-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nVAckPNb/y+1y0XWEJOAGehPTNXN3Lg/J3JxTNBQwFkjBN0AXXMtJSrvmATTY6Eo wu7DmhR0jeYIJgcISeABUg== 0000950134-95-000310.txt : 19950612 0000950134-95-000310.hdr.sgml : 19950612 ACCESSION NUMBER: 0000950134-95-000310 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950307 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US WEST INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840926774 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08611 FILM NUMBER: 95519067 BUSINESS ADDRESS: STREET 1: 7800 E ORCHARD RD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037936629 MAIL ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-K405 1 FORM 10-K FISCAL YEAR ENDED 12/31/94 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 OR / / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8611 U S WEST, INC. A COLORADO I.R.S. EMPLOYER IDENTIFICATION CORPORATION NO. 84-0926774
7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111 TELEPHONE NUMBER (303) 793-6500 --------------------- Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE IN TITLE OF EACH CLASS WHICH REGISTERED - ---------------------------------------------------------------------------------------- Common Stock (without par value) New York Stock Exchange Pacific Stock Exchange Liquid Yield Option Notes, due 2011 New York Stock Exchange (convertible to common stock under certain circumstances)
--------------------- Securities registered pursuant to Section 12(g) of the Act: None At January 31, 1995, 468,435,778 shares of common stock were outstanding. At January 31, 1995, the aggregate market value of the voting stock held by non-affiliates was approximately $18,250,730,316. INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO . --- --- DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's 1994 Annual Report to Shareowners are incorporated by reference into Parts I, II and IV. Portions of the Registrant's definitive Proxy Statement dated March 16, 1995, to be issued in connection with the 1995 Annual Meeting of Shareowners are incorporated by reference into Parts II and III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X]. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS PART I
ITEM PAGE ---- ---- 1. Business...................................................................... 1 2. Properties.................................................................... 6 3. Legal Proceedings............................................................. 6 4. Submission of Matters to a Vote of Security Holders........................... 7 PART II 5. Market for the Registrant's Common Equity and Related Stockholder Matters..... 8 6. Selected Financial Data....................................................... 8 7. Management's Discussion and Analysis of Financial Condition and 8Results of Operations...................................................... 8 8. Consolidated Financial Statements and Supplementary Data...................... 8 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................ 8 PART III 10. Directors and Executive Officers of the Registrant............................ 8 11. Executive Compensation........................................................ 8 12. Security Ownership of Certain Beneficial Owners and Management................ 8 13. Certain Relationships and Related Transactions................................ 8 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............. 9 Independent Accountants' Report............................................... 14
i 3 PART I ITEM 1. BUSINESS. GENERAL U S WEST, Inc. ("U S WEST") was incorporated under the laws of the State of Colorado and has its principal executive offices at 7800 East Orchard Road, Englewood, Colorado 80111, telephone number (303) 793-6500. U S WEST is a diversified global communications company engaged in the telecommunications, directory publishing, marketing and, most recently, entertainment services businesses. Telecommunications services are provided by U S WEST's principal subsidiary, U S WEST Communications, Inc., to more than 25 million residential and business customers in the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming (collectively, the "U S WEST Region"). Directory publishing, marketing and entertainment services as well as cellular mobile communications services are provided by other U S WEST subsidiaries to customers both inside and outside the U S WEST Region. (Financial information concerning U S WEST's operations is set forth in the Consolidated Financial Statements and Notes thereto in the U S WEST 1994 Annual Report to Shareowners (the "1994 Annual Report"), which is incorporated herein by reference.) U S WEST and its subsidiaries had 61,505 employees at December 31, 1994. RECENT DEVELOPMENTS U S WEST COMMUNICATIONS Development of Multimedia Network. In 1993, U S WEST announced its intention to build a multimedia telecommunications network (the "Multimedia Network") capable of providing voice, data and video services to customers within the U S WEST Region. U S WEST expects that it will ultimately deliver a variety of integrated communications, entertainment and information services and other high speed digital services, including data applications, through the Multimedia Network in selected areas of the U S WEST Region. These integrated services, including video-on-demand, targeted advertising, home shopping, interactive games, high-definition broadcast television and two-way, video telephony are expected to become available over time as the Multimedia Network develops. U S WEST began limited testing of its Multimedia Network in Omaha, Nebraska in December, 1994. A market trial will begin in 1995 in an area that will cover up to 50,000 homes. U S WEST is seeking approval from the Federal Communications Commission (the "FCC") to install Multimedia Network architecture in several other cities within the U S WEST Region. The results of the technical and market trials will be incorporated into the network configuration and future service offerings. Re-engineering. U S WEST also announced in 1993 that U S WEST Communications would implement a plan (the "Re-engineering Plan") designed to provide faster, more responsive customer service and improved repair capabilities while reducing the costs of providing these services. Pursuant to the Re-engineering Plan, U S WEST Communications is developing new systems that will enable it to monitor networks to reduce the risk of service interruptions, activate telephone service on demand, provide automated inventory systems and centralize its service centers so that customers can have their telecommunications needs resolved with one phone call. U S WEST Communications is also gradually reducing its work force by approximately 9,000 employees and consolidating the operations of its existing 560 customer centers into 26 customer centers in ten cities. Implementation of the Re-engineering Plan is expected to extend into 1997, rather than being completed in 1996 as originally scheduled. In the third quarter of 1993, U S WEST accrued a one-time, after-tax charge of $610 million for costs associated with the Re-engineering Plan, including employee training costs, severance benefits, employee relocations costs and building preparation and system installation costs. While U S WEST estimates that total employee and related costs will be reduced upon completion of the Re-engineering Plan, these savings are expected to be offset by the effects of inflation. (See "Restructuring Charges" under Management's Discussion and Analysis of Financial Condition and Results of Operations on p. 14 of the 1994 Annual Report, which is incorporated by reference herein.) 1 4 Discontinuance of SFAS 71 Accounting. In 1993, U S WEST incurred a $3.1 billion non-cash, extraordinary charge, net of an income tax benefit of $2.3 billion, against its earnings in conjunction with its decision to discontinue accounting for the operations of U S WEST Communications in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"). SFAS 71 generally applies to regulated companies that meet certain requirements, including a requirement that a company be able to recover its costs, notwithstanding competition, by charging its customers at prices established by a regulator. U S WEST's decision to discontinue accounting for the operations of U S WEST Communications in accordance with SFAS 71 is based on the belief that the development of multimedia technology, competition and market conditions, more than prices established by regulators, will determine the future cost recovery by U S WEST Communications. As a result of this accounting change, the remaining asset lives of U S WEST Communications' telephone plant were shortened to more closely reflect the useful life of such plant. U S WEST Communications' financial reporting for regulatory purposes was not affected by the change. U S WEST Communications expects that it will continue to work with regulators to set appropriate prices that reflect changing market conditions, including shorter asset lives. CABLE INVESTMENTS On December 6, 1994, U S WEST purchased Wometco Cable Corp. and Georgia Cable Holdings (the "Atlanta Cable Properties") for $1.2 billion, consisting of $745 million in cash and $459 million in common stock. Together, the Atlanta Cable Properties serve about 65 percent of the cable customers in the metropolitan Atlanta area. U S WEST expects that it will eventually offer local exchange services as well as multimedia services in the Atlanta area as a result of this acquisition. In 1993, U S WEST acquired 25.51% pro rata priority capital and residual equity interests in Time Warner Entertainment Company, L.P. ("TWE") for an aggregate purchase price of approximately $2.55 billion, consisting of approximately $1.53 billion in cash and approximately $1.02 billion in the form of a four-year promissory note bearing interest at a rate of 4.391% per annum (the "TWE Investment"). TWE owns and operates substantially all of the filmed entertainment (including Warner Bros.), programming (including HBO and Cinemax) and cable operations previously owned and