE 11: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current................................................................. $ 540 $ 434 $ 368
Deferred................................................................ 97 177 233
Investment tax credits -- net........................................... (28) (38) (47)
--------- --------- ---------
609 573 554
--------- --------- ---------
State and local:
Current................................................................. 67 56 58
Deferred................................................................ 22 33 41
--------- --------- ---------
89 89 99
--------- --------- ---------
Provision for income taxes................................................ $ 698 $ 662 $ 653
--------- --------- ---------
--------- --------- ---------
</TABLE>
U S WEST paid $693, $566 and $313 for income taxes in 1996, 1995 and 1994,
respectively, of which $633, $511 and $491 related to the Communications Group.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN PERCENT)
Federal statutory tax rate....................................... 35.0 35.0 35.0
Investment tax credit amortization............................... (0.8) (1.3) (1.7)
State income taxes -- net of federal effect...................... 3.0 3.1 3.6
Other............................................................ (0.7) (0.9) (0.7)
--------- --------- ---------
Effective tax rate............................................... 36.5 35.9 36.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
B-40
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.................................................. $ 1,507 $ 1,433
State deferred taxes -- net of federal effect.................................. 185 180
Other.......................................................................... 74 68
--------- ---------
Deferred tax liabilities..................................................... 1,766 1,681
--------- ---------
Postemployment benefits, including pension..................................... 664 675
Restructuring and other........................................................ 163 231
Unamortized investment tax credit.............................................. 61 70
State deferred taxes -- net of federal effect.................................. 124 133
Other.......................................................................... 176 142
--------- ---------
Deferred tax assets.......................................................... 1,188 1,251
--------- ---------
Net deferred tax liability..................................................... $ 578 $ 430
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $171 and $259 at December
31, 1996 and 1995, respectively, resulting primarily from restructuring charges
and compensation-related items.
NOTE 12: RELATED PARTY TRANSACTIONS
CUSTOMER LISTS, BILLING AND COLLECTION SERVICES AND OTHER SERVICES. U S
WEST Communications sells customer lists, billing and collection services and
other services to the domestic publishing operations of the Media Group. These
data and services are sold at market price. However, the accounting and
reporting for regulatory purposes is in accordance with regulatory requirements.
U S WEST Communications charged $17, $20 and $29 for these services in 1996,
1995 and 1994, respectively.
TELECOMMUNICATIONS SERVICES. U S WEST Communications sells
telecommunications network access and usage to the domestic wireless operations
of the Media Group. U S WEST Communications charged $43, $40 and $30 in 1996,
1995 and 1994, respectively, for these services.
BELL COMMUNICATIONS RESEARCH, INC. ("BELLCORE"). Charges relating to
research, development and maintenance of existing technologies performed by
Bellcore, of which U S WEST Communications has a one-seventh ownership interest,
were $97, $95 and $122 in 1996, 1995 and 1994, respectively.
In fourth-quarter 1996, U S WEST Communications and the other Regional Bell
Operating Companies ("RBOCs") entered into an agreement to sell their interests
in Bellcore. The sale is expected to be finalized in late 1997 after the RBOCs
obtain the requisite regulatory approvals. Following the disposition, Bellcore
and other third parties will provide research and development and other services
to the Communications Group on a contract basis.
B-41
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 13: CONTINGENCIES
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for hearing, thereby establishing two
exceptions to the rule against retroactive ratemaking: (1) unforeseen and
extraordinary events, and (2) misconduct. The PSC's initial order denied a
refund request from interexchange carriers and other parties related to the Tax
Reform Act of 1986. The range of possible risk is $0 to $155 at December 31,
1996.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995
rate request. In February 1995, U S WEST Communications sought to increase
revenues by raising rates for basic residential services over a four-year
period. The two major issues in this proceeding involve U S WEST Communications'
requests for improved capital recovery and elimination of the imputation of
Yellow Pages revenue. Instead of granting U S WEST Communications' rate request,
the Commission ordered approximately $91.5 in annual revenue reductions,
effective May 1, 1996. Based on the above ruling, U S WEST Communications filed
a lawsuit with the King County Superior Court (the "Court") for an appeal of the
order, a temporary stay of the ordered rate reduction and an authorization to
implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay pending its decision on U S WEST Communications'
appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues
subject to refund with interest. On November 25, 1996, the Court ruled in favor
of the WUTC. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which, on January 22,
1997, granted a stay of the order, pending the State Supreme Court's full review
of the appeal. U S WEST Communications expects the State Supreme Court's review
to begin in the second quarter of 1997.
U S WEST Communications expects its appeal to be successful and has not
accrued any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on the future results of operations.
B-42
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Operating revenues....................................................... $ 2,465 $ 2,500 $ 2,515 $ 2,599
Income before income taxes and cumulative effect of change
in accounting principle................................................ 469 517 455 472
Income before cumulative effect of change in accounting principle........ 294 324 286 311
Net income............................................................... 328 324 286 311
Earnings per common share before cumulative effect of change in
accounting principle................................................... 0.62 0.68 0.60 0.65
Earnings per common share................................................ 0.69 0.68 0.60 0.65
1995
Operating revenues....................................................... $ 2,318 $ 2,338 $ 2,389 $ 2,439
Income before income taxes and extraordinary item........................ 500 460 454 432
Income before extraordinary item......................................... 315 293 292 284
Net income............................................................... 315 293 287 281
Earnings per common share before extraordinary item...................... 0.67 0.62 0.62 0.60
Earnings per common share................................................ 0.67 0.62 0.61 0.59
</TABLE>
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock. Earnings
per common share for 1995 have been presented on a pro forma basis to reflect
the two classes of stock as if they had been outstanding since January 1, 1995.
For periods prior to the recapitalization, the average common shares outstanding
are assumed to be equal to the average common shares outstanding for U S WEST,
Inc.
1996 first-quarter net income includes the cumulative and current effects of
$34 ($0.07 per share) and $5 ($0.01 per share), respectively, from adopting SFAS
No. 121. 1996 second-quarter net income includes $30 ($0.06 per share) from
gains on the sales of certain rural telephone exchanges and current effects of
$5 ($0.01 per share) from adopting SFAS No. 121. 1996 third-quarter net income
includes $1 (no share impact) from a gain on the sales of certain rural
telephone exchanges and current effects of $3 ($0.01 per share) from adopting
SFAS No. 121. 1996 fourth-quarter net income includes $5 ($0.01 per share) from
gains on the sales of certain rural telephone exchanges and current effects of
$2 ($0.01 per share) from adopting SFAS No. 121.
1995 first-quarter net income includes $39 ($0.08 per share) from gains on
the sales of certain rural telephone exchanges. 1995 second-quarter net income
includes $10 ($0.02 per share) from gains on the sales of certain rural
telephone exchanges. 1995 third-quarter net income includes $21 ($0.04 per
share) from gains on the sales of certain rural telephone exchanges and $5
($0.01 per share) for expenses associated with the Recapitalization Plan. 1995
third-quarter net income also includes a charge of $5 ($0.01 per share) for the
early extinguishment of debt. 1995 fourth-quarter net income includes $15 ($0.03
per share) from gains on the sales of certain rural telephone exchanges and
other charges of $6 ($0.01 per share), including an extraordinary charge of $3
for the early extinguishment of debt and $3 for expenses associated with the
Recapitalization Plan.
B-43
<PAGE>
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------------
PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS
- --------------------------------------------------------------------- --------- --------- --------- -----------
(WHOLE DOLLARS)
<S> <C> <C> <C> <C>
1996
First quarter........................................................ $ 37.500 $ 30.250 $ 32.375 $ 0.535
Second quarter....................................................... 34.625 31.125 32.000 0.535
Third quarter........................................................ 32.250 27.250 29.875 0.535
Fourth quarter....................................................... 33.625 29.250 32.250 0.535
1995
Fourth quarter(1).................................................... $ 36.375 $ 28.375 $ 35.625 $ 0.535
</TABLE>
- ------------------------------
(1) Fourth-quarter 1995 per share market and dividend data is for the period
of November 1, 1995 through December 31, 1995.
B-44
<PAGE>
U S WEST MEDIA GROUP
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
Sales and other revenues.................................. $ 2,955 $ 2,374 $ 1,908 $ 1,549 $ 1,384
EBITDA(1)................................................. 937 716 533 485 410
Income (loss) before extraordinary item(2)................ (71) 145 276 85 146
Earnings (loss) available for common stock(2)............. (80) 138 276 85 146
Earnings (loss) per common share(3)....................... (0.16) 0.29 0.61 -- --
Total assets.............................................. 24,061 8,615 7,394 5,446 3,130
Total debt(4)............................................. 8,853 2,101 1,814 1,526 249
Mandatorily redeemable preferred securities(5)............ 1,131 651 51 -- --
Media Group equity........................................ 7,632 4,472 4,203 3,139 2,265
Capital expenditures...................................... 668 401 343 215 169
Average common shares outstanding
(thousands)(3).......................................... 491,924 470,549 453,316 -- --
Common shares outstanding (thousands)(3).................. 608,863 472,314 469,343 -- --
</TABLE>
PROPORTIONATE DATA(6)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
DOLLARS IN MILLIONS
Sales and other revenues.................................................. $ 6,367 $ 5,115 $ 4,213 $ 2,157
Operating income.......................................................... 459 476 401 195
Income (loss) before extraordinary item(2)................................ (71) 145 276 85
EBITDA(1)................................................................. 1,473 1,149 902 527
Subscribers/advertisers (thousands)....................................... 11,919 5,922 4,199 3,086
</TABLE>
- ------------------------------
(1) Earnings before interest, taxes, depreciation, amortization, and other
("EBITDA"). EBITDA also excludes gains on asset sales, equity losses,
guaranteed minority interest expense, and restructuring charges. The Media
Group considers EBITDA an important indicator of the operating performance
of its businesses. EBITDA, however, should not be considered as an
alternative to operating or net income as an indicator of performance or as
an alternative to cash flows from operating activities as a measure of
liquidity, in each case determined in accordance with generally accepted
accounting principles ("GAAP").
(2) 1996 net losses include a net loss of $71 related to the November 15, 1996
merger (the "Merger") of Continental Cablevision, Inc. into a wholly owned
subsidiary of U S WEST, Inc. ("U S WEST" or "Company") and a charge of $19
from the sale of the Company's cable television interests in Norway, Sweden
and Hungary. 1995 income is before extraordinary item and includes a gain of
$95 from the merger of Telewest Communications plc ("Telewest") with SBC
CableComms (UK) and costs of $9 associated with the November 1, 1995,
recapitalization. 1994 income includes a gain of $105 on the partial sale of
U S WEST's joint venture interest in Telewest and a gain of $41 on the sale
of U S WEST's paging operation. 1993 income was reduced by restructuring
charges totaling $76. 1993 and 1992 income and earnings available for common
stock is from continuing operations.
(3) 1996 average and common shares outstanding includes 150,615,000 shares
issued related to the Merger. Effective November 1, 1995, each share of U S
WEST, Inc. common stock was converted into one share each of U S WEST
Communications Group common stock and U S WEST Media Group common stock.
Earnings per common share for 1995 and 1994 have been presented on a pro
forma basis to reflect the Media stock as if it had been outstanding since
January 1, 1994. For periods prior to the recapitalization, the average
common shares outstanding are assumed to be equal to the average common
shares outstanding for U S WEST.
(4) Excludes debt associated with the capital assets segment, which has been
discontinued and is held for sale.
C-1
<PAGE>
U S WEST MEDIA GROUP
FINANCIAL HIGHLIGHTS (CONTINUED)
(5) Includes Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company-guaranteed debentures ("Preferred
Securities") of $1,080 in 1996, $600 in 1995 and preferred stock subject to
mandatory redemption of $51 in 1996, 1995 and 1994.
(6) Selected proportionate data is not required by GAAP or intended to replace
the Combined Financial Statements prepared in accordance with GAAP. It is
presented supplementally because the Media Group believes that proportionate
data facilitates the understanding and assessment of its Combined Financial
Statements. Proportionate accounting reflects the Media Group's relative
ownership interests in operating revenues and expenses for both its
consolidated and equity method investments. The table does not reflect
financial data of the capital assets segment which has been discontinued and
is held for sale.
C-2
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
Some of the information presented in or in connection with this report
constitutes "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results will not differ materially from its expectations. Factors that could
cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable, telephony, wireless
and directories markets, (ii) the gain or loss of significant customers, (iii)
regulatory changes affecting the cable and telecommunications industries,
including changes that could have an impact on the competitive environment in
the local exchange market, (iv) a change in economic conditions in the various
markets served by the Company's operations that could adversely affect the level
of demand for cable, wireless, directories or other services offered by the
Company, (v) greater than anticipated competitive activity requiring new pricing
for services, (vi) higher than anticipated start-up costs associated with new
business opportunities, (vii) increases in fraudulent activity with respect to
wireless services, or (viii) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
THE RECAPITALIZATION PLAN
On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado"), voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors to reincorporate in
Delaware and create two classes of common stock. Under the Recapitalization
Plan, shareholders approved an Agreement and Plan of Merger between U S WEST
Colorado and U S WEST, Inc., a Delaware corporation ("U S WEST" or the
"Company"), pursuant to which U S WEST continued as the surviving corporation.
In connection with the merger, the Certificate of Incorporation of U S WEST has
been amended and restated to designate two classes of common stock of U S WEST,
one class of which is authorized as U S WEST Communications Group Common Stock
("Communications Stock") and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock").
The Communications Stock and Media Stock provide shareholders with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
The Combined Financial Statements of the Media Group include the (i)
combined historical balance sheets, results of operations and cash flows of the
businesses that comprise the Media Group; (ii) assets and liabilities related to
the capital assets segment, which has been discontinued and is held for sale;
(iii) corporate assets and liabilities of U S WEST and related transactions not
identified with the Communications Group; and (iv) an allocated portion of the
corporate expense of U S WEST. All significant intra group financial
transactions have been eliminated. Transactions between the Media Group and the
Communications Group have not been eliminated. For a more complete discussion of
U S WEST's corporate allocation policies, see the U S WEST Media Group Combined
Financial Statements -- Note 2 -- Summary of Significant Accounting Policies.
THE MEDIA GROUP
The Media Group is comprised of: (i) cable and telecommunications network
businesses outside of the Communications Group 14 state region and
internationally, (ii) domestic and international wireless
C-3
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
communications network businesses and (iii) domestic and international directory
and information services businesses.
CABLE AND TELECOMMUNICATIONS. On November 15, 1996, Continental
Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U
S WEST (the "Merger" or the "Continental Merger"). Continental, the nation's
third largest cable operator, serves 4.5 million domestic customers and passes
7.4 million domestic homes. Continental holds significant domestic and
international investments, including a 50 percent interest in a cable venture in
Argentina, a 25 percent interest in a cable venture in Singapore, an 11 percent
interest in Teleport Communications Group ("TCG"), a 10 percent interest in
PRIMESTAR (a direct broadcast satellite service), telephone access businesses in
Florida and Virginia, and interests in programming that include Time Warner,
Inc., E! Entertainment Television and the Golf Channel. The aggregate
consideration paid by Media Group to shareholders of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock with a market value of $920 million and $1.15
billion in cash. In connection with the Merger, U S WEST also assumed all of
Continental's outstanding indebtedness and other liabilities, which approximated
$7.0 billion at November 15, 1996, for a total purchase price of $11.7 billion.
Media Group has accounted for the Merger by the purchase method of accounting.
Accordingly, the purchase price is allocated to the assets acquired and
liabilities assumed based on their estimated fair values.
With the Continental Merger and the Company's cable systems in the Atlanta,
Georgia metropolitan area ("the Atlanta Systems"), Media Group now serves 5.0
million domestic customers and passes 8.3 million domestic homes. Media Group's
domestic customers are highly clustered in six large markets -- New England,
California, Chicago, Atlanta, Michigan/Ohio and Florida.
The Media Group's cable and telecommunications businesses also include an
investment in Time Warner Entertainment Company L.P. ("TWE" or "Time Warner
Entertainment"), the second largest provider of cable television services in the
United States, and international investments including Telewest Communications,
plc ("Telewest"), the largest provider of combined cable and telecommunications
services in the United Kingdom. The Media Group also owns interests in cable and
telecommunications properties in Argentina, Singapore, the Netherlands, Belgium,
Czech Republic, Malaysia, Indonesia and Japan.
Cable and telephony services are at the core of the Media Group's strategy.
The Media Group believes that hybrid fiber-optic and coaxial ("HFC") broadband
networks provide the best and most economical platform for delivery of video,
data, telephony and broadband services. The Media Group plans to selectively
upgrade its cable systems. Once completed, this upgrade will enhance network
quality and reliability as well as provide capacity for added channels,
pay-per-view offerings and targeted advertising. The upgrade will also permit
the offering of new services to subscribers, such as high-speed Internet access,
telephony and digital video offerings. With the Continental Merger, the Media
Group believes it has achieved the scale and scope necessary to execute its
strategy and capitalize on new market opportunities in enhanced cable, telephony
and high-speed data services.
WIRELESS COMMUNICATIONS. The Media Group provides domestic wireless
communications services, including cellular services, in 12 western and
midwestern states to a rapidly growing customer base. During 1994, Media Group
signed a definitive agreement with AirTouch Communications, Inc. ("AirTouch") to
combine their domestic cellular properties into a partnership in a multi-phased
transaction. During Phase I, which commenced on November 1, 1995, the partners
are operating their cellular properties separately. A Wireless Management
Company (the "WMC") has been formed and is providing services to both companies
on a contract basis. In Phase II, the partners will combine their domestic
properties,
C-4
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
subject to certain authorizations and partnership approvals. The passage of the
Telecommunications Act of 1996 has removed significant regulatory barriers to
completion of Phase II. In February 1997, the King County Superior Court in
Washington state ruled that Media Group violated the terms of its partnership
agreement with its minority partners in the Seattle market by entering into the
joint venture agreement with AirTouch. Media Group has obtained a stay of the
ruling pending its appeal. Similar litigation has been filed in other
jurisdictions regarding other cellular partnerships by the same minority partner
that brought the Seattle litigation. Media Group believes it will ultimately be
successful in all such litigation. Media Group expects that Phase II closing
will occur in the second half of 1997.
Upon implementation of Phase II, management expects the joint venture
interests will be approximately 74 percent AirTouch and 26 percent Media Group
(assuming contribution of all domestic cellular properties). The actual
interests in the joint venture at commencement of Phase II depend, among other
things, on the timing of Phase II closing and the ability of the partners to
combine their domestic properties. Media Group's interest will further adjust
depending on the timing of the contribution of its investment in PrimeCo
Personal Communications L.P. ("PrimeCo"). The timing of such contribution is at
Media Group's discretion and will occur either at the closing of Phase II or a
date selected by Media Group, no later than mid-1998.
Media Group has the right to convert its joint venture interest in the
domestic cellular properties into AirTouch stock ("Phase III"). Media Group's
interest will be valued on a private market basis and the AirTouch common stock
received by Media Group will be based on a fair public market value. In the
event the value to be received by Media Group exceeds 19.9 percent of AirTouch's
outstanding common stock, Media Group will receive the excess in the form of
nonvoting preferred stock. Media Group has the right to initiate Phase III upon
completion of Phase II of the merger and contribution of both Media Group's and
AirTouch's interests in PrimeCo to the joint venture.
Media Group also partnered with AirTouch, Bell Atlantic and NYNEX to form a
venture to provide personal communications services ("PCS"), as well as a
strategic national marketing and technical alliance for their wireless
operations. In November, 1996, PrimeCo launched PCS service reaching 32 million
people in 16 major cities nationwide. The venture purchased 11 licenses in the
Federal Communication Commission's (the "FCC") PCS auction, covering 58 million
people in Chicago, Dallas, Honolulu, Houston, Jacksonville, Miami, Milwaukee,
New Orleans, Richmond, San Antonio and Tampa.
Wireless networks are serving an important component of the networked world,
helping customers to communicate and do business with fewer limitations on time
and mobility. Pursuant to its July 25, 1994 agreement with AirTouch, and the
marketing and technical alliance with Bell Atlantic Corporation and NYNEX
Corporation, the Media Group is positioned to offer national product branding
and achieve scale economies, in addition to negotiating favorable equipment
contracts, providing national roaming capabilities and securing strong
distribution channels.
The Media Group also provides wireless communications services
internationally through its 50 percent joint venture interest in One 2 One,
formerly Mercury One 2 One, the world's first PCS service located in the United
Kingdom. The Media Group also owns interests in wireless properties in Hungary,
the Czech and Slovak Republics, Russia, Malaysia, India and Poland.
DIRECTORY AND INFORMATION SERVICES. The Media Group's directory and
information services businesses develop and package content and information
services, including telephone directories, database marketing and other
interactive services in domestic and international markets. The Media Group
publishes approximately 320 White and Yellow Pages directories in 14 western and
midwestern states and over
C-5
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
220 directories in the United Kingdom and Poland. The Media Group also has a 50
percent interest in Listel, Brazil's largest telephone directory publisher.
Directory and information services help buyers and sellers connect with each
other in the networked world. The domestic directory business is investing for
growth, focusing on new and enhanced products and services that extend the
timeliness and reach of its Yellow Pages business. The Media Group is also
evaluating opportunities in new markets, including the full scale rollout of
Yellow Pages on the Internet.
The following discussion is based on the U S WEST Media Group Combined
Financial Statements prepared in accordance with GAAP. The discussion should be
read in conjunction with the U S WEST, Inc. Consolidated Financial Statements. A
discussion of the Media Group's operations on a proportionate basis follows the
GAAP presentation in "Selected Proportionate Financial Data."
RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic.................................................................... $ 1,120 $ 1,058 $ 62 5.9
International............................................................... 139 122 17 13.9
--------- --------- --------- ---------
1,259 1,180 79 6.7
Wireless communications:
Cellular service............................................................ 1,078 845 233 27.6
Cellular equipment.......................................................... 105 96 9 9.4
--------- --------- --------- ---------
1,183 941 242 25.7
Cable and telecommunications:
Domestic.................................................................... 488 215 273 --
International............................................................... 6 -- 6 --
--------- --------- --------- ---------
494 215 279 --
Other......................................................................... 19 38 (19) (50.0)
--------- --------- --------- ---------
Sales and other revenues...................................................... $ 2,955 $ 2,374 $ 581 24.5
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Media Group sales and other revenues increased 24.5 percent, to $2,955 in
1996. Excluding the effects of the Continental Merger, sales and other revenues
increased 13.9 percent. The increase was primarily due to strong growth in
cellular service revenue.
C-6
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising, which represents 98 percent of the domestic directory and
information services revenue, increased 7.4 percent, to $1,102 in 1996. The
increases are largely a result of a 5.7 percent increase in revenue per local
advertiser (primarily a result of price increases of approximately 4.0 percent)
combined with an increase of 3,000 in local advertisers during the year.
International directory publishing revenues increased 13.9 percent to $139
in 1996. The increases are primarily a result of publishing more directories in
1996.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 27.6 percent,
to $1,078 in 1996, due to a 40 percent increase in subscribers during the year
(with 22 percent of the additions occurring in December), partially offset by a
12 percent drop in average revenue per subscriber to $53.00 per month. The
increase in subscribers relates to continued growth in demand for wireless
services. Consumers, who use cellular phones for safety and convenience, have
contributed significantly to this growth in demand. The Media Group anticipates
this growth trend to continue, although at decreased rates.
New wireless competitors offering PCS services will create additional
competitive pressures on pricing in Media Group markets in 1997. Pricing
pressures associated with new and existing competitors, combined with the
continuing shift in the customer base from businesses to consumers, will cause
the average revenue per subscriber to continue to decline.
Cellular equipment revenues increased 9.4 percent, to $105 in 1996, as a
result of a 61 percent increase in units sold which was somewhat offset by lower
equipment costs. A 30 percent increase in customers added during the year and
the implementation of a phone exchange program for existing customers led to the
increase in units sold.
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues increased $273, to $488 in 1996. The November 15, 1996 Continental
Merger contributed $252 to the increase. Revenues related to the Atlanta Systems
increased 9.8 percent, to $236, as a result of a 3.9 percent increase in revenue
per subscriber to $39.36 per month (primarily a result of price increases of 6
to 7 percent) and a basic subscriber increase of 4.5 percent.
International cable and telecommunications revenues reflect the
third-quarter 1996 consolidation of Kabel Plus a.s. ("Kabel Plus"), Media
Group's cable operation in the Czech Republic. The consolidation of Kabel Plus
is associated with a restructuring whereby the Company's ownership interest
increased to 94 percent.
C-7
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
------------------------
1996 1995 $ %
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Directory and information services:
Domestic................................................................ $ 452 $ 399 $ 53 13.3
International........................................................... 2 (1) 3 --
--------- --------- ----- -----------
454 398 56 14.1
Wireless communications................................................... 243 147 96 65.3
Cable and telecommunications:
Domestic................................................................ (13) 23 (36) --
International........................................................... (7) -- (7) --
--------- --------- ----- -----------
(20) 23 (43) --
Other(1).................................................................. (162) (101) (61) (60.4)
--------- --------- ----- -----------
Operating income.......................................................... $ 515 $ 467 $ 48 10.3
--------- --------- ----- -----------
--------- --------- ----- -----------
</TABLE>
- ------------------------------
(1) Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
During 1996, Media Group operating income increased 10.3 percent, to $515.
Excluding the effects of the November 15, 1996 Continental Merger, Media Group
operating income increased 15.6 percent. Earnings before interest, taxes,
depreciation, amortization and other ("EBITDA") increased 30.9 percent, to $937.
Excluding the effects of the Merger, Media Group EBITDA increased 18.7 percent.
The increases were primarily due to strong growth in wireless communications
operations. The Media Group considers EBITDA an important indicator of the
operating performance of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of
performance or as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with GAAP.
DIRECTORY AND INFORMATION SERVICES. During 1996, operating income related
to domestic Yellow Pages directory advertising increased 1.6 percent to $511.
Revenue increases of 7.4 percent were offset by an approximate 10 percent
increase in paper, printing, delivery and distribution costs and a charge of $25
to reorganize and reduce headcount in 1996. The Yellow Pages operation announced
a plan to reorganize the centralized operating management into three regions to
establish greater accountability and to move decision making closer to the
customers. In conjunction with the reorganization, the Yellow Pages operation
reduced headcount by approximately 200 people in 1996. This reorganization will
be fully implemented during 1997.
Operating losses associated with on-going product development activities are
also included in domestic directory and information services. Such losses
reduced domestic directory and information services operating income by $59 in
1996, compared with a reduction of $104 in 1995. The decrease in operating
losses is primarily the result of exiting various product development activities
in 1995.
EBITDA related to domestic Yellow Pages directory advertising services
increased 2.3 percent, to $531 in 1996, including the effects of the $25 charge
to reorganize and reduce headcount in 1996. This charge caused the EBITDA margin
to decline to 48.2 percent in 1996, compared with the 1995 margin of 50.6
percent.
C-8
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating income for international directory publishing operations improved
slightly in 1996 as a result of revenue gains associated with publishing more
directories.
WIRELESS COMMUNICATIONS. Cellular operating income increased 65.3 percent,
to $243 in 1996. The increase in operating income is a result of revenue
increases associated with the rapidly expanding subscriber base combined with
efficiency gains. The 1996 decline in revenue per subscriber of 12 percent has
been more than offset by a combined decrease of 18 percent in the costs incurred
to acquire and support customers. Customer acquisition costs include sales
commissions, advertising, other selling costs and equipment costs. Customer
support costs include charges for access and usage of land-line
telecommunications networks, subscriber billing, customer service and general
support costs, as well as costs associated with roaming, toll calls within local
access and transport area ("LATA") boundaries and fraud. Support costs per
subscriber have declined 24 percent in 1996. The decline is generally a result
of the efficiencies gained from an expanding customer base without corresponding
increases in headcount and infrastructure.
Cellular EBITDA increased 45.5 percent during 1996, to $390. The business is
continuing to realize operating scale efficiencies resulting in lower costs on a
per subscriber basis. The efficiencies have contributed to an increase in 1996
cellular service EBITDA margin to 36.2 percent from 31.7 percent in 1995.
Digital cellular services using code division multiple access technology are
being introduced in the Seattle market in the first quarter of 1997. The Company
plans to expand the service to six additional markets, including Denver and
Phoenix, by the end of 1997. Digital networks offer much greater call capacity
than analog systems.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications results include
an operating loss of $25 related to the November 15, 1996 Continental Merger.
Continental's EBITDA of $87 (for the period since the Merger) was more than
offset by depreciation and amortization expenses totaling $112. The depreciation
and amortization expense reflects the preliminary purchase price allocation.
Continental will generate operating losses for the foreseeable future because of
the effects of amortization of intangible assets and depreciation associated
with network upgrades.
The Atlanta Systems contributed operating income of $12 in 1996, compared
with $23 in 1995. An increase in depreciation expense related to system upgrade
activities has contributed to the decline in operating income.
International cable and telecommunications operating loss reflects the
third-quarter 1996 consolidation of Kabel Plus.
OTHER. Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Other operating losses increased in 1996 primarily as a result of a change in
cost allocation policy. Beginning in 1996, other operating losses include costs
that are not specifically identifiable with an operating company. Previously
such costs were allocated to the operating companies. Other operating losses
also include a charge of $10 related to staff reductions at international
headquarters in 1996.
C-9
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
1996 1995 INCREASE
--------- --------- -----------
<S> <C> <C> <C>
Interest expense........................................................................ $ 168 $ 100 $ 68
Equity losses in unconsolidated ventures................................................ 346 207 139
Guaranteed minority interest expense.................................................... 55 14 41
Other expense (income) -- net........................................................... 19 (5) 24
</TABLE>
Interest expense increased $68, or 68 percent, primarily as a result of
assuming $6.5 billion, at market value, in debt related to the Continental
Merger.
Equity losses increased $139 in 1996, primarily due to network expansion
costs and additional financing costs at Telewest and One 2 One. Rapid customer
growth at One 2 One also contributed to the increase. Start-up and other costs
associated with new international investments located in Poland and Malaysia
contributed to the increase, along with losses related to Continental's cable
and telecommunications investments. Domestically, improved results from the TWE
partnership, related to improvements in cable and programming operations, were
more than offset by increased losses at PrimeCo as the partnership launched
service in the fourth quarter of 1996. The Media Group expects PrimeCo to
experience several years of operating losses associated with the start-up phase
of its operations. The Media Group expects equity losses to continue to be
significant in 1997 as expansion activities of its equity investments continue.
Guaranteed minority interest expense reflects an increase of $34 related to
the September 11, 1995 issuance of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely Company-guaranteed
debentures ("Preferred Securities") totaling $600, and an increase of $7 related
to an additional $480 issuance of Preferred Securities on October 29, 1996.
Other expense increased $24 in 1996, primarily as a result of a pretax
charge of $31, associated with the sale of the Media Group's cable television
interests in Norway, Sweden and Hungary. This charge was partially offset by
foreign currency translation gains associated with loans to international
ventures.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1996 1995 (DECREASE)
----- --------- -----------
<S> <C> <C> <C>
Provision (benefit) for income taxes............................................. $ (2) $ 163 $ (165)
Effective tax rate............................................................... 2.7% 52.9% --
</TABLE>
The decrease in the effective tax rate is primarily a result of a shift from
pretax earnings to pretax losses, additional goodwill amortization associated
with the Continental Merger and a one-time benefit associated with the leveraged
lease portfolio.
NET INCOME (LOSS)
During 1996, the Media Group recorded a net loss of $71, ($0.16 per share),
compared to net income before extraordinary item of $145, ($0.30 per share), in
1995. Excluding the effects of the November 15, 1996 Continental Merger, the
Media Group would have been break-even. The decline in 1996 net income,
excluding Continental, is primarily due to the effects of a 1995 gain of $95,
($0.20 per share), from the merger of Telewest with SBC CableComms (UK) and
higher equity losses related to international and
C-10
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
domestic growth initiatives. The declines were partially offset by improvement
in the domestic cellular operation. Media Group losses will be significant in
1997 and beyond as a result of the Continental Merger.
During 1995, the Media Group incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by TWE and incurred
after-tax costs of $9 associated with the Recapitalization Plan.
RESULTS OF OPERATIONS -- 1995 COMPARED WITH 1994
SALES AND OTHER REVENUES
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Directory and information services:
Domestic.................................................................. $ 1,058 $ 997 $ 61
International............................................................. 122 78 44
--------- --------- -----
1,180 1,075 105
Wireless communications:
Cellular service.......................................................... 845 633 212
Cellular equipment........................................................ 96 120 (24)
Paging sales and service(1)............................................... -- 28 (28)
--------- --------- -----
941 781 160
Cable and telecommunications................................................ 215 18 197
Other....................................................................... 38 34 4
--------- --------- -----
Sales and other revenues.................................................... $ 2,374 $ 1,908 $ 466
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
the six months ending June 30, 1994.
Media Group sales and other revenues increased 15 percent, to $2,374 in
1995, excluding the effects of the 1994 Atlanta Systems acquisition and sale of
the paging business. The increase was primarily due to strong growth in cellular
service revenue.
DIRECTORY AND INFORMATION SERVICES. Revenues related to Yellow Pages
directory advertising increased 6.4 percent, to $1,026 in 1995. The increase was
a result of price increases of 4.5 percent, higher revenue per advertiser and an
increase in Yellow Pages advertising volume.
International directory publishing revenues increased $44 in 1995, primarily
due to Media Group's May 1994 purchase of Thomson Directories. The remaining
increase is due to an increase in advertisers and revenue per advertiser.
WIRELESS COMMUNICATIONS. Cellular service revenues increased 34 percent, to
$845 in 1995, due to a 51 percent increase in subscribers during the year (with
20 percent of the additions occurring in December), partially offset by a 13
percent drop in average revenue per subscriber to $60.00 per month. The increase
in subscribers relates to continued growth in demand for wireless services.
Cellular equipment revenues decreased 20 percent, to $96 in 1995, as a
result of lower cellular equipment costs. These lower equipment costs are being
passed on to retailers and to new customers.
C-11
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Revenues related to the paging sales and service operations, which were sold
in 1994, approximated $28 in 1994.
CABLE AND TELECOMMUNICATIONS. Domestic cable and telecommunications
revenues increased $197 in 1995, due to the December 1994 acquisition of the
Atlanta Systems.
OPERATING INCOME
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Directory and information services:
Domestic........................................................................... $ 399 $ 397 $ 2
International...................................................................... (1) (1) --
--------- --------- -----
398 396 2
Wireless communications:
Cellular........................................................................... 147 82 65
Paging sales and service(1)........................................................ -- 6 (6)
--------- --------- -----
147 88 59
Cable and telecommunications......................................................... 23 -- 23
Other(2)............................................................................. (101) (95) (6)
--------- --------- -----
Operating income..................................................................... $ 467 $ 389 $ 78
--------- --------- -----
--------- --------- -----
</TABLE>
- ------------------------------
(1) The paging business was sold in June 1994. Results reflect operations for
six months ending June 30, 1994.
(2) Primarily includes headquarters expenses for shared services and
divisional expenses associated with equity investments.
During 1995, Media Group operating income increased 13 percent, to $467,
excluding the effects of the 1994 Atlanta Systems acquisition and sale of the
paging business. EBITDA increased approximately 16 percent, to $716, on a
comparable basis. The increases were primarily due to strong growth in wireless
communications operations.
DIRECTORY AND INFORMATION SERVICES. During 1995, operating income related
to domestic Yellow Pages directory advertising increased $40. Revenue increases
of $61 and general cost savings of $15, including $8 associated with assuming
the management of certain data base services from the Communications Group,
contributed to the increase. The revenue gains and cost savings were partially
offset by operating cost increases of $36, primarily due to an 11 percent
increase in paper, printing, delivery and distribution costs. New product
development activities reduced domestic directory and information services
operating income by $104 in 1995, compared with a reduction of $66 in 1994. This
is a result of higher costs associated with the development of new database
marketing and interactive services, including a one-time charge of $8 to exit
certain product lines.
EBITDA related to domestic Yellow Pages directory advertising services
increased 9 percent, to $519 in 1995. Expansion of the business combined with
cost savings led to an EBITDA margin related to the Yellow Pages operations of
50.6 percent in 1995, compared with 49.4 percent in 1994.
C-12
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Operating income for international directory publishing operations was
unchanged from 1994. The 1995 revenue gains of $44 were offset by increased
operating expenses, primarily associated with the May 1994 acquisition of
Thomson Directories and increased costs associated with business volume.
WIRELESS COMMUNICATIONS. Cellular operating income increased 79 percent, to
$147 in 1995. The increase in operating income is a result of revenue increases
associated with the rapidly expanding subscriber base combined with efficiency
gains. The 1995 decline in revenue per subscriber of 13 percent has been more
than offset by decreases in the cost incurred to acquire and support customers.
Support costs per subscriber have declined 20 percent in 1995. The decline is
generally a result of the efficiencies gained from an expanding customer base
without corresponding increases in headcount and infrastructure. The acquisition
cost per subscriber added decreased 6 percent in 1995 as a result of the
expanding customer base and shifts in the distribution channel, resulting in
generally less costly subscriber additions.
Cellular EBITDA increased 49 percent during 1995, to $268. The business is
realizing operating scale efficiencies that have resulted in lower costs on a
per subscriber basis. The efficiencies have resulted in an increase in 1995
cellular service EBITDA margin to 31.7 percent from 28.4 percent in 1994.
CABLE AND TELECOMMUNICATIONS. Cable and telecommunications operating income
reflects the December 1994 acquisition of the Atlanta Systems. The Atlanta
Systems contributed operating income of $23 and EBITDA of $100 in 1995.
OTHER. Other operating income decreased primarily due to costs associated
with growth in international operations.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
INCREASE
1995 1994 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Interest expense................................................................ $ 100 $ 66 $ 34
Equity losses in unconsolidated ventures........................................ 207 121 86
Other income.................................................................... 5 46 (41)
</TABLE>
Interest expense increased $34, or 52 percent, primarily as a result of
financing costs associated with the December 1994 acquisition of the Atlanta
Systems, new domestic and international investments, and a reclassification of
debt from net investment in assets held for sale.
Equity losses increased $86 in 1995, primarily due to costs related to
expansion of the network and additional financing costs at Telewest; and
additional costs associated with the significant increase in customers at One 2
One. Start-up and other costs associated with new international cable and
telecommunications investments primarily located in the Czech Republic and
Malaysia also contributed to the increase. These increased losses were partially
offset by earnings in the European wireless operations and gains related to
movement in foreign currency exchange rates. Losses related to domestic
investments in TWE and PrimeCo also increased.
Other income decreased $41, or 89 percent, primarily as a result of
increased minority interest expense associated with the domestic cellular
operations, costs associated with the Recapitalization Plan and a 1994 gain on
sale of nonstrategic operations.
C-13
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
1995 1994 (DECREASE)
--------- --------- -------------
<S> <C> <C> <C>
Provision for income taxes............................................................ $ 163 $ 204 $ (41)
Effective tax rate.................................................................... 52.9% 42.5% --
</TABLE>
The increase in the effective tax rate primarily reflects the impact of
lower pretax income, the effects of goodwill amortization related to the
acquisition of the Atlanta Systems, higher state and foreign income taxes, and
expenses associated with the Recapitalization Plan. Additionally, a tax benefit
was recorded in 1994 related to the sale of paging assets that contributed to
the increase in the effective tax rate.
NET INCOME
1995 net income includes a gain of $95 from the merger of Telewest with SBC
CableComms (UK) and $9 for costs associated with the Recapitalization Plan.
During 1995, the Media Group also incurred an extraordinary loss of $4, net of a
tax benefit of $2, related to the early retirement of debt by TWE.
1994 net income includes gains of $105 from the partial sale of Media
Group's joint venture interest in Telewest and a gain of $41 from the sale of
Media Group's paging operations.
During 1995, net income declined 55 percent, to $59, excluding the effects
of the one-time items. The decline is due primarily to higher equity losses
related to international growth initiatives and increased amortization and
interest expense.
LIQUIDITY AND CAPITAL RESOURCES -- THREE YEARS ENDED DECEMBER 31, 1996
OPERATING ACTIVITIES. Cash provided by operating activities increased $52
in 1996, to $692. During 1996, a hedging premium payment reduced cash provided
by operations by $32. Adjusted for this payment, cash provided by operations
increased $84, or 13.1 percent. Growth in operations from the cellular business,
the Yellow Pages business and the November 15, 1996 Continental Merger
contributed to the increase. This growth was partially offset by an increase in
interest payments associated with increased debt levels resulting from the
Continental Merger and domestic and international expansion activities.
The Media Group expects that cash from operations will not be adequate to
fund expected cash requirements in the next four to five years. In 1997, asset
sales, primarily related to certain international and Continental investments,
are expected to generate approximately $1 billion in cash. These asset sales,
combined with cash generated from operations, will not be adequate to fund
expected cash requirements in 1997. Additional financing will come primarily
from new short-term debt.
Cash provided by operating activities increased $89 in 1995, to $640. During
1995, an income tax payment related to the 1994 partial sale of the Media
Group's joint venture interest in Telewest reduced cash provided by operations
by $60. Adjusted for this income tax payment, operating cash flow of the Media
Group increased $149. Growth in operations from the cellular business and
acquisition of the Atlanta Systems contributed to the increase. Growth in
operating cash flow from directory and information services operations has been
reduced by investments related to its growth initiatives. Operating cash flow
from Media Group businesses was partially offset by a significant increase in
income taxes paid in 1995, primarily due to lower tax benefits generated from
the investment in TWE.