operated by Time Warner Inc. TWE is the second-largest domestic multiple system cable operator, owning or operating 22 of the top 100 cable systems in the United States. U S WEST has an option to increase its equity interests in TWE from 25.51% to 31.84%. The option is exercisable, in whole or in part, between January 1, 1999 and May 31, 2005 upon the attainment of certain earnings thresholds for an aggregate cash exercise price of $1.25 billion to $1.8 billion (depending on the year of exercise). At the election of U S WEST or TWE, the exercise price will be payable by surrendering a portion of the equity interests receivable upon exercise of such option. In connection with the TWE Investment, U S WEST acquired 12.75% of the common stock of Time Warner Entertainment Japan Inc., a joint venture company established to expand and develop the market for entertainment services in Japan. DOMESTIC WIRELESS SERVICES On July 25, 1994, AirTouch Communications ("AirTouch") and U S WEST announced an agreement to combine their domestic wireless operations. AirTouch's initial equity ownership of the wireless joint venture will be approximately 70 percent and U S WEST's will be 30 percent. This joint venture will provide U S WEST with an expanded wireless presence and economies of scale. The joint venture will have a presence in 9 of the top 20 cellular markets in the country. The transaction is expected to close in the second quarter of 1995 upon obtaining certain federal and state regulatory approvals. Each company's cellular operations initially will continue to operate as separate entities owned by the individual partners, but upon closing will report to a joint Wireless Management Company, which will provide support services. A merger of the two companies' operations will take place upon the earlier of four years from July 25, 1994, the lifting of certain MFJ restrictions, or at AirTouch's option. The agreement gives U S WEST strategic flexibility, including the right to exchange its interest in the joint venture for up to 19.9 percent of 2 5 AirTouch common stock, with any excess amounts to be received in the form of AirTouch non-voting preferred stock. A Partnership Committee, led by the president and chief operating officer of AirTouch and three other AirTouch representatives, three U S WEST representatives and one mutually agreed upon independent representative will oversee the companies' domestic cellular operations. On December 5, 1994, a partnership formed by the AirTouch/U S WEST joint venture and the Bell Atlantic/NYNEX partnership began bidding on personal communications services ("PCS") licenses that are being auctioned by the FCC. The combined companies own cellular licenses in 15 of the top 20 cities and serve over five million customers. The partnership, known as PCS PrimeCo, is eligible to bid for PCS licenses in 26 markets, representing more than 100 million POPS. This entity will be governed by a board made up of three members from the Bell Atlantic/NYNEX partnership and three members from the AirTouch/U S WEST joint venture. A second partnership will develop a national branding and marketing strategy and a common "look and feel" for both cellular and PCS customers. The cellular properties of Bell Atlantic/NYNEX will not be merged with those of AirTouch/U S WEST. PERSONAL COMMUNICATIONS SERVICES In 1993, Mercury One-2-One, a 50-50 joint venture between U S WEST and Cable & Wireless PLC, launched the world's first commercial PCS in the United Kingdom. Mercury One-2-One's PCS is a digital cellular communications service designed to offer consumers higher quality service, increased privacy and more features at lower prices than existing cellular communications systems. To meet growing customer demand, Mercury One-2-One has expanded its coverage to reach 30 percent of the U.K. population. TELEWEST INITIAL PUBLIC OFFERING In 1994, TeleWest Communications PLC ("TeleWest"), a venture with Tele-Communications, Inc., completed an initial public offering of its common stock. U S WEST's interest in TeleWest was reduced from 50 percent to 37.8 percent as a result of the offering, but based on the offering price, its interest is valued at U.S. $1.1 billion. TeleWest is the largest provider of combined cable television and telephone service in the world. The combined services are provided over a multimedia network which has been designed to provide a wide range of interactive and integrated entertainment, telecommunication and information services as they become available in the future. TeleWest owns all or part of 23 franchises that encompass 3.6 million homes. Through TeleWest, U S WEST has gained experience in packaging video and telephone service that it utilizes in other parts of the world. DISCONTINUANCE OF CAPITAL ASSETS SEGMENT In 1993, in connection with its decision to concentrate its resources and efforts on developing its telecommunications business, U S WEST determined to treat its capital assets business segment (the "Capital Assets segment") as a discontinued operation and announced its intention to dispose of the businesses comprising that segment. U S WEST's remaining business segment, "Communications and Related Services," comprises the continuing operations of U S WEST. U S WEST continues to make progress in disposing of its Capital Assets segment in accordance with its plan of disposition. In May, 1994, U S WEST sold 7.5 million shares of Financial Security Assurance Holdings Ltd. ("FSA"), including 2 million shares to Fund American Enterprises Holdings, Inc. ("FFC"), in an initial public offering of FSA common stock. In June, 1994, an additional 600,000 shares were issued in connection with an over-allotment option. U S WEST received $154 million in net proceeds from the offering. In conjunction with the sale of FSA shares to FFC, U S WEST issued 50,000 shares of a class of newly created cumulative redeemable preferred stock. FFC's voting rights in FSA increased to 21.0 percent through a combination of direct share ownership of common and preferred FSA shares and a voting trust agreement with U S WEST. U S WEST's voting rights are 49.8 percent. 3 6 During 1994, U S WEST Real Estate, Inc. continued the liquidation of its real estate portfolio, selling 12 buildings, six parcels of land and other assets for approximately $327 million U S WEST expects that the liquidation of this portfolio will be substantially completed by 1998. U S WEST'S CONTINUING OPERATIONS U S WEST Communications. U S WEST Communications was formed January 1, 1991, when Northwestern Bell Telephone Company ("Northwestern Bell") and Pacific Northwest Bell Telephone Company ("Pacific Northwest Bell") were merged into The Mountain States Telephone and Telegraph Company ("Mountain States"), which simultaneously changed its name to U S WEST Communications, Inc. U S WEST acquired ownership of Mountain Bell, Northwestern Bell and Pacific Northwest Bell on January 1, 1984, when American Telephone and Telegraph Company ("AT&T") transferred its ownership interests in these three wholly owned operating telephone companies to U S WEST. This divestiture was made pursuant to a court-approved consent decree entitled the "Modification of Final Judgment" ("MFJ") which arose out of an antitrust action brought by the United States Department of Justice against AT&T. Operations of U S WEST Communications. U S WEST Communications serves approximately 80% of the population in the U S WEST Region and approximately 40% of the land area. At December 31, 1994, U S WEST Communications had approximately 14,336,000 telephone network access lines in service, a 3.6% increase over year end 1993. Under the terms of the MFJ, the U S WEST Region was divided into 29 geographical areas called "Local Access and Transport Areas" ("LATAs") with each LATA generally centered on a metropolitan area or other identifiable community of interest. The principal types of telecommunications services offered by U S WEST Communications are (i) local service, (ii) exchange access service (which connects customers to the facilities of interLATA service providers), and (iii) intraLATA long distance network service. For the year ended December 31, 1994, local service, exchange access service and intraLATA long distance network service accounted for 37%, 27% and 12%, respectively, of the sales and other revenues of U S WEST's continuing operations. In 1994, revenues from a single customer, AT&T, accounted for approximately 10% of the sales and other revenues of U S WEST's continuing operations. U S WEST Communications incurred capital expenditures of approximately $2.45 billion in 1994 and expects to incur approximately $2.1 billion in 1995. The 1994 capital expenditures of U S WEST Communications were substantially devoted to the continued modernization of telephone plant, including investments in fiber optic cable, in order to improve customer services and network productivity. Central to U S WEST Communications' competitive strategy in 1994 were its efforts respecting the Multimedia Network and the Re-engineering Plan. See "Recent Developments -- U S WEST Communications." Regulation of U S WEST Communications. U S WEST Communications is subject to varying degrees of regulation by state commissions with respect to intrastate rates and service, and access charge tariffs. Under traditional rate of return regulation, intrastate rates are generally set on the basis of the amount of revenues needed to produce an authorized rate of return. U S WEST Communications has sought alternative forms of regulations ("AFOR") plans which provide for competitive parity, enhanced pricing flexibility and improved capability in bringing to market new products and services. In a number of states where AFOR plans have been adopted, such actions have been accompanied by requirements to refund revenues, reduce existing rates or upgrade service, any of which could have adverse short-term effects on earnings. Similar agreements may have resulted under traditional rate of return regulation. (See "State Regulatory Issues" under Management's Discussion and Analysis of Financial Condition and Results of Operations on p. 22 of the 1994 Annual Report, which