INVESTING ACTIVITIES. Total capital expenditures of the Media Group were
$652, $363 and $349 in 1996, 1995 and 1994, respectively. Results include
Continental capital expenditures of $131 incurred since the
C-14
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Continental Merger. The Media Group anticipates that the capital requirements to
upgrade the Continental systems to provide telephony, high-speed data and other
broadband services will be significant over the next four to five years. In
1997, the Media Group anticipates spending $1.3 billion to continue the upgrade
of its domestic cable network. Capital requirements related to the domestic
cellular operations are expected to be approximately $280 in 1997. The actual
domestic cellular capital requirements could vary depending on the timing of
entering Phase II of the joint venture agreement with AirTouch.
In March 1995, PrimeCo was awarded PCS licenses in 11 markets. The Media
Group's share of the cost of the licenses was approximately $268, all of which
was funded in 1995. In 1996, the Media Group invested an additional $132 to fund
network build activities. Under the PrimeCo partnership agreement, Media Group
is required to fund approximately 24 percent of PrimeCo's operating and capital
costs, including licensing costs. Media Group anticipates that its total funding
obligations to PrimeCo during the next two years will be approximately $250 to
$350. The actual funding requirements could vary depending on the timing of
contribution of the Company's interest in PrimeCo to the WMC.
Investing activities of the Media Group include equity investments in
international ventures. The Media Group invested $243, $681 and $444 in
international ventures in 1996, 1995 and 1994, respectively. Investments in 1996
include loans provided to One 2 One, the purchase of a 23 percent interest in a
venture to provide wireless service in Poland and the purchase of a 28 percent
interest in a venture in Belgium to provide telephony services on the cable
network. In 1995, the Media Group invested $681 in international ventures in
Malaysia, the Netherlands, Czech Republic and United Kingdom. The Media Group
invested approximately $444 in developing international businesses in 1994,
including the acquisition of Thomson Directories. The Media Group anticipates
that investments in international ventures will approximate $420 in 1997. This
includes investments to provide digital wireless service in India and to fund
expansion at One 2 One. Additionally, Media Group may contribute equity in 1997
to ventures acquired from Continental.
In connection with its review of the financial and operating performance,
market value and capital requirements of its international investment portfolio,
management has identified certain international investments it believes are
appropriate to sell or restructure under acceptable terms. Management expects
that sales proceeds could approximate $300 in 1997. In January 1997, the Company
sold its 5 percent interest in a French wireless venture for proceeds of $82.
Additionally, U S WEST is pursuing a possible sale or restructuring of
Continental's joint venture interest in Optus Vision Pty Ltd, an Australian
cable/ telephony venture.
In 1994, the Media Group received cash proceeds of $143 from the sale of its
paging operations. The Media Group did not receive cash from the 1994 partial
sale of its joint venture interest in Telewest. All proceeds from the 1994 sale
have been used by Telewest for general business purposes, including financing
both construction and operations, and repaying debt.
FINANCING ACTIVITIES. Media Group debt at December 31, 1996 was $8,853, an
increase of $6,752 compared with December 31, 1995. The increase is primarily a
result of assuming Continental debt totaling $6,525 (at market value) on
November 15, 1996. Concurrently, the Company refinanced $3,657 of the assumed
debt with U S WEST commercial paper. In January 1997, the Company issued medium-
and long-term debt totaling $4.1 billion, at a weighted average rate of 7.47
percent. The proceeds were used to refinance the commercial paper. Accordingly,
such commercial paper is classified as long-term debt in the accompanying U S
WEST Media Group Combined Balance Sheet at December 31, 1996. Also in January
1997, the Company paid the cash portion of the Merger consideration totaling
$1,150. This payment was financed with U S WEST commercial paper.
C-15
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The assumption of Continental's debt, in conjunction with the Merger, has
resulted in a downgrading of U S WEST's credit ratings. Senior unsecured debt
and commercial paper ratings by Moody's, Standard & Poor's and Duff & Phelps
were Baa1, BBB+ and BBB+, and P2, A2, and D-2, respectively. The Media Group
recognizes that the successful implementation of its strategy will require
access to the capital markets at reasonable costs.
Media Group from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interests, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of U S
WEST and the Media Group. There is no assurance that any such discussions will
result in the consummation of any such transaction.
In 1996, U S WEST issued $254 of exchangeable notes, or Debt Exchangeable
for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each DECS will be
mandatorily exchanged by U S WEST for shares of Financial Security Assurance
Holdings Ltd. ("FSA") held by Media Group or, at U S WEST's option, redeemed at
the cash equivalent. The capital assets segment currently holds approximately 40
percent of the outstanding FSA common stock. On October 29, 1996, the Company
refinanced commercial paper through the issuance of 8.25 percent Preferred
Securities totaling $480. The payment of interest and redemption amounts to
holders of the Preferred Securities are fully and unconditionally guaranteed by
U S WEST. Subsequent to the Continental Merger, Media Group purchased and placed
into treasury 15,916,000 shares of Media Stock at an average price of $18.66 per
share, for a cost basis of $297. In January 1997, Media Group purchased and
placed into treasury an additional 2,835,000 shares of Media Stock, for a cost
basis of $53.
During 1995, debt increased $287 primarily due to new investments in
international ventures, cash funding of the PCS licenses and a reclassification
of debt from net investment in assets held for sale. During fourth-quarter 1995,
U S WEST issued $130 of DECS, due December 15, 1998. Upon maturity, each DECS
will be mandatorily exchanged by U S WEST for shares of Enhance Financial
Services Group, Inc. ("Enhance") or, at U S WEST's option, redeemed at the cash
equivalent. At December 31, 1996, the capital assets segment held 30.1 percent
of the outstanding Enhance common stock. These increases in debt were partially
offset by reductions of debt in 1995 related to the investment in TWE and a
refinancing of commercial paper by issuing $600 of Preferred Securities. The
payment of interest and redemption amounts to holders of the Preferred
Securities are fully and unconditionally guaranteed by U S WEST.
Debt increased $288 in 1994, primarily due to the December 1994 acquisition
of the Atlanta Systems, partially offset by reductions in debt related to the
investment in TWE. The cash investment related to the acquisition of the Atlanta
Systems was $745, obtained through short-term borrowings.
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Excluding debt associated with the capital assets segment, the Media Group's
percentage of debt to total capital at December 31, 1996, was 50.3 percent
compared with 29.1 percent at December 31, 1995. Including debt associated with
the capital assets segment, Preferred Securities and mandatorily redeemable
preferred stock, the Media Group's percentage of debt to total capital was 57.8
percent at December 31, 1996 and 44.2 percent at December 31, 1995. The increase
in the percentage of debt to total capital in 1996 is a result of the increase
in debt associated with the Continental Merger.
C-16
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. U S WEST maintains lines of credit aggregating approximately $4.5
billion, which are available to both the Media Group and the nonregulated
subsidiaries of the Communications Group in accordance with their borrowing
needs. Under registration statements filed with the Securities and Exchange
Commission ("SEC"), as of December 31, 1996, U S WEST is permitted to issue up
to approximately $620 of new debt securities, available to both the Media Group
and the nonregulated subsidiaries of the Communications Group.
Debt related to the capital assets segment, which is held for sale,
decreased $315, $487 and $213 in 1996, 1995 and 1994, respectively, as a result
of funds generated from asset sales. For financial reporting purposes, debt of
the capital assets segment is netted against the related assets. See Media Group
Combined Financial Statements -- Note 20 -- Net Investment in Assets Held for
Sale.
The Media Group reinvests earnings, if any, for future growth and does not
expect to pay dividends on the Media Stock in the foreseeable future.
RISK MANAGEMENT. U S WEST is exposed to market risks arising from changes
in interest rates and foreign exchange rates. Derivative financial instruments
are used to manage these risks. U S WEST does not use derivative financial
instruments for trading purposes.
INTEREST RATE RISK MANAGEMENT. The objective of the interest rate risk
management program is to minimize the total cost of debt over time and the
debt's interest variability. This is achieved through interest rate swaps, which
adjust the ratio of fixed- to variable-rate debt.
Notional amounts of interest rate swaps and cap agreements outstanding were
$2,265 and $825 as of December 31, 1996 and 1995, respectively. 1996 includes
notional amounts for interest rate swaps and cap agreements of $1,500 that were
assumed in the Continental Merger. These contracts have various maturities that
extend to 2004. A 25 basis point increase in interest rates would create a gain
of $3 in the market value of interest rate contracts. Likewise, a 25 basis point
decrease in interest rates would create a loss of $3 in the market value of
interest rate contracts.
During fourth-quarter 1996, U S WEST purchased put options for $1.5 billion
notional of U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. A deferred gain of $5 was
recognized in January 1997 at contract closing. The deferred gain will be
recognized as a yield adjustment over the life of the debt, which matures at
various dates through 2027.
FOREIGN EXCHANGE RISK MANAGEMENT. U S WEST enters into forward and
zero-cost combination option contracts to manage the market risks associated
with fluctuations in foreign exchange rates after consideration of offsetting
foreign exposures among international operations. The use of forward and option
contracts allow U S WEST to fix or cap the cost of firm foreign investment
commitments and the repayment of foreign currency denominated short-term
receivables in countries with freely convertible currencies. The market values
of the foreign exchange positions, including the hedging instruments, are
continuously monitored and compared with predetermined levels of acceptable
risk.
As of December 31, 1996, 1995 and 1994, notional amounts of foreign exchange
forward and option contracts outstanding were $0, $456 and $170, respectively.
These contracts were primarily for the purchase of Dutch guilders and British
pounds in 1995 and British pounds in 1994. In January and February 1997, the
Company entered into foreign exchange forward contracts in notional amounts
totaling
C-17
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
$170 for the purchase and/or sale of British pounds, Japanese yen and French
francs. All foreign exchange contracts have maturities of one year or less.
The Media Group had British pound-denominated receivables in the translated
principal amounts of $250, $139 and $48 at December 31, 1996, 1995 and 1994,
respectively. The Media Group also had foreign exchange risks associated with a
Dutch guilder-denominated payable in the translated principal amount of $216 at
December 31, 1995, which was repaid in February 1996. These positions were
partially hedged in 1996 and 1995. In 1997, these positions are no longer
hedged.
DISPOSITION OF THE CAPITAL ASSETS SEGMENT
U S WEST announced a plan of disposition of the capital assets segment in
June 1993. See the Media Group Combined Financial Statements -- Note 20 -- Net
Investment in Assets Held for Sale.
Effective January 1, 1995, the capital assets segment is being accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the SEC, which
requires discontinued operations not disposed of within one year of the
measurement date to be accounted for prospectively in continuing operations as a
net investment in assets held for sale. The net realizable value of the assets
are reevaluated on an ongoing basis with adjustments to the existing reserve, if
any, being charged to continuing operations. No adjustments were required in
1996 or 1995.
During 1994, Media Group reduced its ownership interest in FSA, a member of
the capital assets segment, to 60.9 percent and its voting interest to 49.8
percent through a series of transactions. In May and June 1994, Media Group sold
8.1 million shares of FSA common stock and received $154 in net proceeds from a
public offering. In December 1995, FSA merged with Capital Guaranty Corporation
for shares of FSA and cash of $51. The transaction was valued at approximately
$203 and reduced Media Group's ownership interest in FSA to 50.3 percent and its
voting interest to 41.7 percent. During the second quarter of 1996, Media Group
received $98 from the sale of 3,750,000 shares of FSA common stock. This sale
reduced Media Group's ownership in FSA to approximately 40 percent. Also in
second-quarter 1996, U S WEST issued $254 of exchangeable notes, or DECS, due
May 15, 1999. Upon maturity, each DECS will be mandatorily exchanged by U S WEST
for shares of FSA held by Media Group or, at U S WEST's option, redeemed at the
cash equivalent.
On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of cumulative redeemable preferred stock for a total
of $50. The shares are mandatorily redeemable in year ten and, at the option of
FFC, the preferred stock also can be redeemed for common shares of FSA. The
shares of FSA to be delivered upon maturity of the DECS, combined with the
exercise of outstanding options held by FFC to purchase FSA shares would, if
consummated, result in a complete disposition of Media Group's ownership in FSA.
U S WEST Real Estate, Inc. has sold various assets totaling $156, $120 and
$327 in 1996, 1995, and 1994, respectively. The sales proceeds were in line with
estimates. Proceeds from building sales were primarily used to repay related
debt. Media Group expects to substantially complete liquidation of this
portfolio by 1998. The remaining balance of assets subject to sale is
approximately $287, net of reserves, as of December 31, 1996.
C-18
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
COMPETITIVE AND REGULATORY ENVIRONMENT
CABLE AND TELECOMMUNICATIONS. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") authorizes the FCC to set
standards for governmental authorities to regulate the rates for certain cable
television services, except for services offered on a per-channel or per-program
basis. Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a
series of rate regulations. The FCC also publicly announced that it would
consider "social contracts" as an alternative form of rate regulation for cable
operators. Continental's social contract with the FCC was adopted by the FCC on
August 3, 1995 and amended on August 21, 1996 to include systems recently
acquired by Continental. The social contract is a six-year agreement covering
all of Continental franchises, including those that were unregulated, and
settled Continental's pending rate cases. As part of the resolution, Continental
agreed to, among other things, invest at least $1.7 billion in domestic system
rebuilds and upgrades through 2000, to expand channel capacity and improve
system reliability and picture quality. At December 31, 1996, $870 is remaining
on this commitment. Continental also agreed to reduce its benchmark broadcast
service tier service rates.
The social contract also provides that, if the laws and regulations
applicable to services offered in any Continental franchise change in a manner
that would have a material favorable financial impact on Continental, Media
Group may petition the FCC to terminate the social contract.
The Telecommunications Act of 1996 (the "Telecommunications Act")
establishes a pro-competitive, de-regulatory policy framework for the
telecommunications industry. Under the Telecommunications Act, cable programming
service tier rates are deregulated effective March 31, 1999, or earlier if
competition exists. The Telecommunications Act allows telephone companies to
build and operate cable systems in their local markets and sets forth the
conditions for voice and data competition in the local telephone market. This
legislation will enable the Media Group to provide "one-stop shopping" for
voice, video and data services. The Media Group has received certification from
the Georgia Public Service Commission to provide local switched and nonswitched
telephone service in Georgia and, with the passage of the Telecommunications
Act, certain long-distance services. The Media Group has negotiated local
interconnection rates, terms and conditions with BellSouth and is planning on
entering the local exchange market, through the Atlanta Systems, on a
competitive basis during 1997.
Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services, franchise renewal and imposition of franchise fees.
Cable systems compete for viewer attention with programming from a variety
of sources, including the direct reception of broadcast television signals by
the viewer's own antenna, satellite master antenna service and direct broadcast
satellite services. Cable television systems also compete for both viewers and
advertising in varying degrees with other communications and entertainment
media. Such competition may increase with the development and growth of new
technologies.
WIRELESS COMMUNICATIONS. The wireless operations are subject to regulation
by federal and some state and local authorities. Pursuant to the Communications
Act of 1934, the FCC regulates the construction, transfer and operation of
cellular systems in the United States and regulates licensing and technical
standards for the provision of cellular telephone service. Pursuant to Congress'
1993 Omnibus Budget Reconciliation Act, the FCC adopted rules preempting state
and local governments from regulating wireless entry and most rates.
C-19
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The passage of the Telecommunications Act eliminates long-distance
restrictions imposed by the Modified Final Judgment. As a result, the Media
Group, including its wireless partners, has begun to offer integrated local and
long-distance telecommunications services. On August 8, 1996, the FCC
established a framework of minimum national rules that will enable the states
and the FCC to begin implementing the local competition provision of the
Telecommunications Act. Among other things, the order stipulates that wireline
and wireless carriers are entitled to reciprocal compensation arrangements and
that local exchange carriers ("LEC") may not charge a wireless carrier for
terminating LEC-originated traffic.
There are two competitive cellular licenses in each market. Competition is
based on the price of cellular service, the quality of the service and the size
of the geographic area served. The development of PCS services will increase the
number of competitors and the level of competition. Media Group is unable to
estimate the impact of the availability of PCS services on its cellular
operations, though it could be significant.
DIRECTORY AND INFORMATION SERVICES. Media Group may face emerging
competition in the provision of interactive services from cable and
entertainment companies, on-line services and other information providers.
Directory listings are being offered via electronic databases through telephone
company and third party networks. As such offerings expand and are enhanced
through interactivity and other features, Media Group may experience heightened
competition in its directory publishing businesses. With the passage of the
Telecommunications Act, Media Group is able to provide certain information
services across LATA boundaries.
C-20
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELECTED PROPORTIONATE FINANCIAL DATA
The following table reflects the significant entities included in the Media
Group Combined Financial Statements and the percent ownership by industry
segment. The proportionate financial and operating data for these entities are
summarized in the proportionate data table that follows:
<TABLE>
<CAPTION>
CABLE AND TELECOMMUNICATIONS WIRELESS COMMUNICATIONS DIRECTORY AND INFORMATION SERVICES
-------------------------------- ----------------------------------------- ---------------------------------------
DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL DOMESTIC INTERNATIONAL
<S> <C> <C> <C> <C> <C> <C>
C Continental Kabel Plus a.s. U S WEST NewVector Russian U S WEST DEX Thomson Directories
O Cablevision (Czech Republic) 91%(1) Telecommunications 100%(2) (UK)
N 100% 94% Development Corp. 100%
S Atlanta (Russia) U S WEST
O Systems 66.5% Polska
L 100% (Poland)
I 100%
D
A
T
E
D
E TWE Telewest PrimeCo One 2 One Listel
Q 25.51% (UK) 24% (UK) (Brazil)
U 26.8% 50% 50%
I A2000 (KTA) Westel
T (Netherlands) Radiotelefon
Y 50% (Hungary)
Binariang 49%
M Communications Westel 900
E Sdn Bhd (Hungary)
T (Malaysia) 46.6%
H 20% EuroTel
O ARIAWEST (Czech & Slovak
D (Indonesia) Republics)
35% 24.5%
Telenet Flanders Polska Telefonia
(Belgium) (Poland)
28% 22.5%
Fintelco BPL U S WEST
(Argentina) Cellular Ltd
50% (India)
49%
</TABLE>
- ------------------------------
(1) Proportionate information reflects an approximate 9 percent minority
interest in NewVector's underlying operations.
(2) Formerly U S WEST Marketing Resources Group, Inc.
C-21
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table and discussion is not required by GAAP or intended to
replace the Combined Financial Statements prepared in accordance with GAAP. It
is presented supplementally because the Media Group believes that proportionate
financial and operating data facilitate the understanding and assessment of its
Combined Financial Statements. Proportionate accounting reflects Media Group's
relative ownership interests in operating revenues and expenses for both its
consolidated and equity method investments. The financial information included
below departs materially from GAAP because it aggregates the revenues and
operating income of entities not controlled by the Media Group with those of the
consolidated operations of the Media Group. The table does not reflect financial
data of the capital assets segment, which had net assets of $409, $429 and $302
at December 31, 1996, 1995 and 1994, respectively. Previously reported amounts
have been reclassified to conform with current year presentation.
<TABLE>
<CAPTION>
CABLE AND TELE- WIRELESS DIRECTORY AND
COMMUNICATIONS COMMUNICATIONS INFORMATION SERVICES
------------------------ ------------------------ ------------------------ CORP. &
DOMESTIC(1) INTERN'L DOMESTIC INTERN'L DOMESTIC INTERN'L OTHER(2) TOTAL
----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA:
YEAR ENDED 1996
Revenue...................... $ 3,267 $ 251 $ 1,075 $ 436 $ 1,120 $ 206 $ 12 $ 6,367
EBITDA....................... 776 (50) 307 (2) 488 20 (66) 1,473
Operating income (loss)...... 191 (177) 165 (102) 452 6 (76) 459
Net income (loss)............ (101) (215) 87 (98) 268 1 (13) (71)
Debt......................... 11,722
YEAR ENDED 1995
Revenue...................... $ 2,643 $ 128 $ 818 $ 295 $ 1,058 $ 142 $ 31 $ 5,115
EBITDA....................... 582 (55) 224 (40) 424 3 11 1,149
Operating income (loss)...... 181 (117) 116 (92) 399 (10) (1) 476
Net income (loss)............ (55) 18 56 (80) 247 (13) (32) 141
Debt......................... 4,417
YEAR ENDED 1994
Revenue...................... $ 2,176 $ 85 $ 657 $ 186 $ 997 $ 79 $ 33 $ 4,213
EBITDA....................... 444 (42) 163 (68) 417 2 (14) 902
Operating income (loss)...... 138 (73) 81 (103) 397 (8) (31) 401
Net income (loss)............ (41) 65 74 (68) 252 (4) (2) 276
Debt......................... 3,865
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
C-22
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
CABLE AND TELE- WIRELESS DIRECTORY AND
COMMUNICATIONS COMMUNICATIONS INFORMATION SERVICES
---------------------- ---------------------- --------------------------
DOMESTIC(1) INTERN'L DOMESTIC INTERN'L DOMESTIC INTERN'L TOTAL
----------- --------- ----------- --------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
(THOUSANDS):
YEAR ENDED 1996
Subscribers/advertisers.............. 7,562 1,224 1,882 509 482 260 11,919
Homes passed......................... 12,191 3,015 -- -- -- -- 15,206
POPs(3).............................. -- -- 34,220 77,320 -- -- 111,540
Telephone lines...................... -- 303 -- -- -- -- 303
YEAR ENDED 1995
Subscribers/advertisers.............. 2,908 617 1,339 308 479 271 5,922
Homes passed......................... 4,551 1,172 -- -- -- -- 5,723
POPs(3).............................. -- -- 33,800 44,300 -- -- 78,100
Telephone lines...................... -- 141 -- -- -- -- 141
YEAR ENDED 1994
Subscribers/advertisers.............. 2,372 226 817 169 468 147 4,199
Homes passed......................... 3,952 576 -- -- -- -- 4,528
POPs(3).............................. -- -- 18,900 38,300 -- -- 57,200
Telephone lines...................... -- 69 -- -- -- -- 69
</TABLE>
- ------------------------------
(1) The proportionate results include Media Group's 25.51 percent pro-rata
priority and residual equity interests in reported TWE results. The reported
TWE results are prepared in accordance with GAAP and have not been adjusted
to report TWE investments accounted for under the equity method on a
proportionate basis.
(2) Includes costs related to general and administrative services, including
services provided by U S WEST to the Media Group. Beginning in 1996, certain
of these costs are no longer assigned to operating companies.
(3) POPs are the estimated market population multiplied by Media Group's
ownership interest in the market.
PROPORTIONATE RESULTS OF OPERATIONS -- 1996 COMPARED WITH 1995
In 1996, proportionate Media Group revenue increased 24 percent, to $6.4
billion, and EBITDA increased 28 percent, to $1.47 billion. Excluding the
effects of the Continental Merger, proportionate revenue increased 19 percent
and EBITDA increased 22 percent. Strong growth in both wireless communications
and domestic cable and telecommunications contributed to the increases. Media
Group's objective is to increase proportionate EBITDA at a rate of 20 percent
annually.
CABLE AND TELECOMMUNICATIONS. During 1996, the domestic cable and
telecommunications proportionate revenue increased 24 percent, to $3,267, and
proportionate EBITDA increased 33 percent, to $776. Excluding the effects of the
Continental Merger, proportionate revenue and EBITDA increased 14 percent and 18
percent, respectively. The growth is primarily due to the TWE cable, programming
and filmed entertainment operations. TWE cable improvements are attributed to
normalized subscriber growth of 3.6 percent.
During 1996, international cable and telecommunications proportionate
revenue almost doubled to $251 and proportionate EBITDA improved $5 to ($50).
Approximately one-third of the revenue increase is related to customer growth at
Telewest. The remaining increase is from new ventures, including Continental
ventures, offset by the 1996 sale of the Company's cable television interests in
Norway, Sweden and Hungary. A $14 increase in proportionate EBITDA at Telewest
was more than offset by losses
C-23
<PAGE>
U S WEST MEDIA GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
related to start-up operations, the sale of Norway, Sweden and Hungary and
losses related to Continental ventures. Cable television subscribers of Telewest
and its affiliates increased to 600,000 at December 31, 1996, a 31 percent
increase compared with 1995, and telephone access lines increased 47 percent
during the last twelve months, to 773,000.
WIRELESS COMMUNICATIONS. During 1996, domestic wireless proportionate
revenue increased 31 percent, to $1,075, and proportionate EBITDA increased 37
percent, to $307. Excluding losses generated by the start-up of PrimeCo,
proportionate EBITDA increased 50 percent in 1996. This increase is due to a 40
percent increase in proportionate subscribers partially offset by a decrease in
average revenue per subscriber.
International wireless communications proportionate revenue increased 48
percent, to $436, and proportionate EBITDA increased $38, to ($2). One 2 One and
the Hungarian wireless operations contributed almost two-thirds of the revenue
increase and nearly 90 percent of the EBITDA increase. The remaining
contribution is from new ventures. The increases are a result of rapid growth in
the subscriber base, related to service area expansion and aggressive marketing
in the case of One 2 One and the introduction of digital services in Hungary.
One 2 One customers grew 45 percent in 1996 and account for 50 percent of the
Media Group's international wireless customers. The Media Group's share of
international wireless customers grew to 509,000 at December 31, 1996, a 65
percent increase compared with 1995.
DIRECTORY AND INFORMATION SERVICES. Domestic directory and information
services proportionate revenue increased 6 percent, to $1,120 in 1996, and
proportionate EBITDA increased 15 percent, to $488. The proportionate revenue
increase is due to a 5.7 percent increase in revenue per advertiser. Decreased
spending related to product development activities contributed to the increase
in EBITDA.
International directories proportionate revenue increased $64, to $206 in
1996, and proportionate EBITDA increased $17, to $20. Results for Listel, a
Brazilian directories operation, were included in the Media Group proportionate
results beginning with fourth-quarter 1995 compared with a full year of results
reflected in 1996. This accounts for the majority of the increase in
proportionate revenue and the entire increase in proportionate EBITDA.
PROPORTIONATE DEBT. Proportionate debt increased $7,305 in 1996, primarily
as a result of the Continental Merger and an increase in debt financing at One 2
One.
C-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Combined Balance Sheet of U S WEST Media
Group (as described in Note 2 to the Combined Financial Statements) as of
December 31, 1996, and the related Combined Statements of Operations and Cash
Flows for the year then ended. These combined financial statements and the
Supplementary Selected Proportionate Results of Operations referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements and supplementary information
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of U S WEST Media Group as of
December 31, 1996, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
We have also audited the Supplementary Selected Proportionate Results of
Operations for the year ended December 31, 1996, presented on page C-67. The
Supplementary Selected Proportionate Results of Operations have been prepared by
management to present relevant financial information that is not provided by the
Combined Financial Statements and is not intended to be a presentation in
conformity with generally accepted accounting principles. In our opinion, the
Supplementary Selected Proportionate Results of Operations referred to above
fairly states, in all material respects, the information set forth therein on
the basis of accounting described on page C-67.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 12, 1997.
C-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Combined Balance Sheet of U S WEST Media Group (as
described in Note 2 to the Combined Financial Statements) as of December 31,
1995, and the related Combined Statements of Operations and Cash Flows for each
of the two years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of U S WEST Media
Group as of December 31, 1995, and the combined results of its operations and
its cash flows for each of the two years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.
As more fully discussed in Note 2, the Combined Financial Statements of U S
WEST Media Group should be read in connection with the audited Consolidated
Financial Statements of U S WEST, Inc.
We have also audited the Supplementary Selected Proportionate Results of
Operations for the two years in the period ended December 31, 1995 presented on
page C-67. The Supplementary Selected Proportionate Results of Operations have
been prepared by management to present relevant financial information that is
not provided by the Combined Financial Statements and is not intended to be a
presentation in accordance with generally accepted accounting principles. In our
opinion, the Supplementary Selected Proportionate Results of Operations referred
to above presents fairly, in all material respects, the information set forth
therein on the basis of accounting described on page C-67.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 12, 1996
C-26
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
Sales and other revenues:
Directory and information services............................................. $ 1,259 $ 1,180 $ 1,075
Wireless communications........................................................ 1,183 941 781
Cable and telecommunications................................................... 494 215 18
Other.......................................................................... 19 38 34
--------- --------- ---------
Total sales and other revenues............................................... 2,955 2,374 1,908
Operating expenses:
Cost of sales and other revenues............................................... 966 772 612
Selling, general and administrative expenses................................... 1,052 886 763
Depreciation and amortization.................................................. 422 249 144
--------- --------- ---------
Total operating expenses..................................................... 2,440 1,907 1,519
--------- --------- ---------
Operating income................................................................. 515 467 389
Interest expense................................................................. 168 100 66
Equity losses in unconsolidated ventures......................................... 346 207 121
Gains on merger and partial sale of joint venture interest....................... -- 157 164
Gain on sale of paging assets.................................................... -- -- 68
Guaranteed minority interest expense............................................. 55 14 --
Other expense (income) -- net.................................................... 19 (5) (46)
--------- --------- ---------
Income (loss) before income taxes and extraordinary item......................... (73) 308 480
Provision (benefit) for income taxes............................................. (2) 163 204
--------- --------- ---------
Income (loss) before extraordinary item.......................................... (71) 145 276
Extraordinary item -- early extinguishment of debt, net of tax................... -- (4) --
--------- --------- ---------
NET INCOME (LOSS)................................................................ $ (71) $ 141 $ 276
--------- --------- ---------
--------- --------- ---------
Dividends on preferred stock..................................................... 9 3 --
--------- --------- ---------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK....................................... $ (80) $ 138 $ 276
--------- --------- ---------
--------- --------- ---------
Earnings (loss) per common share:
Income (loss) before extraordinary item........................................ $ (0.16) $ 0.30 $ 0.61
Extraordinary item -- early extinguishment of debt............................. -- (0.01) --
--------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE................................................. $ (0.16) $ 0.29 $ 0.61
--------- --------- ---------
--------- --------- ---------
AVERAGE COMMON SHARES OUTSTANDING (thousands).................................... 491,924 470,549 453,316
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-27
<PAGE>
U S WEST MEDIA GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
DOLLARS IN MILLIONS
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................................. $ 121 $ 20
Accounts and notes receivable, less allowance for
credit losses of $85 and $58, respectively............................................... 508 287
Deferred directory costs................................................................... 259 247
Receivable from Communications Group....................................................... 92 106
Marketable securities...................................................................... 58 --
Other...................................................................................... 101 81
--------- ---------
Total current assets......................................................................... 1,139 741
--------- ---------
Property, plant and equipment -- net......................................................... 4,275 1,148
Investment in Time Warner Entertainment...................................................... 2,477 2,483
Net investment in international ventures..................................................... 1,548 1,511
Intangible assets -- net..................................................................... 12,595 1,798
Net investment in assets held for sale....................................................... 409 429
Other assets................................................................................. 1,618 505
--------- ---------
Total assets................................................................................. $ 24,061 $ 8,615
--------- ---------
--------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt............................................................................ $ 217 $ 836
Due to Continental Cablevision shareholders................................................ 1,150 --
Accounts payable........................................................................... 425 235
Deferred revenue and customer deposits..................................................... 129 87
Other...................................................................................... 795 411
--------- ---------
Total current liabilities.................................................................... 2,716 1,569
--------- ---------
Long-term debt............................................................................... 8,636 1,265
Deferred income taxes........................................................................ 3,600 382
Deferred credits and other................................................................... 346 276
Commitments and Contingencies
Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding
solely Company-guaranteed debentures....................................................... 1,080 600
Preferred stock subject to mandatory redemption.............................................. 51 51
Media Group equity........................................................................... 7,723 4,599
Company LESOP guarantee...................................................................... (91) (127)
--------- ---------
Total equity................................................................................. 7,632 4,472
--------- ---------
Total liabilities and equity................................................................. $ 24,061 $ 8,615
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-28
<PAGE>
U S WEST MEDIA GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
DOLLARS IN MILLIONS
OPERATING ACTIVITIES
Net income (loss)............................................................... $ (71) $ 141 $ 276
Adjustments to net income (loss):
Depreciation and amortization................................................. 422 249 144
Equity losses in unconsolidated ventures...................................... 346 207 121
Gains on merger and partial sale of joint venture interest.................... -- (157) (164)
Gain on sale of paging assets................................................. -- -- (68)
Deferred income taxes......................................................... (86) 102 147
Provision for uncollectibles.................................................. 65 55 36
Changes in operating assets and liabilities:
Restructuring payments........................................................ (16) (19) (10)
Accounts and notes receivable................................................. (101) (103) (76)
Deferred directory costs, prepaid and other................................... 4 (28) (52)
Accounts payable and accrued liabilities...................................... 112 36 143
Other -- net.................................................................... 17 157 54
--------- --------- ---------
Cash provided by operating activities........................................... 692 640 551
--------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.................................. (652) (363) (349)
Investments in international ventures........................................... (243) (681) (350)
Investment in PCS licenses...................................................... (132) (286) --
Cash from net investment in assets held for sale................................ 213 -- --
Investment in Atlanta Systems................................................... -- -- (745)
Proceeds from sale of paging assets............................................. -- -- 143
Other -- net.................................................................... (4) 92 (121)
--------- --------- ---------
Cash (used for) investing activities............................................ (818) (1,238) (1,422)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayments of) short-term debt -- net............................ 3,891 (449) 936
Repayments of long-term debt.................................................... (4,217) (724) (316)
Proceeds from issuance of Preferred Securities -- net........................... 465 581 --
Proceeds from issuance of long-term debt........................................ 360 1,085 --
Proceeds from issuance of common stock.......................................... 34 57 323
Purchase of treasury stock...................................................... (297) -- --
Dividends paid on preferred stock............................................... (9) (3) --
Proceeds from issuance of mandatorily redeemable preferred stock................ -- -- 50
Other -- net.................................................................... -- (22) --
--------- --------- ---------
Cash provided by financing activities........................................... 227 525 993
--------- --------- ---------
Cash provided by (used for) continuing operations............................... 101 (73) 122
Cash (to) discontinued operations............................................... -- -- (101)
--------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)............................................................. 101 (73) 21
Beginning balance............................................................... 20 93 72
--------- --------- ---------
Ending balance.................................................................. $ 121 $ 20 $ 93
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
C-29
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
NOTE 1: RECAPITALIZATION PLAN
On October 31, 1995, the shareowners of U S WEST, Inc., a Colorado
corporation ("U S WEST Colorado") voted to approve a proposal (the
"Recapitalization Plan") adopted by the Board of Directors of U S WEST, Inc.
(the "Board") to reincorporate in Delaware and create two classes of common
stock that are intended to reflect separately the performance of the
communications and multimedia businesses. Under the Recapitalization Plan,
shareowners approved an Agreement and Plan of Merger between U S WEST Colorado
and U S WEST, Inc., a Delaware corporation ("U S WEST" or "Company"), pursuant
to which U S WEST continues as the surviving corporation. In connection with the
merger, the Certificate of Incorporation of U S WEST has been amended and
restated to designate two classes of common stock of U S WEST, one class of
which is authorized as U S WEST Communications Group Common Stock
("Communications Stock"), and the other class which is authorized as U S WEST
Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share
of common stock of U S WEST Colorado was converted into one share each of
Communications Stock and Media Stock.
The Communications Stock and Media Stock provide shareowners with two
distinct securities that are intended to reflect separately the communications
businesses of U S WEST (the "Communications Group") and the multimedia
businesses of U S WEST (the "Media Group" and, together with the Communications
Group, the "Groups").
The Communications Group is comprised of U S WEST Communications, Inc. ("U S
WEST Communications"), U S WEST Communications Services, Inc., U S WEST Federal
Services, Inc., U S WEST Advanced Technologies, Inc., U S WEST Business
Resources, Inc. and U S WEST Long Distance, Inc. The Communications Group
provides telecommunications services to more than 25 million residential and
business customers in the Communications Group region (the "Region"). The Region
includes the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana,
Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and
Wyoming. Services offered by the Communications Group include local telephone
services, exchange access services (which connect customers to the facilities of
carriers, including long-distance providers and wireless operators), and
long-distance services within LATAs in the Region. The Communications Group
provides other products and services, including high-speed data applications,
customer premises equipment and certain other communications services to
business customers and governmental agencies both inside and outside the Region.
The Media Group is comprised of Continental Cablevision, Inc., the third
largest cable television system operator in the United States, U S WEST
Multimedia Communications, Inc., which owns domestic cable television operations
and investments, U S WEST Dex, Inc. (formerly U S WEST Marketing Resources
Group, Inc.), which publishes White and Yellow Pages telephone directories, and
provides directory and information services, U S WEST NewVector Group, Inc.,
which provides communications and information products and services over
wireless networks and U S WEST International Holdings, Inc., which primarily
owns investments in international cable and telecommunications, wireless
communications and directory publishing operations.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The Combined Financial Statements of the Groups
comprise all of the accounts included in the corresponding Consolidated
Financial Statements of U S WEST. Investments in less than majority-owned
ventures are generally accounted for using the equity method. The separate Group
Combined Financial Statements have been prepared on a basis that management
believes to be
C-30
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reasonable and appropriate and include: (i) the combined historical balance
sheets, results of operations and cash flows of the businesses that comprise
each of the Groups, with all significant intra-group amounts and transactions
eliminated; (ii) in the case of the Communications Group Combined Financial
Statements, certain corporate assets and liabilities of U S WEST and related
transactions identified with the Communications Group; (iii) in the case of the
Media Group Combined Financial Statements, all other corporate assets and
liabilities and related transactions of U S WEST; and (iv) an allocated portion
of the corporate expense of U S WEST. Transactions between the Communications
Group and the Media Group have not been eliminated.
Notwithstanding the allocation of assets, liabilities (including contingent
liabilities) and shareowners' equity between the Communications Group and the
Media Group for the purpose of preparing the respective financial statements of
such Group, owners of Communications Stock and Media Stock are subject to risks
associated with an investment in a single company and all of U S WEST's
businesses, assets and liabilities. Financial effects arising from either Group
that affect U S WEST's results of operations or financial condition could, if
significant, affect the results of operations or financial position of the other
Group or the market price of the class of common stock relating to the other
Group. Any net losses of the Communications Group or the Media Group, and
dividends or distributions on, or repurchases of Communications Stock, Media
Stock or preferred stock, will reduce the funds of U S WEST legally available
for payment of dividends on both the Communications Stock and Media Stock.
Accordingly, the Media Group Combined Financial Statements should be read in
conjunction with U S WEST's Consolidated Financial Statements and the
Communications Group Combined Financial Statements.
The accounting policies described herein applicable to the preparation of
the Combined Financial Statements of the Media Group may be modified or
rescinded at the sole discretion of the Board without approval of the
shareowners, although there is no present intention to do so. The Board may also
adopt additional policies depending on the circumstances. Any determination of
the Board to modify or rescind such policies, or to add additional policies,
including any decision that would have disparate impacts upon owners of
Communications Stock and Media Stock, would be made by the Board in good faith
and in the honest belief that such decision is in the best interests of all U S
WEST shareowners, including the owners of Communications Stock and the owners of
Media Stock. In making such determination, the Board may also consider
regulatory requirements imposed on U S WEST Communications by the public utility
commissions of various states and the Federal Communications Commission. In
addition, generally accepted accounting principles require that any change in
accounting policy be preferable (in accordance with such principles) to the
policy previously established.
Certain reclassifications within the Combined Financial Statements have been
made to conform to the current year presentation.
ALLOCATION OF SHARED SERVICES. Certain costs relating to U S WEST's general
and administrative services (including certain executive management, legal, tax,
accounting and auditing, treasury, strategic planning and public policy
services) are directly assigned by U S WEST to each Group based on actual
utilization or are allocated based on each Group's operating expenses, number of
employees, external revenues, average capital and/or average equity. U S WEST
charges each Group for such services at fully distributed cost. These direct and
indirect allocations to Media Group were $41, $41 and $38 in 1996, 1995 and
1994, respectively. In 1996, the direct allocations comprised approximately 44
percent of the total shared corporate services allocated to the Media Group. It
is not practicable to provide a detailed estimate of the expenses which would be
recognized if the Media Group were a separate legal entity. However,
C-31
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
U S WEST believes that under the Recapitalization Plan, each Group benefits from
synergies with the other, including lower operating costs than might be incurred
if each Group were a separate legal entity.
ALLOCATION OF INCOME TAXES. Federal, state and local income taxes, which
are determined on a consolidated or combined basis, are allocated to each Group
in accordance with tax sharing agreements between U S WEST and the entities
within the Groups. The allocations will generally reflect each Group's
contribution (positive or negative) to consolidated taxable income and
consolidated tax credits. A Group will be compensated only at such time as, and
to the extent that, its tax attributes are utilized by U S WEST in a combined or
consolidated income tax filing. Federal and state tax refunds and carryforwards
or carrybacks of tax attributes will generally be allocated to the Group to
which such tax attributes relate.
The Media Group includes members which operate in states where U S WEST does
not file consolidated or combined state income tax returns. Separate state
income tax returns are filed by these members in accordance with the respective
states' laws and regulations. The members record a tax provision on a separate
company basis in accordance with the requirements of Statement of Financial
Accounting Standard ("SFAS") No. 109.
GROUP FINANCING. Financing activities for the Media Group and the
nonregulated Communications Group businesses, including the issuance, repayment
and repurchase of short-term and long-term debt, and the issuance and repurchase
of Preferred Securities and preferred stock are managed by U S WEST on a
centralized basis. Financing activities for U S WEST Communications are
separately identified and accounted for in U S WEST's records and U S WEST
Communications conducts its own borrowing activities. Debt incurred and
investments made by U S WEST and its subsidiaries on behalf of the Media Group
are specifically allocated to and reflected on the financial statements of the
Media Group. Debt incurred and investments made by U S WEST and its subsidiaries
on behalf of the nonregulated businesses of the Communications Group and all
debt incurred and investments made by U S WEST Communications are specifically
allocated to and reflected on the financial statements of the Communications
Group. Debt incurred by U S WEST or a subsidiary on behalf of a Group is charged
to such Group at the borrowing rate of U S WEST or such subsidiary.