is incorporated by reference herein.) U S WEST Communications is also subject to the jurisdiction of the FCC with respect to interstate access tariffs (that specify the charges for the origination and termination of interstate communications) and 4 7 other matters. U S WEST's interstate services have been subject to price cap regulation since January 1991. Price caps are a form of incentive regulation and, ostensibly, limit prices rather than profits. However, the FCC's price cap plan includes sharing of earnings in excess of authorized levels. The Company believes that competition will ultimately be the determining factor in pricing telecommunications services. (See "Federal Regulatory Issues" under Management's Discussion and Analysis of Financial Condition and Results of Operations on p. 21 of the 1994 Annual Report, which is incorporated by reference herein.) Congress failed to pass telecommunications reform legislation in 1994. It is expected that new telecommunications legislation will be introduced in 1995. However, there is uncertainty concerning the scope and the direction of that legislation. U S WEST believes that it is in the public interest to lift all competitive restrictions, placing all competitors under the same rules. Such action would lead to wider consumer choices, and ensure the industry's technological development and long-term financial health. Competition. U S WEST believes that the convergence of the communications, entertainment and information services businesses will lead to increased competition for U S WEST from companies in industries with which U S WEST did not historically compete. U S WEST Communications' principal competitors are competitive access providers ("CAPs") and interexchange carriers. In recent years, potential competitors have expanded to include cable television companies, combined cable television/telecommunications companies and cellular companies. Cable television companies are expected to increase competition by offering telecommunications and other information services. Combined cable television and telecommunications companies are expected to increase competition for local telephone and alternative exchange access services as well as those services expected to be available through the Multimedia Network. AT&T's entrance into the cellular communications market through its acquisition of McCaw Cellular Communications, Inc. may create increased competition in local exchange as well as cellular services. Currently, competition from long distance companies is eroding U S WEST Communications' market share of intraLATA long distance services such as Wide Area Telephone Service and "800." These revenues have steadily declined over the last several years as customers have migrated to interexchange carriers who have the ability to offer these services on both an intraLATA and interLATA basis. U S WEST and its affiliates are prohibited from providing interLATA long distance services. The impact of increased competition on the operations of U S WEST Communications will be influenced by the future actions of regulators and legislators who increasingly are advocating competition. The loss of local exchange customers to competitors would affect multiple revenue streams of U S WEST and could have a material adverse effect on its operations. Other U S WEST Subsidiaries and Investments. Other continuing operations include subsidiaries engaged in (i) publishing services, primarily "Yellow Pages" and other directories, (ii) designing, engineering and operating mobile telecommunications systems, (iii) cellular and land-line telecommunications, network infrastructure and cable television businesses in certain foreign countries, and (iv) entertainment services. U S WEST Marketing Resources Group, Inc. ("Marketing Resources"), which accounted for about 9% of U S WEST's 1994 revenues from continuing operations, publishes about 300 white and yellow page directories in the U S WEST Region. Marketing Resources competes with local and national publishers of directories, as well as other advertising media such as newspapers, magazines, broadcast media and direct mail. Marketing Resources intends to focus on enhancing core products, developing and packaging new information products through new and existing databases. U S WEST NewVector Group, Inc. ("NewVector"), which accounted for approximately 7% of U S WEST's 1994 revenues from continuing operations, provides communications and information products and services, including cellular services, over wireless networks in 31 Metropolitan Service Areas and 34 Rural Service Areas, primarily located in the U S WEST Region. Competition for full service cellular customers is currently limited to holders of the two cellular licenses granted in a given cellular market. Despite its rapid growth, the cellular industry is faced with many challenges including the introduction of new technologies, increased competition and an uncertain regulatory environment. In 1994, NewVector agreed to combine its domestic wireless services with those of AirTouch, and to be part of a partnership including AirTouch, Bell 5 8 Atlantic and NYNEX that would bid on PCS licenses that are being auctioned by the FCC. See "Recent Developments -- Domestic Wireless Services." U S WEST Multimedia Communications, Inc. ("Multimedia Communications") was formed to manage U S WEST's cable investments, and has primary responsibility for aiding U S WEST in achieving its strategic goal of becoming a leading provider of interactive, integrated communications, entertainment and information services outside the U S WEST Region. Multimedia Communications is also responsible for identifying and pursuing alliances, acquisitions and/or investments that complement U S WEST's strategy. U S WEST is seeking to strengthen its national out-of-region presence by acquiring or forming alliances with other communications, entertainment and information services companies throughout the United States. The first major step toward that goal was the TWE Investment made in 1993. More recently, U S WEST acquired the Atlanta Cable Properties. See "Recent Developments -- Cable Investments." U S WEST will continue to employ strategic alliances and will also make direct investments in assets or businesses that are consistent with its business strategies. Financing for new investments will primarily come from a combination of new debt and equity. In the event of a new investment of substantial magnitude, the Company may also re-evaluate its use of internally generated cash, the feasibility of further acquisitions, the possibility of sales of assets and the capital structure. During 1994, U S WEST continued expanding its international ventures, which include investments in cable television and telecommunications, wireless communications including PCS, directory publishing, and international networks. The Company completed its purchase of Thomson Directories, a publisher of 155 telephone directories that reach 80 percent of the households in Great Britain. The Company also purchased 49 percent of Listel, a Brazilian company that produces telephone directories, and acquired a minority interest in Binariang Sdn Bhd, a Malaysian telecommunications company that holds four licenses that enable it to become a second network operator in Malaysia. U S WEST's net investment in international ventures approximated $988 million (inclusive of consolidated entities) at December 31, 1994, approximately 68% of which is in the United Kingdom. Of the total international investment, approximately 53% is invested in cable television joint ventures, mostly in the United Kingdom and Western Europe. Because U S WEST's international investments are in new, developing businesses, they typically are in a high growth, reinvestment phase for several years and do not show net income or positive cash flow until they become more mature. Consequently, start-up losses from these investments, in total, are expected to increase in 1995 and possibly beyond. The Company's future commitment to international ventures is currently planned at about $400 million in 1995, but could increase as new opportunities become available. ITEM 2. PROPERTIES. The properties of U S WEST do not lend themselves to description by character and location of principal units. At December 31, 1994, the majority of U S WEST property was utilized in providing telecommunications services by U S WEST Communications. Substantially all of U S WEST Communications' central office equipment is located in owned buildings situated on land owned in fee, while many garages and administrative and business offices are in leased quarters. ITEM 3. LEGAL PROCEEDINGS. U S WEST and its subsidiaries are subject to claims and proceedings arising in the ordinary course of business. While complete assurance cannot be given as to the outcome of any contingent liabilities, in the opinion of U S WEST, any financial impact to which U S WEST and its subsidiaries are subject is not expected to be material in amount to U S WEST's operating results or its financial position. 6 9 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF U S WEST Pursuant to General Instructions G(3), the following information is included as an additional item in Part I:
DATE ASSUMED PRESENT POSITION AGE POSITION ---------------------------------- --- ------------ A. Gary Ames(1).......... President & Chief Executive 50 1990 Officer of U S WEST Communications James T. Anderson........ Vice President & Treasurer 55 1984 Richard J. Callahan...... Executive Vice President, 53 1988 U S WEST, & President, U S WEST International and Business Development Group Charles M. Lillis........ Executive Vice President & 53 1987 President and Chief Executive Officer, U S WEST Diversified Group C. Scott McClellan(2).... Acting Executive Vice President 46 1994 Richard D. McCormick..... Chairman of the Board, 54 1986(3) Chief Executive Officer & President James M. Osterhoff(4).... Executive Vice President & 58 1991 Chief Financial Officer Lorne G. Rubis........... Vice President 44 1992 Charles P. Russ, III..... Executive Vice President, 50 1992 General Counsel & Secretary Judith A. Servoss........ Vice President 49 1987 James H. Stever.......... Executive Vice President 51 1993