As of November 1, 1995, the effective date of the Recapitalization Plan, U S
WEST does not intend to transfer funds between the Groups, except for certain
short-term, ordinary course advances of funds at market rates associated with U
S WEST's centralized cash management. Such short-term transfers of funds will be
accounted for as short-term loans between the Groups bearing interest at the
market rate at which management determines the borrowing Group could obtain
funds on a short-term basis. If the Board, in its sole discretion, determines
that a transfer of funds between the Groups should be accounted for as a
long-term loan, the Board would establish the terms on which such loan would be
made, including the interest rate, amortization schedule, maturity and
redemption terms. Such terms would generally reflect the then prevailing terms
upon which management determines such Group could borrow funds on a similar
basis. The financial statements of the lending Group, and the financial
statements of the borrowing Group, will reflect the amount of any such loan and
the periodic interest accruing thereon. The Board may determine that a transfer
of funds from the Communications Group to the Media Group should be accounted
for as an equity contribution, in which case an inter-group interest (determined
by the Board based on the then current market value of shares of Media Stock)
will either be created or increased, as applicable. Similarly, if an inter-group
interest exists, the Board may determine that a transfer of funds from the Media
Group to the Communications Group should be accounted for as a reduction in the
inter-group interest.
C-32
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DIVIDENDS. Under the Recapitalization Plan, U S WEST intends to retain
future earnings of the Media Group, if any, for the development of the Media
Group's businesses and does not anticipate paying dividends in the foreseeable
future.
EARNINGS PER COMMON SHARE. Earnings per common share ("earnings per share")
for 1995 and 1994 have been presented on a pro forma basis to reflect the Media
Stock as if it had been outstanding since January 1, 1994. For periods prior to
the recapitalization, the average common shares outstanding are assumed to be
equal to the average common shares outstanding for U S WEST.
INDUSTRY SEGMENTS. The businesses comprising the Media Group operate in
four industry segments, as defined in SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," consisting of directory and information
services, wireless communications, cable and telecommunications and the capital
assets segment, which is held for sale.
Prior to January 1, 1995, the capital assets segment was accounted for as
discontinued operations. Effective January 1, 1995, the capital assets segment
has been accounted for as a net investment in assets held for sale, as discussed
in Note 20 -- Net Investment in Assets Held for Sale -- to the Media Group
Combined Financial Statements.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is carried at cost less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. All other repairs and
maintenance costs are expensed as incurred.
Interest related to qualifying construction projects, including construction
projects of equity method investees, is capitalized and reflected as a reduction
of interest expense. Amounts capitalized by the Media Group were $38, $33 and $8
in 1996, 1995 and 1994, respectively.
Depreciation is calculated using the straight-line method. When such
depreciable property, plant and equipment is retired or sold, the resulting gain
or loss is included in earnings. Continental provides for depreciation using the
straight-line group method over estimated useful lives. Sales or retirements are
generally charged to accumulated depreciation.
COMPUTER SOFTWARE. The cost of computer software, whether purchased or
developed internally, is generally expensed, except for Continental, which
capitalizes the cost of computer software.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Debt and equity securities are
classified as available for sale and are carried at market value with unrealized
gains and losses included in equity.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of international
investments are translated at year-end exchange rates, and income statement
items are translated at average exchange rates for the year.
C-33
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Resulting translation adjustments are recorded as a separate component of
equity. Gains and losses resulting from foreign currency transactions are
included in earnings.
INTANGIBLE ASSETS. Intangible assets are recorded when the cost of acquired
companies exceeds the fair value of their tangible assets. The costs of
identified intangible assets and goodwill are amortized by the straight-line
method over periods ranging from five to forty years. These assets are evaluated
for impairment, with other related assets, using the methodology prescribed by
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of."
FINANCIAL INSTRUMENTS. Net interest accrued on interest rate swaps is
recognized over the life of the swaps as an adjustment to interest expense.
Foreign exchange contracts designated as hedges of firm equity investment
commitments are carried at market value, with gains and losses recorded in
equity until sale of the investment. Forward contracts designated as hedges of
foreign denominated loans are recorded at market value, with gains and losses
recorded in earnings.
REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS. Cellular access and cable
television services are generally billed monthly in advance, and revenues are
recognized the following month when services are provided. Revenues derived from
cable pay-per-view, advertising and wireless airtime usage are billed and
recorded monthly as services are provided.
Directory advertising revenues and related directory costs of selling,
composition, printing and distribution are generally deferred and recognized
over the period directories are used, normally 12 months. For international
operations, directory advertising revenues and related directory costs are
deferred and recognized upon publication.
INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods.
NEW ACCOUNTING STANDARDS. Effective January 1, 1996, U S WEST adopted SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and
associated intangibles be written down to fair value whenever an impairment
review indicates that the carrying value cannot be recovered on an undiscounted
cash flow basis. SFAS No. 121 also requires that a company no longer record
depreciation expense on assets held for sale. The adoption of SFAS No. 121 did
not have a material effect on the financial position or results of operations of
the Media Group.
In 1996, U S WEST adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." This standard establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. U S
WEST has adopted the disclosure provisions of SFAS No. 123 but continues to
account for the stock incentive plans under Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees. See Note 15 -- Stock
Incentive Plans -- to the Media Group Combined Financial Statements.
In fourth-quarter 1997, U S WEST will adopt SFAS No. 128, "Earnings Per
Share." This standard specifies new computation, presentation and disclosure
requirements for earnings per share. Among other things, SFAS No. 128 requires
presentation of basic and diluted earnings per share on the face of the income
statement. Adoption of the new standard will not have a material impact on Media
Group earnings per share.
C-34
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MERGER OF CABLE SYSTEMS
CONTINENTAL CABLEVISION, INC. On November 15, 1996, Continental
Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U
S WEST (the "Merger" or the "Continental Merger"). Continental is the third
largest cable television system operator in the United States. The aggregate
consideration paid by Media Group to shareowners of Continental consisted of
150,615,000 shares of Media Stock valued at $2.59 billion, 20,000,000 shares of
U S WEST Series D Preferred Stock with a market value of $920 million and $1.15
billion in cash. In connection with the Merger, U S WEST also assumed all of
Continental's outstanding indebtedness and other liabilities, which approximated
$7.0 billion at November 15, 1996, for a total purchase price of $11.7 billion.
Continental serves 4.5 million domestic customers, passes 7.4 million domestic
homes and holds significant other domestic and international properties.
Media Group has accounted for the Merger by the purchase method of
accounting. Accordingly, the purchase price is allocated to the assets acquired
and liabilities assumed based on their estimated fair values. The $8.0 billion
excess of the purchase price over the net tangible assets acquired and the
goodwill related to a deferred income tax liability of $3.3 billion is being
amortized over 25 years, except for intangible assets allocated to Continental's
equity method investments, which are being amortized over 15 years. Amortization
related to Continental's equity method investments is recorded as a component of
equity losses in unconsolidated ventures. The intangible assets acquired consist
principally of the cable television franchises of Continental and goodwill.
Continental's results of operations have been included in the combined results
of operations of the Media Group since the Merger date.
Following are summarized, combined, unaudited pro forma results of
operations for the Media Group for the years ended December 31, 1996 and 1995,
assuming the Merger occurred as of the beginning of respective periods:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
SUMMARIZED RESULTS OF OPERATIONS 1996 1995
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Revenues................................................................... $ 4,662 $ 4,156
Loss before extraordinary item............................................. (513) (349)
Net loss................................................................... (513) (353)
Loss per common share before extraordinary item............................ (0.90) (0.64)
</TABLE>
Loss before extraordinary item, net loss and loss per common share before
extraordinary item are before nonrecurring items directly attributable to the
Merger. The final allocation of the purchase price is dependent upon certain
valuations and other studies that have not progressed to the stage where there
is sufficient information to make a final allocation in the Combined Financial
Statements. Accordingly, the purchase price allocations made in connection with
the Combined Financial Statements are preliminary.
The impact on the financial position of the Media Group from the disposition
of certain Continental properties as required by federal rules governing
cross-ownership by telephone companies of cable companies and provision of
interLATA services within the Communications Group region is not expected to be
material.
ATLANTA SYSTEMS. On December 6, 1994, U S WEST acquired the stock of
Wometco Cable Corp. and subsidiaries, and the assets of Georgia Cable Partners
and Atlanta Cable Partners L.P. (the "Atlanta Systems"), for cash of $745 and
12,779,206 U S WEST common shares valued at $459, for a total purchase
C-35
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: MERGER OF CABLE SYSTEMS (CONTINUED)
price of approximately $1.2 billion. The Atlanta Systems' results of operations
have been included in the combined results of operations of the Media Group
since the acquisition date.
The acquisition was accounted for using the purchase method. Accordingly,
the purchase price was allocated to assets acquired (primarily identified
intangibles) based on their estimated fair values. The identified intangibles
and goodwill are being amortized on a straight-line basis over 25 years.
NOTE 4: INDUSTRY SEGMENTS
The Media Group operates in four industry segments: directory and
information services, wireless communications, cable and telecommunications and
capital assets, which is held for sale. Supplemental Media Group information on
a proportionate basis is presented in Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The cable and telecommunications segment consists of cable television
properties serving 5.0 million domestic subscribers and passing 8.3 million
domestic homes. The directory and information services segment consists of the
publishing of White and Yellow Pages telephone directories, database marketing
services and interactive services in domestic and international markets. The
wireless communications segment provides information products and services over
wireless networks in 12 western and midwestern states.
Industry segment financial information follows:
<TABLE>
<CAPTION>
DIRECTORY AND CORPORATE
INFORMATION WIRELESS CABLE AND AND
SERVICES(1) COMMUNICATIONS TELECOMMUNICATIONS(2) OTHER(3) COMBINED
------------- --------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996
Sales and other revenues............. $ 1,259 $ 1,183 $ 494 $ 19 $ 2,955
Operating income (loss).............. 454 243 (20) (162) 515
Identifiable assets.................. 685 1,579 15,504 6,293 24,061
Depreciation and amortization........ 48 147 212 15 422
Capital expenditures................. 36 264 353 15 668
1995
Sales and other revenues............. 1,180 941 215 38 2,374
Operating income (loss).............. 398 147 23 (101) 467
Identifiable assets.................. 583 1,439 1,466 5,127 8,615
Depreciation and amortization........ 36 121 77 15 249
Capital expenditures................. 37 277 64 23 401
1994
Sales and other revenues............. 1,075 781 18 34 1,908
Operating income (loss).............. 396 88 -- (95) 389
Identifiable assets.................. 613 1,286 1,459 4,036 7,394
Depreciation and amortization........ 30 102 6 6 144
Capital expenditures................. 42 274 2 25 343
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
C-36
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
(FOOTNOTES FOR PRECEDING TABLE)
- ------------------------------
(1) Includes revenues from directory publishing activities in Europe of $139,
$122 and $78, and identifiable assets of $154, $133 and $124 in 1996, 1995
and 1994, respectively.
(2) Results for Continental and the Atlanta Systems have been included since
the dates of Merger and acquisition. 1996 includes revenues of $6, operating
losses of $7, and identifiable assets of $133 from cable operations in the
Czech Republic.
(3) Identifiable assets include Media Group's investments in debt and equity
securities, equity and cost method investments and the capital assets
segment, which has been discontinued and is held for sale.
Operating income (loss) represents sales and other revenues less operating
expenses, and excludes interest expense, equity losses in unconsolidated
ventures, other expense (income) and income taxes. For the year ended December
31, 1996, operating income of the directory and information services segment
includes a charge of $25 to reorganize and reduce headcount.
Corporate and Other operating losses include costs related to general and
administrative services provided by U S WEST to the Media Group, including
executive management, legal, accounting and auditing, tax, treasury, strategic
planning and public policy. Also included are costs related to managing the
various Media Group operations, predominantly the international operations.
Corporate and Other operating losses increased in 1996 primarily as a result of
a change in cost allocation policy. Beginning in 1996, other operating losses
include costs that are not specifically identifiable with an operating company.
Previously such costs were allocated to the operating companies. Corporate and
Other operating losses also include a charge of $10 related to staff reductions
at international headquarters in 1996.
Identifiable assets are those assets used in each segment's operations.
Corporate and Other assets consist primarily of cash, debt and equity
securities, investments in international ventures, the investment in Time Warner
Entertainment, the net investment in assets held for sale and other assets.
To ensure consistency and quality of service, the wireless segment uses
Motorola as its primary vendor for infrastructure equipment and cellular mobile
telephone equipment and accessories. In addition, Motorola provides ongoing
technological support for the infrastructure equipment. Approximately 75 percent
of the Media Group's major cellular markets is comprised of Motorola equipment.
During 1994, Media Group signed a definitive agreement with AirTouch
Communications, Inc. ("AirTouch") to combine their domestic cellular properties
into a partnership in a multi-phased transaction. During Phase I, which
commenced on November 1, 1995, the partners are operating their cellular
properties separately. A Wireless Management Company (the "WMC") has been formed
and is providing services to both companies on a contract basis. In Phase II,
the partners will combine their domestic properties subject to obtaining certain
authorizations and partnership approvals. The passage of the Telecommunications
Act of 1996 has removed significant regulatory barriers to completion of Phase
II. In February 1997, the King County Superior Court in Washington state ruled
that Media Group violated the terms of its partnership agreement with its
minority partners in the Seattle market by entering into the joint venture
agreement with AirTouch. The Company has obtained a stay of the ruling pending
its appeal. Similar litigation has been filed in other jurisdictions regarding
other cellular partnerships by the same minority partner that brought the
Seattle litigation. The Company believes it will ultimately be successful in all
such litigation. Media Group expects that Phase II closing will occur in the
second half of 1997.
Upon the implementation of Phase II, management expects the joint venture
interests will be approximately 74 percent AirTouch and 26 percent Media Group
(assuming contribution of all domestic cellular properties). The actual
interests in the joint venture at commencement of Phase II depend, among other
things, on the timing of the Phase II closing and the ability of the partners to
combine their domestic properties. Media Group's interest will further adjust
depending on the timing of the contribution of its
C-37
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: INDUSTRY SEGMENTS (CONTINUED)
investment in PrimeCo. The timing of such contribution is at Media Group's
discretion and will occur either at the closing of Phase II or a date selected
by Media Group, no later than mid-1998.
Media Group has the right to convert its joint venture interest in the
domestic cellular properties into AirTouch stock ("Phase III"). Media Group's
interests will be valued on a private market basis and the AirTouch common stock
received by Media Group will be based on a fair public market value. In the
event the value to be received by Media Group exceeds 19.9 percent of AirTouch's
outstanding common stock, Media Group will receive the excess in the form of
nonvoting preferred stock. Media Group has the right to initiate Phase III upon
completion of Phase II of the merger and contribution of both Media Group's and
AirTouch's interests in PrimeCo to the joint venture.
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT
On September 15, 1993, Media Group acquired 25.51 percent pro-rata priority
capital and residual equity interests ("equity interests") in Time Warner
Entertainment Company L.P. ("TWE" or "Time Warner Entertainment") for an
aggregate purchase price of $2.553 billion. TWE owns and operates substantially
all of the entertainment assets previously owned by Time Warner Inc. ("Time
Warner"), consisting primarily of its filmed entertainment, programming-HBO and
cable businesses. Upon Media Group's admission to the partnership, certain
wholly owned subsidiaries of Time Warner ("General Partners") and subsidiaries
of Toshiba Corporation and ITOCHU Corporation held pro-rata priority capital and
residual equity interests of 63.27, 5.61 and 5.61 percent, respectively. In
1995, Time Warner acquired the limited partnership interests previously held by
subsidiaries of each of ITOCHU Corporation and Toshiba Corporation.
Media Group has an option to increase its pro-rata priority capital and
residual equity interests in TWE from 25.51 percent up to 31.84 percent
depending upon cable operating performance. The option is exercisable, in whole
or part, between January 1, 1999 and May 31, 2005, for an aggregate cash
exercise price ranging from $1.25 billion to $1.8 billion, depending upon the
year of exercise. Either TWE or Media Group may elect that the exercise price
for the option be paid with partnership interests rather than cash.
Pursuant to the TWE Partnership Agreement, there are four levels of capital.
From the most to least senior, the capital accounts are: senior preferred (held
by the General Partners); pro-rata priority capital (A preferred -- held pro
rata by the general and limited partners); junior priority capital (B preferred
- -- held by the General Partners); and common (residual equity interests held pro
rata by the general and limited partners). Of the $2.553 billion contributed by
U S WEST, $1.658 billion represents A preferred capital and $895 represents
common capital. The TWE Partnership Agreement provides for special allocations
of income and distributions of partnership capital. Partnership income, to the
extent earned, is allocated as follows: (1) to the partners so that the economic
burden of the income tax consequences of partnership operations is borne as
though the partnership was taxed as a corporation ("special tax allocations");
(2) to the partners' preferred capital accounts in order of priority described
above, at various rates of return ranging from 8 percent to 13.25 percent; and
(3) to the partners' common capital according to their residual partnership
interests. To the extent partnership income is insufficient to satisfy all
special allocations in a particular accounting period, the unearned portion is
carried over until satisfied out of future partnership income. Partnership
losses generally are allocated in reverse order, first to eliminate prior
allocations of partnership income, except senior preferred and special tax
income, next to reduce initial capital amounts, other than senior preferred,
then to reduce the senior preferred account and finally, to eliminate special
tax allocations.
C-38
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
A summary of the contributed capital and priority capital rates of return
follows:
<TABLE>
<CAPTION>
TIME LIMITED PARTNERS
PRIORITY WARNER ------------------------
CONTRIBUTED CAPITAL RATES GENERAL TIME U S
PRIORITY OF CONTRIBUTED CAPITAL CAPITAL(A) OF RETURN(B) PARTNERS WARNER WEST
- ----------------------------------------- ----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(% PER ANNUM
COMPOUNDED
QUARTERLY) (OWNERSHIP %)
Senior preferred......................... $ 1,400(c) 8.00% 100.00% -- --
Pro-rata priority capital................ 5,600 13.00%(d) 63.27% 11.22% 25.51%
Junior priority capital.................. 2,900 13.25%(e) 100.00% -- --
Residual equity capital.................. 3,300 -- 63.27% 11.22% 25.51%
</TABLE>
- ------------------------------
(a) Estimated fair value of net assets contributed excluding partnership income
or loss allocated thereto.
(b) Income allocations related to priority capital rates of return are based on
partnership income after any special tax allocations.
(c) The senior preferred is scheduled to be distributed to Time Warner in three
annual installments beginning July 1, 1997 with the initial distribution
expected to be $535 million.
(d) 11.00 percent to the extent concurrently distributed.
(e) 11.25 percent to the extent concurrently distributed.
Cash distributions are required to be made to the partners to permit them to
pay income taxes at statutory rates based on their allocable taxable income from
TWE ("Tax Distributions"). The aggregate amount of such Tax Distributions is
computed generally by reference to the taxes that TWE would have been required
to pay if it were a corporation. Tax Distributions were previously subject to
restrictions until July 1995, and are now paid to the partners on a current
basis. For distributions other than those related to taxes or the senior
preferred, the TWE Partnership Agreement requires certain cash distribution
thresholds be met to the limited partners before the General Partners receive
their full share of distributions. No cash distributions have been made to Media
Group.
Media Group accounts for its investment in TWE under the equity method of
accounting. The excess of fair market value over the book value of total
partnership net assets implied by Media Group's initial investment was $5.7
billion. This excess is being amortized on a straight-line basis over 25 years.
The Media Group's recorded share of TWE operating results represents allocated
TWE net income or loss adjusted for the amortization of the excess of fair
market value over the book value of the partnership net assets. As a result of
this amortization and the special income allocations described above, the Media
Group's recorded pretax share of TWE operating results before extraordinary item
was $(4), $(31) and $(18) in 1996, 1995 and 1994, respectively. In addition, TWE
recorded an extraordinary loss for the early extinguishment of debt in 1995. The
Media Group's share of this extraordinary loss was $4, net of an income tax
benefit of $2.
As consideration for its expertise and participation in the cable operations
of TWE, the Media Group earns a management fee of $130 over five years, which is
payable over a four-year period beginning in 1995. Management fees of $26 were
recorded to other income in 1996, 1995 and 1994, respectively. The Media Group
Combined Balance Sheet includes management fee receivables of $56 and $50 at
December 31, 1996 and 1995, respectively, and a note payable to TWE of $169 at
December 31, 1995.
C-39
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: INVESTMENT IN TIME WARNER ENTERTAINMENT (CONTINUED)
Summarized financial information for TWE is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED OPERATING RESULTS 1996 1995 1994
- ---------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenues........................................................ $ 10,852 $ 9,517 $ 8,460
Operating expenses(1)........................................... 9,774 8,557 7,612
Interest and other expense, net(2).............................. 798 777 647
--------- --------- ---------
Income before income taxes and extraordinary item............... 280 183 201
Income before extraordinary item................................ 210 97 161
Net income...................................................... 210 73 161
</TABLE>
- ------------------------------
(1) Includes depreciation and amortization of $1,235, $1,039 and $943 in 1996,
1995 and 1994, respectively.
(2) Includes corporate services of $69, $64 and $60 in 1996, 1995 and 1994,
respectively, and minority interest expense of $207 and $133 in 1996 and
1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
SUMMARIZED FINANCIAL POSITION 1996 1995
- ------------------------------------------------------------------------ --------- ---------
<S> <C> <C>
Current assets(3)....................................................... $ 3,146 $ 2,909
Noncurrent assets(4).................................................... 16,827 15,996
Current liabilities..................................................... 4,075 3,214
Noncurrent liabilities, including minority interest..................... 7,781 7,787
Senior preferred capital................................................ 1,543 1,426
Partners' capital(5), (6)............................................... 6,574 6,478
</TABLE>
- ------------------------------
(3) Includes cash of $216 and $209 at December 31, 1996 and 1995,
respectively.
(4) Includes a loan receivable from Time Warner of $400 at December 31, 1996
and 1995, respectively.
(5) Net of a note receivable from Media Group of $169 at December 31, 1995.
(6) Contributed capital is based on the estimated fair value of the net assets
that each partner contributed to the partnership. The aggregate of such
amounts is significantly higher than TWE's partners' capital as reflected in
the Summarized Financial Position, which is based on the historical cost of
the contributed net assets.
Time Warner has announced its intention to restructure TWE in a manner that
would decrease its interest in the cable businesses and increase its interest in
the entertainment and cable programming businesses of TWE. Any change in the
structure of TWE would require Media Group's approval in addition to certain
creditors' and regulatory approvals.
C-40
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES
The significant components of net investment in international ventures
follow:
<TABLE>
<CAPTION>
NET INVESTMENT AT
DECEMBER 31,
LINE OF OWNERSHIP --------------------
VENTURE LOCATION BUSINESS PERCENTAGE 1996 1995
- ---------------------------- ------------------- -------------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Telewest.................... United Kingdom Cable & Telecom. 26.8 $ 454 $ 540
Binariang Sdn Bhd........... Malaysia Cable & Telecom. 20 205 224
A2000 (KTA)................. Netherlands Cable & Telecom. 50 96 218
All other................... 793 529
--------- ---------
Total..................... $ 1,548 $ 1,511
--------- ---------
--------- ---------
</TABLE>
In connection with the Continental Merger, Media Group acquired a 50 percent
interest in Fintelco, S.A., a cable venture in Argentina and a 25 percent
interest in a cable venture in Singapore. The purchase price assigned to these
ventures is preliminary.
At December 31, 1996, the difference between the carrying amount and Media
Group's interest in the underlying equity of the international ventures was
approximately $365. This difference has been allocated primarily to licenses and
cable franchises and is being amortized over lives ranging from five to twenty
years.
The following table shows summarized combined financial information for the
Media Group's equity method investments in international ventures.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
COMBINED RESULTS OF OPERATIONS 1996 1995 1994
- ------------------------------------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Revenues.......................................................... $ 1,869 $ 1,163 $ 580
Operating loss.................................................... (540) (373) (244)
Net loss.......................................................... (857) (514) (308)
</TABLE>
- ------------------------------
Note: Combined Results of Operations for Continental ventures have been included
since the date of Merger.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
COMBINED FINANCIAL POSITION 1996 1995
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Current assets............................................................. $ 1,126 $ 1,469
Property, plant and equipment -- net....................................... 5,105 3,545
Other assets............................................................... 2,226 1,644
--------- ---------
Total assets............................................................... $ 8,457 $ 6,658
--------- ---------
--------- ---------
Current liabilities........................................................ $ 1,275 $ 1,260
Long-term debt............................................................. 3,880 2,065
Other liabilities.......................................................... 478 58
Owners' equity............................................................. 2,824 3,275
--------- ---------
Total liabilities and equity............................................... $ 8,457 $ 6,658
--------- ---------
--------- ---------
</TABLE>
C-41
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: NET INVESTMENT IN INTERNATIONAL VENTURES (CONTINUED)
In November 1994, Telewest Communications plc ("Telewest") made an initial
public offering of its ordinary shares. Following the offering, in which Media
Group sold part of its 50 percent joint venture interest, Media Group owned
approximately 37.8 percent of Telewest. Net proceeds of approximately $650 were
used by Telewest to finance construction and operating costs, invest in
affiliated companies and repay debt. It is Media Group's policy to recognize in
income any gains or losses related to the sale of stock to the public. The Media
Group recognized a gain of $105 in 1994, net of $59 in deferred taxes, for the
partial sale of its joint venture interest in Telewest.
On October 2, 1995, Telewest and SBC CableComms (UK) completed a merger of
their UK cable television and telecommunications interests, creating the largest
provider of combined cable and telecommunications services in the United
Kingdom. Following completion of the merger, Media Group and Tele-
Communications, Inc., the major shareowners, each own 26.8 percent of the
combined company. The Media Group recognized a gain of $95 in 1995, net of $62
in deferred income taxes, in conjunction with the merger.
Telewest, which is the only equity method investment of Media Group for
which a quoted market price is available, had a market value of $786 and $914 at
December 31, 1996 and 1995, respectively.
FOREIGN CURRENCY TRANSACTIONS. Media Group has entered into forward and
zero-cost combination option contracts to manage foreign currency risk. Under a
forward contract, Media Group agrees with another party to exchange a foreign
currency and U.S. dollars at a specified price at a future date. Under the
combination options, Media Group combined purchased options to cap the foreign
exchange rate to be paid at a future date with written options to finance the
premium on the purchased options. The commitments, forward contracts and
combination options are for periods of one year or less. For the years ended
December 31, 1996 and 1995, the notional amounts of foreign exchange contracts
outstanding were $0 and $489, respectively. In 1997, the Media Group entered
into foreign exchange forward contracts in notional amounts totaling $170 for
the purchase and/or sale of British pounds, Japanese Yen and French Francs.
Forward exchange contracts are carried at market value. Gains or losses on
the portion of the contracts designated as hedges of firm equity investment
commitments are deferred as a component of Media Group equity and are recognized
in earnings upon sale of the investment. Gains or losses on the portion of the
contracts designated to offset translation of investee net income were recorded
in earnings.
Forward contracts were also used to hedge foreign denominated receivables.
These contracts were carried at market value with gains or losses recorded in
earnings. Foreign currency transaction pretax gains of $27 and pretax hedging
losses of $24 were included in earnings in the year ended December 31, 1996.
Cumulative deferred gains on foreign exchange contracts of $9 and deferred
losses of $28, including deferred taxes (benefits) of $4 and $(11),
respectively, are included in Media Group equity at December 31, 1996.
Cumulative deferred gains on foreign exchange contracts of $9 and deferred
losses of $25, including deferred taxes (benefits) of $4 and $(10),
respectively, are included in Media Group equity at December 31, 1995.
The counterparties to these contracts are major financial institutions.
Media Group is exposed to credit loss in the event of nonperformance by these
counterparties. The Company does not have significant exposure to an individual
counterparty and does not anticipate nonperformance by any counterparty.
C-42
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings......................................................... $ 307 $ 168
Cable distribution systems................................................. 2,640 167
Cellular systems........................................................... 897 733
General purpose computers and other........................................ 856 471
Construction in progress................................................... 411 167
--------- ---------
5,111 1,706
Less accumulated depreciation.............................................. 836 558
--------- ---------
Property, plant and equipment -- net....................................... $ 4,275 $ 1,148
--------- ---------
--------- ---------
</TABLE>
During 1996, property, plant and equipment increased $2,635 as a result of
the Continental Merger. This increase was primarily attributed to cable and
distribution systems. Media Group depreciates buildings between 10 to 40 years,
cable distribution systems between 3 to 15 years, cellular systems between 5 to
15 years, and general purpose computer and other between 3 to 20 years.
Depreciation expense was $289, $173, and $121 in 1996, 1995 and 1994,
respectively.
NOTE 8: INTANGIBLE ASSETS
The composition of intangible assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Identified intangibles, primarily franchise value........................ $ 8,388 $ 1,183
Goodwill................................................................. 4,465 743
--------- ---------
12,853 1,926
Less accumulated amortization............................................ 258 128
--------- ---------
Total intangible assets -- net........................................... $ 12,595 $ 1,798
--------- ---------
--------- ---------
</TABLE>
During 1996, identified intangibles (primarily franchise value) increased
$7,203 and goodwill increased $3,710 as a result of the Continental Merger.
Amortization expense was $133, $76 and $23 in 1996, 1995 and 1994, respectively.
C-43
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Notes payable:
Commercial paper............................................................... $ 141 $ 203
Bank loan...................................................................... -- 216
Other.......................................................................... 55 --
Current portion of long-term debt................................................ 167 568
Allocated to the capital assets segment -- net................................... (146) (151)
--------- ---------
Total............................................................................ $ 217 $ 836
--------- ---------
--------- ---------
</TABLE>
U S WEST maintains a commercial paper program to finance short-term cash
flow requirements, as well as to maintain a presence in the short-term debt
market. The weighted-average interest rate on commercial paper was 5.76 percent
and 5.79 percent at December 31, 1996 and 1995, respectively. Additional lines
of credit aggregating approximately $4.5 billion are available to the Media
Group as well as the nonregulated subsidiaries of the Communications Group in
accordance with their borrowing needs.
Other notes payable at December 31, 1996 include $50 associated with the
Media Group's increase in ownership of a cable venture in the Czech Republic.
This note was paid in January 1997. At December 31, 1995, the bank loan, in the
translated principal amount of $216, was denominated in Dutch Guilders. The loan
was repaid in February 1996.
In January 1997, the Media Group paid the cash portion of the Continental
Merger consideration totaling $1,150. This payment was financed with commercial
paper.
The Media Group expects that cash from operations combined with asset sales
will not be adequate to fund expected cash requirements in 1997. Additional
financing will come primarily from new short-term debt.
LONG-TERM DEBT
On November 15, 1996, U S WEST assumed Continental debt totaling $6,525 (at
market value) in conjunction with the Merger. Concurrently, U S WEST refinanced
$3,657 of the assumed debt with commercial paper. In January 1997, U S WEST
issued medium- and long-term debt totaling $4.1 billion, at a weighted-average
interest rate of 7.47 percent. The net proceeds were used to refinance
outstanding commercial paper. Such commercial paper is classified as long-term
debt in the accompanying U S WEST Media Group Combined Balance Sheets and the
following tables.
C-44
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
The components of long-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Senior unsecured notes, debentures and refinanced commercial paper............. $ 7,230 $ 1,138
Zero coupon subordinated notes, 7.3 percent yield to maturity convertible at
any time into equal shares of Communications Stock and Media Stock............ 718 737
Senior subordinated debt....................................................... 400 --
Debt exchangeable for common stock............................................. 384 130
Insurance company notes........................................................ 68 --
Leveraged employee stock ownership plans ("LESOP")............................. 53 91
Capital lease obligations...................................................... 12 2
Other.......................................................................... 68 17
Unamortized discount -- net.................................................... (471) (494)
Unamortized premium -- net..................................................... 335 --
Allocated to the capital assets segment -- net................................. (161) (356)
--------- ---------
Total.......................................................................... $ 8,636 $ 1,265
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996, long-term debt includes senior unsecured notes and
debentures totaling $2.0 billion, senior subordinated debt of $400 and insurance
company notes of $68 assumed in connection with the Continental Merger. The
senior unsecured notes and debentures and the senior subordinated debt totaling
$2.4 billion are not guaranteed by U S WEST. The notes and debentures limit
Continental's ability to, among other things, pay dividends, create liens, incur
additional debt, dispose of property, investments and leases, and requires a
minimum ratio of cash flow to debt.
On May 13, 1996, U S WEST issued $254 of DECS due May 15, 1999, in the
principal amount of $26.63 per note. The notes bear interest at 7.625 percent.
Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of
Financial Security Assurance Holdings Ltd. ("FSA") held by Media Group or the
cash equivalent, at Media Group's option. The number of shares to be delivered
at maturity varies based on the per share market price of FSA. If the market
price is $26.63 per share or less, one share of FSA will be delivered for each
note; if the market price is between $26.63 and $32.48 per share, a fractional
share is delivered so that the value at maturity is equal to $26.63; if the
market value is greater than $32.48 per share, .8197 shares are delivered for
each note. The capital assets segment currently owns approximately 40 percent of
the outstanding FSA common stock.
In 1995, U S WEST issued $130 of DECS, due December 15, 1998, in the
principal amount of $24.00 per note. The notes bear interest at 7.625 percent.
Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of
Enhance Financial Services Group, Inc. ("Enhance") held by Media Group or the
cash equivalent at U S WEST's option. The number of shares to be delivered at
maturity varies based on the per share market price of Enhance. If the market
price is $24.00 per share or less, one share of Enhance will be delivered for
each note; if the market price is between $24.00 and $28.32 per share, a
fractional share equal to $24.00 is delivered; if the market value is greater
than $28.32 per share, .8475 shares are delivered for each note. At December 31,
1996, the capital assets segment owned 30.1 percent of the outstanding Enhance
common stock.
C-45
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: DEBT (CONTINUED)
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- ----------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%................................. $ -- $ -- $ -- $ -- $ 6 $ 6 $ --
Above 5% to 6%........................... 130 -- -- -- 10 140 130
Above 6% to 7%........................... -- 309 48 38 2,089 2,484 1,018
Above 7% to 8%........................... -- -- 13 -- 3,428 3,441 737
Above 8% to 9%........................... 42 11 -- 240 1,475 1,768 147
Above 9% to 10%.......................... -- 15 25 10 525 575 79
Above 10%................................ 34 35 2 2 434 507 2
--------- --------- --------- --------- ----------- --------- ---------
$ 206 $ 370 $ 88 $ 290 $ 7,967 8,921 2,113
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations......................................................................... 12 2
Unamortized discount -- net....................................................................... (471) (494)
Unamortized premium -- net........................................................................ 335 --
Allocated to the capital assets segment -- net.................................................... (161) (356)
--------- ---------
Total............................................................................................. $ 8,636 $ 1,265
--------- ---------
--------- ---------
</TABLE>
Interest payments, net of amounts capitalized, were $233, $140, and $167 for
1996, 1995 and 1994, respectively, of which $59, $87 and $134, respectively,
relate to the capital assets segment.
C-46
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 9: DEBT (CONTINUED)
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
Under an interest rate swap, Media Group agrees with another party to
exchange interest payments at specified intervals over a defined term. Interest
payments are calculated by reference to the notional amount based on the fixed-
and variable-rate terms of the swap agreements. The net interest accrued under
an interest rate swap is accounted for as an adjustment to interest expense. In
1996, U S WEST assumed interest rate swaps in the notional amount of $1,000 and
interest cap agreements in the notional amount of $500 in connection with the
Continental Merger. The interest rate cap agreements protect against large
increases in interest rates and have various maturities through 1998. Interest
payments received under the terms of a cap agreement would be accounted for as
an adjustment to interest expense.
The table summarizes terms of interest rate swaps. Variable rates are
indexed to the 30-day commercial paper rate.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------ ------------------------------------------------
WEIGHTED AVERAGE RATE WEIGHTED AVERAGE RATE
NOTIONAL ---------------------- NOTIONAL ----------------------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY
----------- ----------- ----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed............... $ 1,055 1997-2004 5.73 7.06 $ 55 1997-2004 5.85 9.30
</TABLE>
During fourth-quarter 1996, U S WEST purchased put options for $1.5 billion
notional of U.S. Treasury Bonds to protect against an increase in interest rates
in conjunction with the 1997 debt refinancing. The contracts closed in January
1997 and a deferred gain of $5 was recognized. The deferred gain will be
recognized as a yield adjustment over the life of the debt, which matures at
various dates through 2027.
The counterparties to interest rate contracts are major financial
institutions. U S WEST is exposed to credit loss in the event of nonperformance
by these counterparties. U S WEST manages this exposure by monitoring the credit
standing of the counterparty and establishing dollar and term limitations which
correspond to the respective credit rating of each counterparty. U S WEST does
not have significant exposure to an individual counterparty and does not
anticipate nonperformance by any counterparty.
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable, and short-term debt approximate carrying values due to their short-term
nature.
The fair values of mandatorily redeemable preferred stock and long-term
receivables, based on quoted market prices or discounting future cash flows,
approximate the carrying values. The fair value of foreign exchange contracts
and interest rate cap agreements, based on estimated amounts Media Group would
receive or pay to terminate such agreements, approximate the carrying values. It
is not practicable to estimate the fair value of financial guarantees because
there are no quoted market prices for similar transactions.
C-47
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of interest rate swaps, including swaps associated with the
capital assets segment, are based on estimated amounts Media Group would receive
or pay to terminate such agreements taking into account current interest rates
and creditworthiness of the counterparties.
The fair values of long-term debt, including debt associated with the
capital assets segment and Preferred Securities, are based on quoted market
prices where available or, if not available, are based on discounting future
cash flows using current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)................... $ 9,334 $ 9,400 $ 2,897 $ 3,000
Interest rate swap agreements -- assets.............. -- (5) -- (13)
Interest rate swap agreements -- liabilities......... 17 37 -- 34
----------- --------- ----------- ---------
Debt -- net.......................................... $ 9,351 $ 9,432 $ 2,897 $ 3,021
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Preferred Securities................................. $ 1,080 $ 1,074 $ 600 $ 636
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Investments in debt and equity securities are classified as available for
sale and are carried at market value. The debt securities have various maturity
dates through the year 2001. The market value of these securities is based on
quoted market prices where available or, if not available, is based on
discounting future cash flows using current interest rates.
Equity securities totaling $713 acquired in the Continental Merger are
included in the following table. The amortized cost and estimated market value
of debt and equity securities follow:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------------------- ---------------------------------------
GROSS GROSS GROSS GROSS
UNREALIZED UNREALIZED FAIR UNREALIZED UNREALIZED
SECURITIES COST GAINS LOSSES VALUE COST GAINS LOSSES
- ---------------------------------- --------- ------------- ------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Equity securities................. $ 713 $ 2 $ -- $ 715 $ -- $ -- $ --
Corporate debt.................... 20 -- -- 20 20 -- --
Securitized loan.................. 55 -- (6) 49 55 -- (5)
--------- ----- ----- --------- --------- ----- -----
Total............................. $ 788 $ 2 $ (6) $ 784 $ 75 $ -- $ (5)
--------- ----- ----- --------- --------- ----- -----
--------- ----- ----- --------- --------- ----- -----
<CAPTION>
FAIR
SECURITIES VALUE
- ---------------------------------- ---------
<S> <C>
Equity securities................. $ --
Corporate debt.................... 20
Securitized loan.................. 50
---------
Total............................. $ 70
---------
---------
</TABLE>
Net unrealized losses on marketable securities are included in equity. 1996
net unrealized gains are $1 (net of deferred taxes) and 1995 net unrealized
losses are $3 (net of a deferred tax benefit of $2).
C-48
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: LEASING ARRANGEMENTS
Media Group has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $63, $60 and
$63 in 1996, 1995 and 1994, respectively. Minimum future lease payments as of
December 31, 1996, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ----------------------------------------------------------------------------
<S> <C>
1997........................................................................ $ 69
1998........................................................................ 57
1999........................................................................ 46
2000........................................................................ 37
2001........................................................................ 24
Thereafter.................................................................. 83
---------
Total....................................................................... $ 316
---------
---------
</TABLE>
NOTE 12: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
On October 29, 1996, U S WEST Financing II, a wholly owned subsidiary of U S
WEST ("Financing II") issued $480 of 8.25 percent Trust Originated Preferred
Securities (the "Preferred Securities") and $15 of common securities. U S WEST
holds all of the outstanding common securities of Financing II. Financing II
used the proceeds from such issuance to purchase from U S WEST Capital Funding,
Inc., a wholly owned subsidiary of U S WEST ("Capital Funding"), $495 principal
amount of Capital Funding's 8.25 percent Subordinated Deferrable Interest Notes
due 2036 (the "Subordinated Debt Securities"), the obligations under which are
fully and unconditionally guaranteed by U S WEST (the "Debt Guarantee"). The
sole assets of Financing II are and will be the Deferrable Notes and the Debt
Guarantee.
On September 11, 1995, U S WEST Financing I, a wholly owned subsidiary of U
S WEST ("Financing I"), issued $600 million of 7.96 percent Preferred Securities
and $19 of common securities. U S WEST holds all of the outstanding common
securities of Financing I. Financing I used the proceeds from such issuance to
purchase from Capital Funding $619 principal amount of Capital Funding's 7.96
percent Subordinated Debt Securities due 2025, the obligations under which are
fully and unconditionally guaranteed by U S WEST. The sole assets of Financing I
are and will be the Subordinated Debt Securities and the Debt Guarantee.