- --------------- (1) Mr. Ames, while not an officer of U S WEST, performs significant policy making functions equivalent to those typically performed by an officer. (2) Mr. McClellan was appointed Acting Executive Vice President effective October 10, 1994. (3) Mr. McCormick was appointed Chief Executive Officer on January 1, 1991, and was elected Chairman of the Board effective May 1, 1992. (4) Mr. Osterhoff has announced his retirement from U S WEST but will remain in his present position until a successor is named. Executive Officers are not elected for a fixed term of office, but serve at the discretion of the Board of Directors. Each of the above executive officers has held a managerial position with U S WEST or an affiliate of U S WEST since 1990, except for Messrs. Osterhoff, Rubis and Russ. Mr. Osterhoff was Vice President -- Finance and Chief Financial Officer of Digital Equipment Corporation from 1985 to 1991. Mr. Rubis was Vice President -- Quality for U S WEST International and Business Development Group, a division of U S WEST, from 1991 to 1992; Director -- Quality and Service Improvement for U S WEST NewVector Group, Inc., a subsidiary of U S WEST, from 1990 to 1991. Prior to joining the U S WEST family, Mr. Rubis worked as an independent labor relations consultant and as co-founder and principal of Workplace One, Ltd., a Canadian-based consulting firm, from 1979 to 1988. In 1988, he merged his firm with Deltapoint Corp., a Seattle-based Quality Improvement consulting firm. Mr. Russ was Vice President, Secretary and General Counsel of NCR Corporation from February, 1984 to June, 1992. 7 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required by this item is included on page 54 of the 1994 Annual Report under the heading "Note 18: Quarterly Financial Data (Unaudited)" and is incorporated herein by reference. The U.S. markets for trading in U S WEST common stock are the New York Stock Exchange and the Pacific Stock Exchange. As of December 31, 1994, U S WEST common stock was held by approximately 816,099 shareholders of record. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item is included on page 1 of the 1994 Annual Report under the heading "Financial Highlights" and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item is included on pages 7 through 31 of the 1994 Annual Report and is incorporated herein by reference. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item is included on pages 33 through 54 of the 1994 Annual Report and is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this item with respect to executive officers is set forth in Part I, page 10, under the caption "Executive Officers of U S WEST." The information required by this item with respect to Directors is included in the U S WEST definitive Proxy Statement dated March 16, 1995 ("Proxy Statement") under "Election of Directors" on pages 4 and 5 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is included in the Proxy Statement under "Executive Compensation" on pages 10 through 16 and "Compensation of Directors" on pages 2 and 3 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is included in the Proxy Statement under "Securities Owned by Management" on page 3 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable. 8 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following independent accountants' report and consolidated financial statements are incorporated by reference in Part II of this report on Form 10-K:
PAGE NUMBER OF ANNUAL REPORT ---------------- (1) Report of Independent Accountants.................................... 32 (2) Consolidated Financial Statements: Consolidated Statements of Operations -- for the years ended December 31, 1994, 1993 and 1992.............................................. 33 Consolidated Balance Sheets as of December 31, 1994 and 1993......... 34 Consolidated Statements of Cash Flows -- for the years ended December 31, 1994, 1993 and 1992.............................................. 35 Consolidated Statements of Shareowners' Equity for years ended December 31, 1994, 1993 and 1992..................................... 36 Notes to Consolidated Financial Statements........................... 37 through 54
PAGE NUMBER ---------------- (3) Consolidated Financial Statement Schedule: Report of Independent Accountants.................................... 14 II -- Valuation and Qualifying Accounts.............................. S-1
Financial statement schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto, or because such schedules are not required or applicable. (b) Reports on Form 8-K: U S WEST filed the following reports on Form 8-K during the fourth quarter of 1994: (i) report dated October 17, 1994 relating to a release of earnings for the period ended September 30, 1994; (ii) report dated December 8, 1994 announcing its plan to buy back stock, and the completion of the Atlanta Cable properties acquisition. 9 12 (c) Exhibits: Exhibits identified in parentheses below, on file with the Securities and Exchange Commission ("SEC"), are incorporated herein by reference as exhibits hereto.
EXHIBIT NUMBER - --------------------- (3a) -- Articles of Incorporation of U S WEST, Inc. dated September 22, 1983 (Exhibit 3a to Registration Statement No. 2-87861). (3a.1) -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated June 6, 1988 (Exhibit 3b to Form 10-K, date of report March 29, 1989, File No. 1-8611). (3a.2) -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated May 3, 1991 (Exhibit 3c to Form SE filed on March 5, 1992, File No. 1-8611). 3a.3 -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated September 1, 1994. (3b) -- Bylaws of the Registrant as amended August 5, 1994 (Exhibit 3-D to Form S-4 Registration Statement No. 33-55289 filed August 30, 1994). 4 -- No instrument which defines the rights of holders of long and intermediate term debt of U S WEST, Inc. and all of its subsidiaries is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10a) -- Reorganization and Divestiture Agreement dated as of November 1, 1983, between American Telephone and Telegraph Company and its affiliates, U S WEST, Inc., The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and NewVector Communications, Inc. (Exhibit 10a to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10b) -- Shared Network Facilities Agreement dated as of January 1, 1984, between American Telephone and Telegraph Company, AT&T Communications of the Midwest, Inc., The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company (Exhibit 10b to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10c) -- Agreement Concerning Termination of the Standard Supply Contract effective December 31, 1983, between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and Central Services Organization (Exhibit 10d to Form 10-K, date of report March 8, 1984, File No, 1-3501). (10d) -- Agreement Concerning Certain Centrally Developed Computer Systems effective December 31, 1983, between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and Central Services Organization (Exhibit 10e to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10e) -- Agreement Concerning Patents, Technical Information and Copyrights effective December 31, 1983, between American Telephone and Telegraph Company and U S WEST, Inc. (Exhibit 10f to Form 10-K, date of report March 8, 1984, File No. 1-3501).
10 13
EXHIBIT NUMBER - --------------------- (10f) -- AMPS Software Agreement effective December 31, 1983, between American Telephone and Telegraph Company and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 28, 1984, File No. 1-8611). (10g) -- Agreement Concerning Contingent Liabilities, Tax Matters and Termination of Certain Agreements dated as of November 1, 1983, between American Telephone and Telegraph Company, U S WEST, Inc., The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10h) -- Agreement Concerning Trademarks, Trade Names and Service Marks effective December 31, 1983, between American Telephone and Telegraph Company, American Information Technologies Corporation, Bell Atlantic Corporation, BellSouth Corporation, Cincinnati Bell, Inc., NYNEX Corporation, Pacific Telesis Group, The Southern New England Telephone Company, Southwestern Bell Corporation and U S WEST, Inc. (Exhibit 10i to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10i) -- U S WEST, Inc. Short-Term Incentive Plan (Exhibit 10i to Form 10-K filed March 19, 1993, File No. 1-8611). (10j) -- Financial Counseling Program for Officers of U S WEST (Exhibit 10-ee to Registration Statement No. 2-87861). (10k) -- U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration Statement No. 2-87861). (10l) -- Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance (Exhibit 10-gg to Registration Statement No. 2-87861). (10m) -- Extract from the U S WEST Management Pension Plan regarding limitations on and payments of pension amounts which exceed the limitations contained in the Employee Retirement Income Security Act (Exhibit 10-hh to Registration Statement No. 2-87861). (10n) -- U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March 29, 1989, File No. 1-8611). (10o) -- U S WEST Deferred Compensation Plan (Exhibit 10o to Form SE filed March 5, 1992, File No. 1-8611). (10p) -- Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March 5, 1992, File No. 1-8611). 10q -- U S WEST, Inc. 1994 Stock Plan. (10r) -- Shareholders' Agreement dated as of January 1, 1988 among Ameritech Services, Inc., Bell Atlantic Management Services, Inc., BellSouth Services Incorporated, NYNEX Service Company, Pacific Bell, Southwestern Bell Telephone Company, The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company (Exhibit 10r to Form SE filed March 5, 1992, File No. 1-8611). (10s) -- U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to Registration Statement No. 2-87861). (10t) -- U S WEST Mid-Career Pension Plan (Exhibit 10u to Form 10-K, date of report March 29, 1989, File No. 1-8611). 10u -- Form of U S WEST, Inc. Non-Qualified Stock Option Agreement. 10v -- Form of U S WEST, Inc. Restricted Stock Agreement.