U S WEST has guaranteed the payment of interest and redemption amounts to
holders of Preferred Securities when Financing I and II have funds available for
such payments (the "Payment Guarantee") as well as Capital Funding's undertaking
to pay all of Financing I and II's costs, expenses and other obligations (the
"Expense Undertaking"). The Payment Guarantee and the Expense Undertaking,
including U S WEST's guarantee with respect thereto, considered together with
Capital Funding's obligations under the indenture and Subordinated Debt
Securities and U S WEST's obligations under the indenture, declaration and Debt
Guarantee, constitute a full and unconditional guarantee by U S WEST of
Financing I and II's obligations under the Preferred Securities. The interest
and other payment dates on the Subordinated Debt Securities correspond to the
distribution and other payment dates on the Preferred Securities. Under certain
circumstances, the Subordinated Debt Securities may be distributed to the
holders of Preferred Securities and common securities in liquidation of
Financing I and II.
C-49
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY-GUARANTEED DEBENTURES
(CONTINUED)
The 7.96 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after September 11, 2000, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing I is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1996
and 1995, 24,000,000 7.96 percent Preferred Securities were outstanding.
The 8.25 percent Subordinated Debt Securities are redeemable in whole or in
part by Capital Funding at any time on or after October 29, 2001, at a
redemption price of $25.00 per Subordinated Debt Security plus accrued and
unpaid interest. If Capital Funding redeems the Subordinated Debt Securities,
Financing II is required to redeem the Preferred Securities concurrently at
$25.00 per share plus accrued and unpaid distributions. As of December 31, 1996,
19,200,000 8.25 percent Preferred Securities were outstanding.
NOTE 13: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings
Inc. ("FFC") 50,000 shares of a class of 7 percent Series C Cumulative
Redeemable Preferred Stock for a total of $50. (See Note 20 -- Net Investment in
Assets Held for Sale -- to the U S WEST Media Group Combined Financial
Statements.) The preferred stock was recorded at fair market value of $51 at the
issue date. Media Group has the right, commencing September 2, 1999, to redeem
the shares for one thousand dollars per share plus unpaid dividends and a
redemption premium. The shares are mandatorily redeemable in 2004 at face value
plus unpaid dividends. At the option of FFC, the preferred stock can also be
redeemed for common shares of Financial Security Assurance, an investment held
by the capital assets segment. The market value of the option was $35 and $20
(based on the Black-Scholes Model) at December 31, 1996 and 1995, respectively,
with no carrying value.
C-50
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: MEDIA GROUP EQUITY
Following is a reconciliation of Media Group equity:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of period................................... $ 4,472 $ 4,203 $ 3,139
Net income (loss).............................................. (71) 141 276
Equity issuance for Continental Merger......................... 2,590 -- --
Series D Preferred Stock issuance for Continental Merger....... 920 -- --
Other Media Stock issuances.................................... 38 7 --
Stock option hedging premium................................... (32) -- --
Company LESOP guarantee........................................ 36 60 56
Market value adjustment for debt and equity securities......... (6) 36 (64)
Foreign currency translation................................... (1) (9) 6
Preferred dividends............................................ (9) (3) --
Equity issuances prior to recapitalization..................... -- 37 790
Treasury stock purchases....................................... (297) -- --
Other.......................................................... (8) -- --
--------- --------- ---------
Balance at end of period......................................... $ 7,632 $ 4,472 $ 4,203
--------- --------- ---------
--------- --------- ---------
</TABLE>
In connection with the Continental Merger, U S WEST issued 150,615,000
shares of Media Stock to Continental shareowners, valued at $2,590. The Company
also purchased and placed into treasury 15,916,000 shares of Media Stock at an
average price per share of $18.66 and a cost basis of $297.
On November 15, 1996, U S WEST issued 20,000,000 shares of 4.5 percent, 20
year, Series D Convertible Preferred Stock (the "Preferred Stock") to
Continental shareowners. Dividends are payable quarterly on the nonvoting
Preferred Stock as and when declared by the Board of Directors out of funds
legally available. The Preferred Stock has a liquidation value of $50 per share
and is recorded at the November 15, 1996 market value of $46 per share. The
Preferred Stock is convertible, at the option of the holder, into shares of
Media Stock at $26.25 per share. Between November 15, 1999 and November 15,
2001, the Preferred Stock is redeemable at par, at the option of U S WEST, into
shares of Media Stock if the Media common shares have closed at $34.44 per share
for at least 20 of the 30 consecutive trading days prior to the notice of
redemption. After November 15, 2001, the Preferred Stock is redeemable at par,
at the option of U S WEST, in cash, Media Stock, or any combination of cash and
stock. If Media Stock is elected, the number of shares to be issued will be
determined based on the average market price for the ten consecutive trading
days ending on the third business day prior to redemption, reduced by five
percent. On November 15, 2016, U S WEST is required to redeem the Preferred
Stock, at its election, for cash, Media Stock, or any combination of cash and
stock. Upon certain events, including the disposition of all or substantially
all of the properties and assets attributed to the Media Group, the Preferred
Stock becomes mandatorily redeemable. The Preferred Stock ranks senior to all
classes of U S WEST common stock, is subordinated to any senior debt and ranks
pari passu with the Preferred Securities.
U S WEST issued 152,468,000 and 392,000 shares of Media Stock in 1996 and
1995 (since the November 1, 1995 recapitalization), respectively, and had
608,863,000 and 472,314,000 shares outstanding at December 31, 1996 and 1995,
respectively.
C-51
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: MEDIA GROUP EQUITY (CONTINUED)
Included in Media Group equity is the cumulative foreign currency
translation adjustment of $(39), $(38) and $(29) at December 31, 1996, 1995 and
1994, respectively, net of income tax benefits of $24, $24 and $18,
respectively.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). The Media Group and the
Communications Group participate in the defined contribution savings plan
sponsored by U S WEST. Employees of the Media Group are covered by the plan,
except for Continental, Atlanta Systems and foreign national employees. U S WEST
matches a percentage of eligible employee contributions with shares of Media
Stock and/or Communications Stock in accordance with participant elections.
Participants may also elect to reallocate past Company contributions between
Media Stock and Communications Stock. In 1989, U S WEST established two LESOPs
to provide Company stock for matching contributions to the savings plan. Shares
in the LESOP are released as principal and interest are paid on the debt. At
December 31, 1996, 11,019,157 shares each of Media Stock and Communications
Stock had been allocated from the LESOP to participants' accounts while
2,132,291 and 1,865,494 shares of Media Stock and Communications Stock,
respectively, remained unallocated.
The borrowings associated with the LESOP, which are unconditionally
guaranteed by U S WEST, are included in the accompanying Media Group Combined
Financial Statements. Contributions from the Media Group and the Communications
Group as well as dividends on unallocated shares held by the LESOP ($5, $8 and
$11 in 1996, 1995 and 1994, respectively), are used for debt service. Beginning
with the dividend paid in fourth-quarter 1995, dividends on allocated shares are
paid annually to participants. Previously, dividends on allocated shares were
used for debt service with participants receiving additional shares from the
LESOP in lieu of dividends. Tax benefits related to dividend payments on
eligible shares in the savings plan have been allocated to the Communications
Group, which paid the dividends.
Media Group recognizes expense based on the cash payments method.
Contributions to the plan related to the Media Group were $12, $16 and $12 in
1996, 1995 and 1994, respectively, of which $2, $3 and $3, respectively, have
been classified as interest expense.
NOTE 15: STOCK INCENTIVE PLANS
The Media Group and Communications Group participate in the stock incentive
plans maintained by U S WEST for executives and other employees and
nonemployees, primarily members of the Board. The Amended 1994 Stock Plan (the
"Plan") was approved by shareowners on October 31, 1995, in connection with the
Recapitalization Plan. The Plan is a successor plan to the U S WEST, Inc. Stock
Incentive Plan and the U S WEST 1991 Stock Incentive Plan (the "Predecessor
Plans"). No further grants of options or restricted stock may be made under the
Predecessor Plans. The Plan is administered by the Human Resources Committee of
the Board of Directors with respect to officers, executive officers and outside
directors and by a special committee with respect to all other eligible
employees and eligible nonemployees.
Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Media Group and one Communications Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
The maximum aggregate number of shares of Media Stock that may be granted in
any calendar year for all purposes under the Plan is three-quarters of one
percent (0.75 percent) of the shares of such class outstanding (excluding shares
held in U S WEST's treasury) on the first day of such calendar year. In the
C-52
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: STOCK INCENTIVE PLANS (CONTINUED)
event that fewer than the full aggregate number of shares of either class
available for issuance in any calendar year are issued in any such year, the
shares not issued shall be added to the shares of such class available for
issuance in any subsequent year or years. Options granted may be exercised no
later than 10 years after the grant date.
During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in earnings in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," was $1 and $3
in 1996 and 1995, respectively all of which related to Plan modifications. No
compensation expense was recognized in 1994.
U S WEST has adopted the disclosure provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation," but continues to account for the Plan under APB
Opinion No. 25. Had compensation cost for the Plan been determined consistent
with the fair value based accounting method under SFAS No. 123, Media Group pro
forma net income (loss) and earnings (loss) per share would have been the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1995
------------------------ --------------------------
LOSS PER EARNINGS
NET LOSS SHARE NET INCOME PER SHARE
----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
As reported.................................... $ (71) $ (0.16) $ 141 $ 0.29
Pro forma...................................... (82) (0.18) 140 0.29
</TABLE>
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the option's vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
C-53
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: STOCK INCENTIVE PLANS (CONTINUED)
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
in 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Risk-free interest rate......................................................... 6.30% 6.00%
Expected life................................................................... 5.0 years 5.0 years
Expected volatility............................................................. 28.5% 28.5%
</TABLE>
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
MEDIA GROUP U S WEST, INC.
------------------------- ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES* PRICE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding January 1, 1994.......................... 5,301,539 $ 39.76
----------- -----------
Granted............................................ 2,438,409 36.15
Exercised.......................................... (139,762) 33.72
Canceled or expired................................ (214,149) 40.71
----------- -----------
Outstanding December 31, 1994........................ 7,386,037 $ 38.66
----------- -----------
Granted(1)......................................... 4,814,856 41.12
Exercised.......................................... (430,631) 34.03
Canceled or expired(1)............................. (1,927,083) 37.02
----------- -----------
Outstanding October 31, 1995......................... 9,843,179 $ 40.39
----------- -----------
Recapitalization Plan................................ 9,843,179 $ 16.28 (9,843,179) $ (40.39)
------------ ----------- ----------- -----------
----------- -----------
Granted............................................ 71,580 18.51
Exercised.......................................... (191,243) 14.71
Canceled or expired................................ (15,350) 16.82
------------ -----------
Outstanding December 31, 1995........................ 9,708,166 $ 16.33
------------ -----------
Granted............................................ 5,523,728 19.36
Exercised.......................................... (507,329) 14.93
Canceled or expired................................ (610,471) 17.86
------------ -----------
Outstanding December 31, 1996........................ 14,114,094 $ 17.49
------------ -----------
------------ -----------
</TABLE>
- ------------------------------
* Includes options granted in tandem with SARs.
(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e. stock grant).
Options to purchase 4,867,207 and 3,021,166 shares of Media stock at
weighted-average exercise prices of $16.74 and $14.89 were exercisable at
December 31, 1996 and 1995, respectively.
C-54
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
---------------------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------------------------------------- ------------ ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$10.10 - $14.46.......................... 3,009,307 6.81 $ 14.23 937,900 $ 13.73
$14.51 - $16.93.......................... 2,920,683 6.86 15.75 1,608,658 15.38
$16.98 - $17.88.......................... 2,827,829 8.63 17.64 928,958 17.63
$17.94 - $20.50.......................... 2,938,175 8.10 19.85 1,391,691 19.74
$20.63 - $21.13.......................... 2,418,100 9.24 20.63 -- --
------------ --- ----------- ---------- -----------
Total................................ 14,114,094 7.87 $ 17.49 4,867,207 $ 16.74
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 5,523,728 and 4,886,436 Media Group options were granted in 1996
and 1995, respectively, of which 249,827 and 1,751,936 were modified options
revalued as new grants. The weighted-average grant date fair value of Media
Group options granted during the year, inclusive of modified options, using the
Black-Scholes option-pricing model was $7.10 and $6.07 for 1996 and 1995,
respectively. Excluding the modifications, the weighted-average grant date fair
value was $7.23 and $6.45, respectively. The exercise price of Media Group stock
options, excluding modified options, equals the market price on the grant date.
The exercise prices of modified stock options may be greater or less than the
market price on the revaluation date.
Approximately 2,200,000 and 1,420,000 shares of Media Stock were available
for grant under the plans in effect at December 31, 1996 and 1995, respectively.
Approximately 16,314,000 shares of Media Stock were reserved for issuance under
the Plan at December 31, 1996.
NOTE 16: EMPLOYEE BENEFITS
PENSION PLAN
The Communications Group and the Media Group participate in the defined
benefit pension plan sponsored by U S WEST. The employees of the Media Group are
covered by the plan, except for Atlanta Systems and foreign national employees.
Effective January 1, 1997, Continental's defined benefit pension plan was merged
into the U S WEST plan. Since plan assets are not segregated into separate
accounts or restricted to providing benefits to employees of the Media Group,
assets of the plan may be used to provide benefits to employees of both the
Communications Group and the Media Group. In the event the single employer
pension plan sponsored by U S WEST would be separated into two or more plans,
guidelines in the Internal Revenue Code dictate how assets of the plan must be
allocated to the new plans. U S WEST currently has no intentions to split the
plan. Because of these factors, U S WEST believes there is no reasonable basis
to attribute plan assets to the Media Group as if it had funded separately its
actuarially determined obligation.
Management benefits are based on a final pay formula while occupational
benefits are based on a flat benefit formula. U S WEST uses the projected unit
credit method for the determination of pension cost
C-55
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
for financial reporting purposes and the aggregate cost method for funding
purposes. The Company's policy is to fund amounts required under the Employee
Retirement Income Security Act of 1974 ("ERISA") and no funding was required in
1996, 1995 or 1994. Should funding be required in the future, funding amounts
would be allocated to the Media Group based upon the ratio of service cost of
the Media Group to total service cost of plan participants.
The composition of the net pension cost (credit) and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost -- benefits earned during the period....................... $ 203 $ 173 $ 197
Interest cost on projected benefit obligation........................... 575 558 561
Actual return on plan assets............................................ (1,509) (1,918) 188
Net amortization and deferral........................................... 726 1,185 (946)
--------- --------- ---------
Net pension cost (credit)................................................. $ (5) $ (2) $ 0
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1996, 1995 and 1994.
The funded status of the U S WEST plan follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of
$6,544 and $5,839, respectively................................................... $ 7,446 $ 6,617
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds.............................. $ 10,958 $ 9,874
Less: Projected benefit obligation................................................. 8,310 8,450
--------- ---------
Plan assets in excess of projected benefit obligation.............................. 2,648 1,424
Unrecognized net (gain)............................................................ (1,502) (101)
Prior service cost not yet recognized in net periodic pension cost................. 31 (62)
Balance of unrecognized net asset at January 1, 1987............................... (626) (705)
--------- ---------
Prepaid pension cost............................................................... $ 551 $ 556
--------- ---------
--------- ---------
</TABLE>
C-56
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate.................................................................................. 7.50% 7.00%
Weighted-average rate of compensation increase................................................. 5.50% 5.50%
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
ALLOCATION OF PENSION COSTS. U S WEST's allocation policy is to: 1) offset
the Company-wide service cost, interest cost and amortization by the return on
plan assets; and 2) allocate the remaining net pension cost to the Media Group
based on the ratio of actuarially determined service cost of the Media Group to
total service cost of plan participants. U S WEST believes allocating net
pension cost based on service cost is reasonable since service cost is a primary
factor in determining pension cost. Net pension costs allocated to the Media
Group were $0 in 1996, 1995 and 1994. The service and interest costs attributed
to the Media Group for 1996 were $25 and $72, respectively, and the projected
benefit obligation at December 31, 1996 was $1,081.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Communications Group and the Media Group participate in plans sponsored
by U S WEST which provide certain health care and life insurance benefits to
retired employees. In conjunction with U S WEST's 1992 adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," U S
WEST elected to immediately recognize the accumulated postretirement benefit
obligation for current and future retirees.
U S WEST uses the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost -- benefits earned during the period.............................. $ 70 $ 65 $ 75
Interest on accumulated benefit obligation..................................... 259 267 260
Actual return on plan assets................................................... (231) (415) 4
Net amortization and deferral.................................................. 68 286 (99)
--------- --------- ---------
Net postretirement benefit costs............................................... $ 166 $ 203 $ 240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1996, 1995 and 1994.
C-57
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
The funded status of the plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees........................................................................... $ 2,255 $ 2,137
Fully eligible plan participants................................................... 347 327
Other active plan participants..................................................... 1,289 1,224
--------- ---------
Total accumulated postretirement benefit obligation.................................. 3,891 3,688
Unrecognized net gain................................................................ 534 539
Unamortized prior service cost....................................................... 32 (34)
Fair value of plan assets, primarily stocks, bonds and life insurance(1)............. (2,063) (1,845)
--------- ---------
Accrued postretirement benefit obligation............................................ $ 2,394 $ 2,348
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155
and $94, respectively, in 1996, and $210 and $112, respectively, in 1995.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
Discount rate......................................................................... 7.50% 7.00%
Medical cost trend rate*.............................................................. 8.00% 9.00%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5.5
percent in 2011.
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1996 net postretirement benefit cost by approximately $27 and
increased the 1996 accumulated postretirement benefit obligation by
approximately $299.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
PLAN ASSETS. Assets of the postretirement medical and life plans may be
used to provide benefits to employees of both the Communications Group and the
Media Group since plan assets are not legally restricted to providing benefits
to either Group. In the event that either plan sponsored by U S WEST would be
separated into two or more plans, there are no guidelines in the Internal
Revenue Code for allocating assets of the plan. U S WEST currently has no
intention to split the plans. For purposes of determining benefit costs, U S
WEST allocates the assets based on historical contributions for postretirement
medical costs, and on the ratio of Group to total salaries for life plan
participants.
POSTRETIREMENT MEDICAL AND LIFE COSTS. The service and interest components
of net postretirement medical benefit costs are calculated for the Media Group
based on the population characteristics of the Group. Since funding of
postretirement medical costs is voluntary, return on assets is attributed to the
Media Group based on historical funding. The Media Group has historically funded
the maximum annual
C-58
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: EMPLOYEE BENEFITS (CONTINUED)
tax deductible contribution for management employees and the amount of annual
expense for occupational employees. The Media Group periodically reviews its
funding strategy and future funding amounts, if any, will be based upon the cash
requirements of the Group.
Net postretirement life costs, and funding requirements, if any, are
allocated to the Media Group in the same manner as pension costs. U S WEST will
generally fund the amount allowed for tax purposes. No funding of postretirement
life insurance occurred in 1996, 1995 and 1994. U S WEST believes its method of
allocating postretirement life costs is reasonable.
Net postretirement medical benefit and life costs recognized by the Media
Group for 1996, 1995 and 1994 were $12, $14 and $11, respectively. The
percentage of postretirement medical assets attributed to the Media Group at
December 31, 1996 and 1995, based upon historical voluntary contributions, was 4
percent. The aggregate accumulated postretirement medical and life benefit
obligation attributable to the Media Group was $199 at December 31, 1996.
NOTE 17: INCOME TAXES
The components of the provision (benefit) for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current.............................................................. $ 61 $ 47 $ 50
Deferred............................................................. (92) 48 104
--- --------- ---------
(31) 95 154
Foreign:
Current.............................................................. 2 6 --
Deferred............................................................. 30 33 14
--- --------- ---------
32 39 14
State and local:
Current.............................................................. 8 8 (6)
Deferred............................................................. (11) 21 42
--- --------- ---------
(3) 29 36
--- --------- ---------
Provision (benefit) for income taxes................................... $ (2) $ 163 $ 204
--- --------- ---------
--- --------- ---------
</TABLE>
U S WEST paid $693, $566 and $313 for income taxes in 1996, 1995 and 1994,
respectively, inclusive of the capital assets segment, of which $60, $55 and
($178) related to the Media Group.
C-59
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
NOTE 17: INCOME TAXES (CONTINUED)
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN PERCENT)
Federal statutory tax rate.......................................... 35.0 35.0 35.0
Foreign taxes -- net of federal effect.............................. (28.2) 8.3 1.9
State income taxes -- net of federal effect......................... 2.7 6.1 4.9
Amortization of goodwill............................................ (19.9) 2.5 --
Leverage lease rate adjustment...................................... 14.6 -- --
Other............................................................... (1.5) 1.1 0.7
--------- --------- ---------
Effective tax rate.................................................. 2.7 53.0 42.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
"Other" tax rate adjustments include prior period adjustments, meals and
entertainment expense disallowance, lobbying expense disallowance and
miscellaneous other deductions and disallowances.