11 14
EXHIBIT NUMBER - --------------------- 10w -- Employment letter from Richard D. McCormick to Charles P. Russ, III dated May 11, 1992. (10y) -- Assignment Agreement, dated July 13, 1993, between U S WEST Overseas Operations, Inc. and Richard J. Callahan (Exhibit (10a) to Form 10-Q filed November 5, 1993). (10z) -- Agreement for Services, dated July 13, 1993, between U S WEST, Inc. and Richard J. Callahan (Exhibit (10b) to Form 10-Q filed November 5, 1993). (10aa) -- Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and U S WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993). 10ab -- Form of Executive Change of Control Agreement. 10ac -- Form of Change of Control Agreement for Chief Executive Officer. 10ad -- U S WEST, Inc. Executive Long-Term Incentive Plan. 10ae -- U S WEST, Inc. Executive Short-Term Incentive Plan. 11 -- Statement Re Computation of Per Share Earnings. 12 -- Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial Services, Inc. 13 -- 1994 Annual Report to Shareowners. 21 -- Subsidiaries of U S WEST, Inc. 23 -- Consent of Independent Accountants. 24 -- Powers of Attorney. 27 -- Financial Data Schedule. 99a -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for Salaried Employees for the year ended December 31, 1994, to be filed by amendment. 99b -- Annual Report on Form 11-K for the U S WEST Savings and Security Plan/ESOP for the year ended December 31, 1994, to be filed by amendment.
12 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Englewood, State of Colorado, on March 7, 1995. U S WEST, Inc. By: /s/ JAMES M. OSTERHOFF James M. Osterhoff Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Principal Executive Officer /s/ RICHARD D. MCCORMICK* Chairman of the Board, President and Chief Executive Officer Principal Financial Officer: /s/ JAMES M. OSTERHOFF* Executive Vice President and Chief Financial Officer Directors: /s/ RICHARD B. CHENEY* /s/ REMEDIOS DIAZ-OLIVER* /s/ GRANT A. DOVE* /s/ ALLAN D. GILMOUR* /s/ PIERSON M. GRIEVE* /s/ SHIRLEY M. HUFSTEDLER* /s/ ALLEN F. JACOBSON* /s/ RICHARD D. MCCORMICK* /s/ MARILYN C. NELSON* /s/ FRANK P. POPOFF* /s/ GLEN L. RYLAND* /s/ JERRY O. WILLIAMS* /s/ DANIEL YANKELOVICH* *By: /s/ JAMES M. OSTERHOFF James M. Osterhoff (for himself and as Attorney-in-Fact)
Dated March 7, 1995 13 16 INDEPENDENT ACCOUNTANTS' REPORT Our report on the consolidated financial statements of U S WEST, Inc., which includes an explanatory paragraph regarding the discontinuance of accounting for the operations of U S WEST Communications, Inc. in accordance with Statement of Financial Accounting Standard No. 71, "Accounting for the Effects of Certain Types of Regulation," in 1993, and a change in the method of accounting for postretirement benefits other than pensions and other postemployment benefits in 1992, has been incorporated by reference in this Form 10-K from page 32 of the 1994 Annual Report to Shareowners of U S WEST, Inc. In connection with our audits or such consolidated financial statements, we have also audited the related consolidated financial statement schedules listed in the index on page 12 of this Form 10-K for the years ended December 31, 1994, 1993 and 1992. In our opinion, the consolidated financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ COOPERS & LYBRAND COOPERS & LYBRAND L.L.P. Denver, Colorado January 18, 1995 14 17 U S WEST, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN MILLIONS)
BALANCE AT CHARGED BALANCE AT BEGINNING CHARGED TO TO OTHER END OF OF PERIOD EXPENSE ACCOUNTS DEDUCTIONS PERIOD ---------- ---------- -------- ---------- ---------- CONTINUING OPERATIONS: ALLOWANCE FOR CREDIT LOSSES Year 1994........................................... $ 54 $ 91(a) $ 3 $ 86(b) $ 62 Year 1993........................................... 59 83(a) 1 89(b) 54 Year 1992........................................... 59 89(a) 11 100(b) 59 RESERVES RELATED TO 1993 BUSINESS RESTRUCTURING, INCLUDING FORCE AND FACILITY CONSOLIDATION Year 1993........................................... $935 $ 0 $ 0 $229 $706 Year 1993........................................... 0 1,000 0 65 935 RESERVES RELATED TO 1991 BUSINESS RESTRUCTURING, INCLUDING FORCE REDUCTIONS AND THE WRITE OFF OF CERTAIN INTANGIBLE ASSETS Year 1994........................................... $ 95 $ 0 $ 0 $ 95 $ 0 Year 1993........................................... 215 0 0 120 95 Year 1992........................................... 314 0 0 99 215 DISCONTINUED OPERATIONS: ALLOWANCE FOR CREDIT LOSSES Year 1994........................................... $ 64 $ 13 $ 0 $ 22(b) $ 55 Year 1993........................................... 63 149 (52)(c) 96(b) 64 Year 1992........................................... 62 20 7 26(b) 63 LOSS RESERVE ON FINANCIAL GUARANTEES(d) Year 1994........................................... $ 36 $ 40 $(36)(e) $ 0 $ 40 Year 1993........................................... 72 103 0 139 36 Year 1992........................................... 12 68 0 8 72 OTHER(f) Year 1994........................................... $ 0 $ 0 $ 0 $ 0 $ 0 Year 1993........................................... 86 0 3 89(c) 0 Year 1992........................................... 84 0 8 6 86 RESERVES RELATED TO 1991 BUSINESS RESTRUCTURING, INCLUDING REAL ESTATE VALUATION ALLOWANCE AND 1993 PROVISION FOR LOSS ON DISPOSAL OF THE CAPITAL ASSETS SEGMENT Year 1994........................................... $336 $ 0 $ 0 $217 $119 Year 1993........................................... 402 120(g) 0 186 336 Year 1992........................................... 500 0 0 98 402
- --------------- NOTE: Certain reclassifications within the schedule have been made to conform to the current year presentation. (a) Does not include amounts charged directly to expense. These amounts were $10, $10 and $9 for 1994, 1993 and 1992, respectively. (b) Represents credit losses written off during the period, less collection of amounts previously written off. (c) Primarily due to sale of U S WEST Financial Services finance receivables and assets. (d) The company adopted SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" in 1993. SFAS No. 113 requires reinsurance receivables to be reflected as assets rather than netted against the loss reserve. Prior years have been restated for comparability. (e) This amount relates to loss reserves of Financial Security Assurance at the beginning of 1994. Financial Security Assurance is now accounted for under the equity method. (f) Primarily valuation allowance related to the 1990 purchase of a $294 face amount mobile home loan portfolio for $197. (g) Provision for estimated loss on disposal of the Capital Assets segment of $100 and an additional provision of $20 to reflect the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. S-1 18 (U S WEST LOGO) (RECYCLED PAPER LOGO) RECYCLED PAPER 19 INDEX TO EXHIBITS