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.............................................. $ 384 $ 107
Leases..................................................................... 673 662
State deferred taxes -- net of federal effect.............................. 956 178
Intangible assets.......................................................... 2,415 112
Investments................................................................ 373 213
Other...................................................................... 57 12
--------- ---------
Deferred tax liabilities................................................. 4,858 1,284
--------- ---------
Postemployment benefits, including pension................................. 34 22
Assets held for sale and other............................................. 138 98
Currency translation....................................................... 22 15
Start-up expenditures...................................................... 13 17
Net operating loss and tax credit carryforwards............................ 466 --
Valuation allowance........................................................ (387) --
State deferred taxes -- net of federal effect.............................. 99 33
Other...................................................................... 244 55
--------- ---------
Deferred tax assets...................................................... 629 240
--------- ---------
Net deferred tax liability................................................. $ 4,229 $ 1,044
--------- ---------
--------- ---------
</TABLE>
In connection with the Continental Merger, Media Group acquired net
operating loss carryforwards of approximately $1,164 for federal income tax
purposes, expiring in various years through 2011. Media Group also acquired
investment tax credit carryforwards of approximately $50, expiring in various
years through 2005. A valuation allowance of $387 has been established for the
carryforwards due to limitations on utilization which exist for U S WEST. If in
future periods the realization of the carryforwards becomes
C-60
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17: INCOME TAXES (CONTINUED)
more likely than not, any reduction in the valuation allowance will be allocated
to reduce goodwill and acquired intangible assets.
The current portion of the deferred tax asset was $42 and $24 at December
31, 1996 and 1995, respectively, resulting primarily from compensation-related
items.
The net deferred tax liability includes $671 and $686 in 1996 and 1995,
respectively, related to the capital assets segment.
In 1996 and 1995 foreign operations contributed pretax losses of $315 and
$35, respectively, in 1994 foreign operations contributed pretax earnings of
$43.
NOTE 18: RELATED PARTY TRANSACTIONS
CUSTOMER LISTS, BILLING AND COLLECTION AND OTHER SERVICES. The domestic
publishing operations purchase customer lists, billing and collection and other
services from the Communications Group. The data and services are purchased at
market price. The charges for these services were $17, $20 and $29 in 1996, 1995
and 1994, respectively.
TELECOMMUNICATIONS SERVICES. The domestic wireless operations purchase
telecommunications network access and usage from the Communications Group. The
services are purchased at market price or fully distributed cost. The charges
for these services were $43, $40 and $30 in 1996, 1995 and 1994, respectively.
CABLE TELEVISION PROGRAMMING. The domestic cable operations purchase cable
television programming from TWE. The programming is purchased at market price.
The charges for these services were $23 and $10 in 1996 and 1995, respectively.
NOTE 19: COMMITMENTS AND CONTINGENCIES
U S WEST has commitments and debt guarantees associated with its
international investments in the principal amount of approximately $700. In
addition, a wholly owned subsidiary of U S WEST guarantees debt associated with
its international investment in the principal amount of approximately $350. U S
WEST also guarantees approximately $170 in commitments related to its domestic
investments.
Continental and the Federal Communications Commission have entered into a
"social contract" as an alternative form of rate regulation for cable operators.
The social contract is a six-year agreement covering all of Continental
franchises. The social contract requires Continental to, among other things,
invest at least $1.7 billion in domestic system rebuilds and upgrades through
2000 to expand channel capacity and improve system reliability and picture
quality. At December 31, 1996, $870 is remaining on this commitment.
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE
The Combined Financial Statements of the Media Group include the
discontinued operations of the capital assets segment. During the second quarter
of 1993, the U S WEST Board approved a plan to dispose of the capital assets
segment through the sale of segment assets and businesses. The capital assets
segment includes activities related to financial services and financial
guarantee insurance operations. Also included in the segment is U S WEST Real
Estate, Inc., for which disposition was announced in 1991.
C-61
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
and Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a "net investment in assets held for sale." The net
realizable value of the assets is reevaluated on an ongoing basis with
adjustments to the existing reserve, if any, charged to continuing operations.
No such adjustment was required in 1996 or 1995. Prior to January 1, 1995, the
entire capital assets segment was accounted for as discontinued operations in
accordance with APB Opinion No. 30.
Through a series of transactions in 1995 and 1994, Media Group reduced its
ownership in FSA to 50.3 percent and its voting interest to 41.7 percent. During
the second quarter of 1996, Media Group received $98 from the sale of 3,750,000
shares of FSA common stock. This sale reduced Media Group's ownership in FSA to
approximately 40 percent. Also in second-quarter 1996, U S WEST issued DECS due
May 15, 1999. The shares of FSA to be delivered upon maturity of the DECS,
combined with the exercise of outstanding options held by Fund American
Enterprises Holdings, Inc. to purchase FSA shares would, if consummated, result
in a complete disposition of Media Group's ownership in FSA. (See Note 9 -- Debt
- -- to the U S WEST Media Group Combined Financial Statements.)
In fourth-quarter 1995, U S WEST issued DECS to reduce its investment in
Enhance Financial Services Group, Inc. ("Enhance") by December 1998. The shares
of Enhance to be delivered upon maturity of the DECS would, if consummated,
result in a complete disposition of Media Group's ownership in Enhance. (See
Note 9 -- Debt -- to the U S WEST Media Group Combined Financial Statements.)
U S WEST Real Estate, Inc. has sold various assets for proceeds of $156,
$120 and $327 in each of the three years ended December 31, 1996, respectively.
The sales proceeds were in line with estimates. Proceeds from sales were
primarily used to repay related debt. Media Group expects to substantially
complete the liquidation of this portfolio by 1998. The remaining balance of
assets subject to sale is approximately $287, net of reserves, as of December
31, 1996.
Building sales and operating revenues of the capital assets segment were
$223, $237 and $553 in 1996, 1995 and 1994, respectively. Subsequent to June 1,
1993, income (loss) from the capital assets segment is being deferred and is
included within the reserve for assets held for sale.
The assets and liabilities of the capital assets segment have been
separately classified on the Combined Balance Sheets as net investment in assets
held for sale.
C-62
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
The components of net investment in assets held for sale follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 21 $ 38
Finance receivables -- net............................................... 869 953
Investment in real estate -- net of valuation allowance.................. 182 368
Bonds, at market value................................................... 146 149
Investment in FSA........................................................ 326 384
Other assets............................................................. 165 177
--------- ---------
Total assets............................................................. $ 1,709 $ 2,069
--------- ---------
--------- ---------
LIABILITIES
Debt..................................................................... $ 481 $ 796
Deferred income taxes.................................................... 671 686
Accounts payable, accrued liabilities and other.......................... 137 148
Minority interests....................................................... 11 10
--------- ---------
Total liabilities........................................................ 1,300 1,640
--------- ---------
Net investment in assets held for sale................................... $ 409 $ 429
--------- ---------
--------- ---------
</TABLE>
Finance receivables primarily consist of contractual obligations under
long-term leases that Media Group intends to run off. These long-term leases
consist mostly of leveraged leases related to aircraft and power plants. For
leveraged leases, the cost of the assets leased is financed primarily through
nonrecourse debt which is netted against the related lease receivable.
The components of finance receivables follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Receivables................................................................ $ 821 $ 921
Unguaranteed estimated residual values..................................... 444 447
--------- ---------
1,265 1,368
Less: Unearned income...................................................... 380 390
Credit loss and other allowances...................................... 16 25
--------- ---------
Finance receivables -- net................................................. $ 869 $ 953
--------- ---------
--------- ---------
</TABLE>
Investments in debt securities are classified as available for sale and are
carried at market value. Any resulting unrealized holding gains or losses, net
of applicable deferred income taxes, are reflected as a component of Media Group
equity.
The amortized cost of $147 and $149 at December 31, 1996 and 1995,
respectively, of investments in debt securities approximates market value. 1996
net unrealized losses of $7 (net of deferred taxes of $5) and 1995 net
unrealized gains of $39 (net of deferred taxes of $21), are included in Media
Group equity.
C-63
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
DEBT
Interest rates and maturities of debt associated with the capital assets
segment at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
----------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1997 1998 1999 2000 2001 1996 1995
- ------------------------------------------------ --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Above 5% to 6%.................................. $ -- $ -- $ -- $ -- $ -- $ -- $ 10
Above 6% to 7%.................................. 15 -- -- -- -- 15 54
Above 7% to 8%.................................. -- -- -- -- -- -- 5
Above 8% to 9%.................................. -- -- 150 4 -- 154 138
Above 9% to 10%................................. -- 5 -- -- -- 5 53
Above 10% to 11%................................ -- -- -- -- -- -- 29
--------- --------- --------- --------- --------- --------- ---------
$ 15 $ 5 $ 150 $ 4 $ -- 174 289
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Allocated to the capital assets
segment -- net................................ 307 507
--------- ---------
Total........................................... $ 481 $ 796
--------- ---------
--------- ---------
</TABLE>
Debt of $71 at December 31, 1995, was collateralized by first deeds of trust
on associated real estate and assignment of rents from leases.
The following table summarizes terms of swaps associated with the capital
assets segment. Variable rates are indexed to three- and six-month LIBOR.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
DECEMBER 31,
--------------------------------------------------
1995
1996 -------------------------------------
-------------------------------------------------- WEIGHTED-
WEIGHTED- AVERAGE RATE AVERAGE
RATE
NOTIONAL ---------------------- NOTIONAL -----------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE
----------- ------------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed(1).............. $ 350 1997 5.55 9.01 $ 380 1996-1997 5.96
Fixed to variable(1).............. 350 1997 7.32 5.61 380 1996-1997 7.29
Variable-rate basis
adjustment(2)................... 10 1997 6.42 5.81 10 1997 5.92
<CAPTION>
PAY
---------
<S> <C>
Variable to fixed(1).............. 9.03
Fixed to variable(1).............. 5.87
Variable-rate basis
adjustment(2)................... 5.85
</TABLE>
- ------------------------------
(1) The fixed to variable swaps have the same terms as the variable to fixed
swaps and were entered into to terminate the variable to fixed swaps. The
net loss on the swaps is deferred and amortized over the remaining life of
the swaps and is included in the reserve for assets held for sale.
(2) Variable-rate debt based on U.S. Treasury rates is swapped to a
LIBOR-based interest rate.
C-64
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: NET INVESTMENT IN ASSETS HELD FOR SALE (CONTINUED)
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK -- FINANCIAL GUARANTEES
The Media Group retained certain risks in asset-backed obligations related
to the commercial real estate portfolio. The principal amounts insured on the
asset-backed obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TERMS OF MATURITY 1996 1995
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
0 to 5 Years................................................................. $ 416 $ 639
5 to 10 Years................................................................ 436 450
10 to 15 Years............................................................... 8 10
--------- ---------
Total........................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</TABLE>
Concentrations of collateral associated with insured asset-backed
obligations follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
TYPE OF COLLATERAL 1996 1995
- ----------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Commercial mortgages:
Commercial real estate..................................................... $ 341 $ 442
Corporate secured.......................................................... 519 657
--------- ---------
Total........................................................................ $ 860 $ 1,099
--------- ---------
--------- ---------
</TABLE>
ADDITIONAL FINANCIAL INFORMATION
Information for U S WEST Financial Services, Inc., a member of the capital
assets segment, follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
SUMMARIZED FINANCIAL INFORMATION 1996 1995 1994
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................... $ 26 $ 44 $ 54
Net finance receivables.......................................... 859 931 981
Total assets..................................................... 1,058 1,085 1,331
Total debt....................................................... 236 274 533
Total liabilities................................................ 998 1,024 1,282
Equity........................................................... 60 61 49
</TABLE>
C-65
<PAGE>
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Sales and other revenues............................... $ 613 $ 658 $ 694 $ 990
Income (loss) before income taxes...................... 20 2 39 (134)
Net income (loss)...................................... 3 (11) 18 (81)
Earnings (loss) per common share....................... -- (0.03) 0.04 (0.16)
1995
Sales and other revenues............................... $ 536 $ 585 $ 604 $ 649
Income before income taxes and extraordinary item...... 38 54 84 132
Income before extraordinary item....................... 15 25 33 72
Net income............................................. 15 25 29 72
Earnings per common share before
extraordinary item................................... 0.03 0.05 0.07 0.15
Earnings per common share.............................. 0.03 0.05 0.06 0.15
</TABLE>
Effective November 1, 1995, each share of U S WEST, Inc. common stock was
converted into one share each of Communications Stock and Media Stock. Earnings
per common share for 1995 have been presented on a pro forma basis to reflect
the two classes of stock as if they had been outstanding since January 1, 1995.
For periods prior to the recapitalization, the average common shares outstanding
are assumed to be equal to the average common shares outstanding for U S WEST,
Inc.
1996 second-quarter net income includes a charge of $19 ($0.04 per share)
related to the sale of the Company's cable television interests in Norway,
Sweden and Hungary. 1996 fourth-quarter net income includes net losses of $71
and losses available for common stock of $77 ($0.15 per share) related to the
Continental Merger.
1995 third-quarter net income includes costs of $5 ($0.01 per share)
associated with the Recapitalization Plan and costs of $4 ($.01 per share) for
the early extinguishment of debt. 1995 fourth-quarter net income includes a gain
of $95 ($0.20 per share) from the merger of U S WEST's joint venture interest in
Telewest. 1995 fourth-quarter net income also includes costs of $4 ($.01 per
share) associated with the Recapitalization Plan.
<TABLE>
<CAPTION>
MARKET PRICE
-------------------------------
HIGH LOW CLOSE
--------- --------- ---------
<S> <C> <C> <C>
(WHOLE DOLLARS)
PER SHARE MARKET DATA
1996
First quarter................................................ $ 23.000 $ 18.875 $ 20.625
Second quarter............................................... 21.000 16.875 18.250
Third quarter................................................ 18.875 14.375 16.875
Fourth quarter............................................... 19.875 15.375 18.375
1995
Fourth quarter(1)............................................ $ 20.000 $ 17.375 $ 19.000
</TABLE>
- ------------------------------
(1) Fourth-quarter 1995 per share market data is for the period November 1,
1995 through December 31, 1995.
C-66
<PAGE>
U S WEST MEDIA GROUP
(DOLLARS IN MILLIONS)
SUPPLEMENTARY SELECTED PROPORTIONATE RESULTS OF OPERATIONS
The Media Group believes that proportionate financial data facilitates the
understanding and assessment of its Combined Financial Statements. The following
proportionate accounting table reflects the relative weight of the Media Group's
ownership interest in its domestic and international investments in cable and
telecommunications, wireless and directory and information services operations.
The financial information included below departs materially from generally
accepted accounting principles ("GAAP") because it aggregates the revenues and
operating income of entities not controlled by the Media Group with those of the
consolidated operations of the Media Group. This table is not intended to
replace the Combined Financial Statements prepared in accordance with GAAP.
Supplemental Media Group information on a proportionate basis is presented in
Management's Discussion and Analysis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Sales and other revenues......................................... $ 6,367 $ 5,115 $ 4,213
Operating expenses............................................... 4,894 3,966 3,311
--------- --------- ---------
EBITDA(1)........................................................ 1,473 1,149 902
Depreciation and amortization.................................... 1,014 673 501
--------- --------- ---------
Operating income................................................. 459 476 401
Income (loss) before extraordinary item.......................... (71) 145 276
Net income (loss)................................................ $ (71) $ 141 $ 276
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) Earnings before interest, taxes, depreciation, amortization and other
("EBITDA"). EBITDA also excludes gains on asset sales, equity losses and
guaranteed minority interest expense.
C-67
<PAGE>
abcde
[LOGO]
PRINTED ON RECYCLED PAPER
<PAGE>
[LOGO]
COMMUNICATIONS GROUP PROXY CARD
- -----------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS ON JUNE 6, 1997.
The undersigned hereby appoints Pierson M. Grieve, Richard D. McCormick and
Marilyn Carlson Nelson, and each of them, proxies, with the powers the
undersigned would possess if personally present, and with full power of
substitution, to vote all common shares of the undersigned in U S WEST, Inc. at
the Annual Meeting to be held at the Marriott DTC Hotel, 4900 South Syracuse
Street, Denver, Colorado, beginning at 10:00 a.m., on June 6, 1997, and at any
adjournments or postponements thereof, upon all subjects that may properly come
before the Annual Meeting including the matters described in the Proxy Statement
furnished herewith, subject to any directions indicated on the reverse side of
this card. IF NO DIRECTIONS ARE GIVEN, THE PROXIES WILL VOTE FOR THE ELECTION OF
ALL LISTED NOMINEES, IN ACCORDANCE WITH THE DIRECTORS' RECOMMENDATIONS ON THE
OTHER SUBJECTS LISTED ON THE REVERSE SIDE OF THIS CARD AND AT THEIR DISCRETION
ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
Your vote for the election of Directors may be indicated on the reverse. The
nominees for Class III are Allan D. Gilmour, Frank Popoff, and Jerry O.
Williams.
<PAGE>
[LOGO]
To vote your shares for all Director nominees, mark the "For" box on item "A."
To withhold voting for all nominees, mark the "Withhold" box. If you do not wish
your shares voted "For" a particular nominee, mark the "For All Except" box and
enter the name(s) of the exception(s) in the space provided; your shares will be
voted for the remaining nominees.
- --------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "FOR"
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
A. For All Except
Election of Directors in Class III Exceptions For / / Withhold // / /
B. Ratification of Auditors For / / Against / / Abstain / /
C. Approval of Amendment to U S WEST Communications Group
Long-Term Incentive Plan For / / Against / / Abstain / /
D. Approval of Amendment to U S WEST 1994 Stock Plan For / / Against / / Abstain / /
- ------------------------------------------------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "AGAINST" THE SHAREHOLDER PROPOSAL REGARDING
- ------------------------------------------------------------------------------------------------------------------------
1. Elimination of Classified Board For / / Against / / Abstain / /
2. Initiation of Cumulative Voting For / / Against / / Abstain / /
</TABLE>
Date ________________________, 1997
Sign here as name appears
x _________________________________
x _________________________________
Please sign this proxy and return
promptly whether or not you plan to
attend the Annual Meeting.
<PAGE>
[LOGO]
MEDIA GROUP PROXY CARD
- -----------------------------------------------------
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS ON JUNE 6, 1997.
The undersigned hereby appoints Pierson M. Grieve, Richard D. McCormick and
Marilyn Carlson Nelson, and each of them, proxies, with the powers the
undersigned would possess if personally present, and with full power of
substitution, to vote all common shares of the undersigned in U S WEST, Inc. at
the Annual Meeting to be held at the Marriott DTC Hotel, 4900 South Syracuse
Street, Denver, Colorado, beginning at 10:00 a.m., on June 6, 1997, and at any
adjournments or postponements thereof, upon all subjects that may properly come
before the Annual Meeting including the matters described in the Proxy Statement
furnished herewith, subject to any directions indicated on the reverse side of
this card. IF NO DIRECTIONS ARE GIVEN, THE PROXIES WILL VOTE FOR THE ELECTION OF
ALL LISTED NOMINEES, IN ACCORDANCE WITH THE DIRECTORS' RECOMMENDATIONS ON THE
OTHER SUBJECTS LISTED ON THE REVERSE SIDE OF THIS CARD AND AT THEIR DISCRETION
ON ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING.
Your vote for the election of Directors may be indicated on the reverse. The
nominees for Class III are Allan D. Gilmour, Frank Popoff, and Jerry O.
Williams.
<PAGE>
[LOGO]
To vote your shares for all Director nominees, mark the "For" box on item "A."
To withhold voting for all nominees, mark the "Withhold" box. If you do not wish
your shares voted "For" a particular nominee, mark the "For All Except" box and
enter the name(s) of the exception(s) in the space provided; your shares will be
voted for the remaining nominees.
- --------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "FOR"
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
A. For All Except
Election of Directors in Class III Exceptions For / / Withhold // / /
B. Ratification of Auditors For / / Against / / Abstain / /
C. Approval of Amendment to U S WEST Communications Group
Long-Term Incentive Plan For / / Against / / Abstain / /
D. Approval of Amendment to U S WEST 1994 Stock Plan For / / Against / / Abstain / /
- ------------------------------------------------------------------------------------------------------------------------
DIRECTORS RECOMMEND A VOTE "AGAINST" THE SHAREHOLDER PROPOSAL REGARDING
- ------------------------------------------------------------------------------------------------------------------------
1. Elimination of Classified Board For / / Against / / Abstain / /
2. Initiation of Cumulative Voting For / / Against / / Abstain / /
</TABLE>
Date ________________________, 1997
Sign here as name appears
x _________________________________
x _________________________________
Please sign this proxy and return
promptly whether or not you plan to
attend the Annual Meeting.