EXHIBIT PAGE NUMBER DESCRIPTION NUMBER - ------- ----------- ------ (3a) -- Articles of Incorporation of U S WEST, Inc. dated September 22, 1983 (Exhibit 3a to Registration Statement No. 2-87861). (3a.1) -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated June 6, 1988 (Exhibit 3b to Form 10-K, date of report March 29, 1989, File No. 1-8611). (3a.2) -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated May 3, 1991 (Exhibit 3c to Form SE filed on March 5, 1992, File No. 1-8611). 3a.3 -- Articles of Amendment to the Articles of Incorporation of U S WEST, Inc. dated September 1, 1994. (3b) -- Bylaws of the Registrant as amended August 5, 1994 (Exhibit 3-D to Form S-4 Registration Statement No. 33-55289 filed August 30, 1994). 4 -- No instrument which defines the rights of holders of long and intermediate term debt of U S WEST, Inc. and all of its subsidiaries is filed herewith pursuant to Regulation S-K, Item 601(b)(4)(iii)(A). Pursuant to this regulation, the Registrant hereby agrees to furnish a copy of any such instrument to the SEC upon request. (10a) -- Reorganization and Divestiture Agreement dated as of November 1, 1983, between American Telephone and Telegraph Company and its affiliates, U S WEST, Inc., The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and NewVector Communications, Inc. (Exhibit 10a to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10b) -- Shared Network Facilities Agreement dated as of January 1, 1984, between American Telephone and Telegraph Company, AT&T Communications of the Midwest, Inc., The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company (Exhibit 10b to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10c) -- Agreement Concerning Termination of the Standard Supply Contract effective December 31, 1983, between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and Central Services Organization (Exhibit 10d to Form 10-K, date of report March 8, 1984, File No, 1-3501). (10d) -- Agreement Concerning Certain Centrally Developed Computer Systems effective December 31, 1983, between American Telephone and Telegraph Company, Western Electric Company, Incorporated, The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and Central Services Organization (Exhibit 10e to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10e) -- Agreement Concerning Patents, Technical Information and Copyrights effective December 31, 1983, between American Telephone and Telegraph Company and U S WEST, Inc. (Exhibit 10f to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10f) -- AMPS Software Agreement effective December 31, 1983, between American Telephone and Telegraph Company and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 28, 1984, File No. 1-8611). (10g) -- Agreement Concerning Contingent Liabilities, Tax Matters and Termination of Certain Agreements dated as of November 1, 1983, between American Telephone and Telegraph Company, U S WEST, Inc., The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company, Pacific Northwest Bell Telephone Company and NewVector Communications, Inc. (Exhibit 10h to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10h) -- Agreement Concerning Trademarks, Trade Names and Service Marks effective December 31, 1983, between American Telephone and Telegraph Company, American Information Technologies Corporation, Bell Atlantic Corporation, BellSouth Corporation, Cincinnati Bell, Inc., NYNEX Corporation, Pacific Telesis Group, The Southern New England Telephone Company, Southwestern Bell Corporation and U S WEST, Inc. (Exhibit 10i to Form 10-K, date of report March 8, 1984, File No. 1-3501). (10i) -- U S WEST, Inc. Short-Term Incentive Plan (Exhibit 10i to Form 10-K filed March 19, 1993, File No. 1-8611). (10j) -- Financial Counseling Program for Officers of U S WEST (Exhibit 10-ee to Registration Statement No. 2-87861). (10k) -- U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit 10-ff to Registration Statement No. 2-87861). (10l) -- Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and Accident Insurance (Exhibit 10-gg to Registration Statement No. 2-87861). (10m) -- Extract from the U S WEST Management Pension Plan regarding limitations on and payments of pension amounts which exceed the limitations contained in the Employee Retirement Income Security Act (Exhibit 10-hh to Registration Statement No. 2-87861). (10n) -- U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K, date of report March 29, 1989, File No. 1-8611). (10o) -- U S WEST Deferred Compensation Plan (Exhibit 10o to Form SE filed March 5, 1992, File No. 1-8611). (10p) -- Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to Form SE filed March 5, 1992, File No. 1-8611). 10q -- U S WEST, Inc. 1994 Stock Plan. (10r) -- Shareholders' Agreement dated as of January 1, 1988 among Ameritech Services, Inc., Bell Atlantic Management Services, Inc., BellSouth Services Incorporated, NYNEX Service Company, Pacific Bell, Southwestern Bell Telephone Company, The Mountain States Telephone and Telegraph Company, Northwestern Bell Telephone Company and Pacific Northwest Bell Telephone Company (Exhibit 10r to Form SE filed March 5, 1992, File No. 1-8611). (10s) -- U S WEST Senior Management Long Term Disability and Survivor Protection Plan (Exhibit 10-dd to Registration Statement No. 2-87861). (10t) -- U S WEST Mid-Career Pension Plan (Exhibit 10u to Form 10-K, date of report March 29, 1989, File No. 1-8611). 10u -- Form of U S WEST, Inc. Non-Qualified Stock Option Agreement. 10v -- Form of U S WEST, Inc. Restricted Stock Agreement. 10w -- Employment letter from Richard D. McCormick to Charles P. Russ, III dated May 11, 1992. (10y) -- Assignment Agreement, dated July 13, 1993, between U S WEST Overseas Operations, Inc. and Richard J. Callahan (Exhibit (10a) to Form 10-Q filed November 5, 1993). (10z) -- Agreement for Services, dated July 13, 1993, between U S WEST, Inc. and Richard J. Callahan (Exhibit (10b) to Form 10-Q filed November 5, 1993). (10aa) -- Admission Agreement dated as of May 16, 1993 between Time Warner Entertainment Company, L.P. and U S WEST, Inc. (Exhibit 10 to Form 8-K filed May 24, 1993). 10ab -- Form of Executive Change of Control Agreement. 10ac -- Form of Change of Control Agreement for Chief Executive Officer. 10ad -- U S WEST, Inc. Executive Long-Term Incentive Plan. 10ae -- U S WEST, Inc. Executive Short-Term Incentive Plan. 11 -- Statement Re Computation of Per Share Earnings. 12 -- Computation of Ratio of Earnings to Fixed Charges of U S WEST, Inc. and U S WEST Financial Services, Inc. 13 -- 1994 Annual Report to Shareowners. 21 -- Subsidiaries of U S WEST, Inc. 23 -- Consent of Independent Accountants. 24 -- Powers of Attorney. 27 -- Financial Data Schedule. 99a -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for Salaried Employees for the year ended December 31, 1994, to be filed by amendment. 99b -- Annual Report on Form 11-K for the U S WEST Savings and Security Plan/ESOP for the year ended December 31, 1994, to be filed by amendment.
EX-3.A3 2 ARTICLES OF INCORPORATION 9/22/83 1 PAGE 1 EXHIBIT 3a.3 ARTICLES OF INCORPORATION OF U S WEST, INC. FILED WITH THE COLORADO SECRETARY OF STATE ON SEPTEMBER 22, 1983 As Last Amended on September 1, 1994 2 PAGE 2 [STATE SEAL] STATE OF COLORADO DEPARTMENT OF STATE CERTIFICATE I, NATALIE MEYER, Secretary of State of the State of Colorado hereby certify that ACCORDING TO THE RECORDS OF THIS OFFICE, ARTICLES OF AMENDMENT WERE FILED ON SEPTEMBER 1, 1994 DESIGNATING SERIES OF STOCK FOR U S WEST, INC. (COLORADO CORPORATION) Dated: SEPTEMBER 1, 1994 /s/ NATALIE MEYER - ------------------------- SECRETARY OF STATE 3 PAGE 3 CERTIFICATE OF DESIGNATIONS OF SERIES B CUMULATIVE REDEEMABLE PREFERRED STOCK $1.00 Par Value of US WEST, Inc. Pursuant to Section 7-106-102 of the Business Corporation Act of the State of Colorado We, James T. Anderson, Vice President and Treasurer, and Stephen E. Brilz, Assistant Secretary, of U S WEST, Inc. (the "Corporation"), a corporation organized and existing under the Business Corporation Act of the State of Colorado, in accordance with the provisions of Section 7-106-102 thereof, DO HEREBY CERTIFY: That pursuant to the authority conferred upon the Board of Directors by the Articles of Incorporation of the Corporation, the Board of Directors on May 6, 1994, adopted the following resolutions creating a series of fifty thousand (50,000) shares of Preferred Stock, par value $1.00 per share, designated as Series B Cumulative Redeemable Preferred Stock: RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of its Articles of Incorporation, a series of Preferred Stock of the Corporation be, and it hereby is, created, and that the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof, are as follows: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as Series B Cumulative Redeemable Preferred Stock, par value $1.00 per share (the "Series B Preferred Stock"), and the number of shares constituting such series shall be fifty thousand (50,000). Section 2. DIVIDENDS. (a) The holders of shares of the Series B Preferred Stock shall be entitled to receive, when, as and if declared by the 4 PAGE 4 Board of Directors out of funds of the Corporation legally available thereof, cumulative cash dividends on the shares of the Series B Preferred Stock at the rate of $70.00 per annum per share, and no more, payable in equal quarterly installments on the first business day of November, February, May and August, in each year, commencing on the first business day of November, 1994. Such dividends shall accrue and be cumulative from the date of original issue of each share of the Series B Preferred Stock, whether or not declared and whether or not there shall be funds legally available for the payment thereof. Each such dividend shall be paid to the holders of record of the shares of the Series B Preferred Stock as they appear on the share register of the Corporation on such record date, not more than 30 days nor less than 10 days preceding the dividend payment date thereof, as shall be fixed by the Board of Directors or a duly authorized committee thereof. Dividends in arrears may be declared and paid at any time without reference to any regular dividend payment date. (b) If dividends are not paid in full, or declared in full and sums set apart for the full payment thereof, upon the shares of the Series B Preferred Stock and shares of any other preferred stock ranking on a parity as to dividends with the Series B Preferred Stock, all dividends declared upon shares of the Series B Preferred Stock and of any other preferred stock ranking on a parity as to dividends with the Series B Preferred Stock shall be paid or declared pro rata so that in all cases the amount of dividends paid or declared per share on the Series B Preferred Stock and on such other shares of preferred stock shall bear to each other the same ratio that accumulated dividends per share, including dividends accrued or dividends in arrears, if any, on the shares of the Series B Preferred Stock and such other shares of preferred stock bear to each other. Except as provided in the preceding sentence, unless full cumulative dividends on the shares of the Series B Preferred Stock have been paid or declared in full and sums set aside exclusively for the payment thereof, (i) no dividends (other than dividends in shares of the Common Stock (as hereinafter defined) or in shares of any other capital stock of the Corporation ranking junior to the Series B Preferred Stock as to dividends) shall be paid or declared or set aside for payment or other distribution made upon the Corporation's Common Stock, no par value per share (the "Common Stock"), or any other capital stock of the Corporation ranking junior to or on a parity with the Series B Preferred Stock as to dividends, (ii) nor shall 5 PAGE 5 any shares of the Common Stock or shares of any other capital stock of the Corporation ranking junior to or on a parity with the Series B Preferred Stock as to dividends, or any warrants, rights, calls or options exercisable for or convertible into Common Stock or any such capital stock, be redeemed, purchased or otherwise acquired for any consideration (or any payment made to or available for a sinking fund or any similar fund for the redemption of any such shares) by the Corporation or any, direct or indirect, subsidiary of the Corporation (except in the case of clause (ii) by conversion into or exchange for shares of capital stock of the Corporation ranking junior to the Series B Preferred Stock as to dividends, or any warrants, rights, calls or options exercisable for or convertible into Common Stock or any such capital stock). Holders of shares of the Series B Preferred Stock shall not be entitled to any dividends, whether payable in cash, property or shares of capital stock, in excess of full accrued and cumulative dividends as herein provided. No interest or sum of money in lieu of interest shall be payable in respect of any dividend payment or payments on the shares of the Series B Preferred Stock that may be in arrears. The terms "accrued dividends", "dividends accrued" and "dividends in arrears", whenever used herein with reference to shares of preferred stock shall be deemed to mean an amount that shall be equal to dividends thereon at the annual dividend rates per share for the respective series from the date or dates on which such dividends commence to accrue to the end of the then current quarterly dividend period for such preferred stock (or, in the case of redemption, to the date of redemption), less the amount of all dividends paid, or declared in full and sums set aside for the payment thereof, upon such shares of preferred stock. (c) Dividends payable on the shares of the Series B Preferred Stock for any period less than a full quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months and the actual number of days elapsed in the period for which payable. Section 3. REDEMPTION; LIMITATIONS ON TRANSFER. (a) MANDATORY REDEMPTION. On September 2, 2004, to the extent (i) the Corporation shall have funds legally available therefor and (ii) the Corporation shall not have been rendered 6 PAGE 6 insolvent pursuant to the U.S. Bankruptcy Code, the Corporation shall redeem all remaining outstanding shares of Series B Preferred Stock, at a redemption price of $1,000.00 per share, together with accrued and unpaid dividends thereon to the redemption date, in cash without interest. If, for any reason, the Corporation shall fail to discharge its mandatory redemption obligations pursuant to this section 3(a), such mandatory redemption obligations shall be discharged as soon as the Corporation is able to discharge such obligations. If and so long as any mandatory redemption obligations with respect to the shares of Series B Preferred Stock shall not be fully discharged, (i) no dividends (other than dividends in shares of the Common Stock) shall be paid or declared or set aside for payment or other distribution made upon the Common Stock or any other capital stock of the Corporation ranking junior to or on a parity with the Series B Preferred Stock as to dividends, or any warrants, rights, calls or options exercisable for or convertible into Common Stock or any such capital stock, (ii) nor shall any shares of the Common Stock or shares of any other capital stock of the Corporation ranking junior to or on a parity with the Series B Preferred Stock as to dividends, or any warrants, rights, calls or options exercisable for or convertible into Common Stock or any such capital stock, be redeemed, purchased or otherwise acquired for any consideration (or any payment made to or available for a sinking or other similar fund for the redemption of any such shares) by the Corporation or any direct or indirect subsidiary of the Corporation (except, in the case of clause (ii), by conversion into or exchange for shares of capital stock of the Corporation ranking junior to the Series B Preferred Stock as to dividends). (b) LIMITATIONS ON TRANSFER AND RELATED OPTIONAL REDEMPTION. The shares of Series B Preferred Stock may not be sold, assigned, pledged, hypothecated or otherwise transferred by Fund American Enterprise Holdings, Inc. ("FFC"); provided, however, that FFC may transfer shares of the Series B Preferred Stock to any majority-owned subsidiary of FFC which subsidiary shall be subject to the same restrictions on transfer as FFC; provided, further, that such subsidiary may hold shares of Preferred Stock only so long as such subsidiary remains a majority-owned subsidiary of FFC. Any such transfer in contravention of this provision (including the shares of Series B Preferred Stock held by a person which is no longer a majority- owned subsidiary of FFC) shall be void ab initio. If the holder 7 PAGE 7 attempts to transfer any shares of Series B Preferred Stock in contravention of this provision, the Corporation may, at its option, call for redemption, in accordance with Section 3(d) hereof, if applicable, and Section 3(e) hereof all shares of Series B Preferred Stock which were proposed to be transferred, sold, hypothecated or assigned by the holder thereof at a redemption price of $1,000 per share plus all dividends accrued and unpaid on the shares up to the date fixed for redemption. (c) OPTIONAL REDEMPTION BEGINNING SEPTEMBER 2, 1999. (i) Subject to Section 3(c)(ii) below, the shares of the Series B Preferred Stock shall be redeemable at the option of the Corporation, in whole or from time to time in part, at any time on or after September 2, 1999, subject to the limitations set forth below, at the following redemption prices per share plus, in each case, all dividends accrued and unpaid on the shares of the Series B Preferred Stock up to the date fixed for redemption, upon giving notice as provided in Section 3(e) below: If redeemed during the twelve-month period beginning September 2, Price ---------------------------- ------ 1999.......................................... $1,035.00 2000.......................................... $1,028.00 2001.......................................... $1,021.00 2002.......................................... $1,014.00 2003.......................................... $1,007.00 The excess amount of the price per share over $1,000 (other than accrued but unpaid dividends) is referred to herein as the "Redemption Premium". (ii) From and after the time of any exercise of any Ten-Year Options (as hereinafter defined), upon giving notice as provided in Section 3(e) below, the Corporation shall have the right to redeem, without the payment of the Redemption Premium thereon, a number of shares of Series B Preferred Stock equal to 50,000 multiplied by a fraction the numerator of which shall be the number of Ten-Year Options so exercised at such time and the denominator of which shall be the aggregate number of Ten-Year Options initially issued. The number of shares of Series B Preferred Stock which may be redeemed without the applicable Redemption Premium shall be cumulative with each such exercise of 8 PAGE 8 the Ten-Year Options but shall be reduced upon any redemption of Series B Preferred Stock without the payment of the Redemption Premium by the number of shares so redeemed. The adjustment to the Redemption Premium in this Section 3(c)(ii) shall take into account any Ten-Year Options exercised prior to the time the shares of Series B Preferred Stock are redeemed on the Redemption Date regardless of whether notice of the redemption of such shares was given prior to the exercise of such Ten-Year Options. "Ten-Year Options" means the 1,893,940 Options initially issued by U S WEST Capital Corporation ("USWCC") to FFC pursuant to the Securities Purchase Agreement dated April 10, 1994, among FFC, the Corporation, USWCC and Financial Security Assurance Holdings Ltd. and referred to in such agreement as the "Ten-Year Options". (d) SPECIAL PROCEDURE FOR PARTIAL REDEMPTION. If less than all of the outstanding shares of the Series B Preferred Stock are to be redeemed, the shares to be redeemed shall be determined pro rata. (e) GENERAL PROCEDURES FOR REDEMPTION. At least 30 days but not more than 60 days prior to the date fixed for the redemption of shares of the Series B Preferred Stock, a written notice shall be given to each holder of record of shares of the Series B Preferred Stock to be redeemed by certified or registered mail in a postage prepaid envelope or by a nationally recognized overnight courier (appropriately marked for overnight delivery) addressed to such holder at its post office address as shown on the records of the Corporation (and shall be deemed given only upon the earlier of (i) the date when received by the holder of (ii) three days after the Corporation has sent such notice), notifying such holder of the election of the Corporation to redeem such shares, stating the date fixed for redemption thereof (the "Redemption Date"), that the shares shall be deemed to be redeemed at 5:00 p.m., New York time, on such date and the redemption price (including a calculation of all accrued dividends up to and including the Redemption Date, but subject to reduction as a result of any exercises of the Ten-Year Options), and calling upon such holder to surrender to the Corporation on the Redemption Date at the place designated in such notice its certificate or certificates representing the number of shares specified in such notice of redemption. Each notice of redemption shall be irrevocable. On or after the Redemption Date, upon surrender by each holder of its certificate or certificates for shares of the Series B Preferred Stock to be 9 PAGE 9 redeemed at the place designated in such notice, the redemption price of such shares (together with all accrued and unpaid dividends thereon up to and including the Redemption Date) shall be paid in immediately available funds to or on the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be cancelled. In case less than all the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares, without cost to the holder thereof. From and after the Redemption Date (unless notice of redemption is not received by each holder of shares as aforesaid, or default shall be made by the Corporation in payment of the redemption price or accrued and unpaid dividends up to and including the Redemption Date), all dividends on the shares of the Series B Preferred Stock designated for redemption in such notice shall cease to accrue, and all rights of the holders thereof as shareholders of the Corporation, except the right to receive the redemption price of such shares (including all accrued and unpaid dividends up to the Redemption Date) upon the surrender of certificates representing the same, shall cease and terminate, and such shares shall not be deemed to be outstanding for any purpose whatsoever. At its election, if notice of redemption is received by each holder of shares as aforesaid, the Corporation prior to the Redemption Date may deposit the redemption price (including all accrued and unpaid dividends up to the Redemption Date) of shares of the Series B Preferred Stock so called for redemption in trust for the account of holders thereof with a bank or trust company (having a capital surplus and undivided profits aggregating not less than $100,000,000) in the Borough of Manhattan, City and State of New York, or the City of Denver, State of Colorado, in which case the aforesaid notice to holders of shares of the Series B Preferred Stock to be redeemed shall state the date of such deposit, shall specify the office of such bank or trust company as the place of payment of the redemption price, and shall call upon such holders to surrender the certificates representing such shares at such place on or after the date fixed in such redemption notice (which shall not be later than the Redemption Date) against payment of the redemption price (including all accrued and unpaid dividends up to the Redemption Date). Any interest accrued on such funds shall be paid to the Corporation from time to time. Any moneys so deposited that shall remain unclaimed by the holders of such shares of the Series B Preferred Stock at the end of two years after the Redemption Date shall be returned by such bank or trust 10 PAGE 10 company to the Corporation, and thereafter the holder of any such shares shall look to the Corporation for the payment of the redemption price (and any accrued and unpaid dividends). (f) SHARES REDEEMED OR REPURCHASED. Shares of the Series B Preferred Stock redeemed, repurchased or retired by the Corporation pursuant to the provisions of this Section 3, shall thereupon be retired and may not be reissued as shares of the Series B Preferred Stock but shall thereafter have the status of authorized but unissued shares of the Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series of the Preferred Stock. Section 4. VOTING RIGHTS. Except as otherwise provided in Section 6 or as required by law, the holders of shares of the Series B Preferred Stock shall not be entitled to vote on any matter on which the holders of any voting securities of the Corporation shall be entitled to vote. Section 5. LIQUIDATION RIGHTS. (a) In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or otherwise, the holders of shares of the Series B Preferred Stock shall be entitled to receive, in cash, out of the assets of the Corporation available for distribution to stockholders, the amount of One Thousand Dollars ($1,000.00) for each share of the Series B Preferred Stock, plus an amount equal to all dividends accrued and unpaid on each such share up to and including the date fixed for distribution, before any distribution shall be made to the holders of shares of the Common Stock or any other capital stock of the Corporation ranking (as to any such distribution) junior to the Series B Preferred Stock. If upon any liquidation, dissolution or winding up of the Corporation, the assets distributable among the holders of shares of the Series B Preferred Stock and all other classes and series of preferred stock ranking (as to any such distribution) on a parity with the Series B Preferred Stock are insufficient to permit the payment in full to the holders of all such shares of all preferential mounts payable to all such holders, then the entire assets of the Corporation thus distributable shall be distributed ratably among the holders of the shares of the Series B Preferred Stock and such other classes and series of preferred stock 11 PAGE 11 ranking (as to any such distribution) on a parity with the Series B Preferred Stock in proportion to the respective amounts that would be payable per share if such assets were sufficient to permit payment in full. (b) For purposes of this Section 5, a distribution of assets in any dissolution, winding up or liquidation shall not include (i) any consolidation or merger of the Corporation with or into any other corporation, (ii) any dissolution, liquidation, winding up or reorganization of the Corporation immediately followed by reincorporation of another corporation or (iii) a sale or other disposition of all or substantially all of the Corporation's assets to another corporation; provided, however, that, in each case, effective provision is made in the certificate of incorporation of the resulting and surviving corporation or otherwise for the protection of the rights of the holders of shares of the Series B Preferred Stock. (c) After the payment of the full preferential amounts provided for herein to the holders of shares of the Series B Preferred Stock or funds necessary for such payment have been set aside in trust for the holders thereof in the manner provided in Section 3(e), such holders shall be entitled to no other or further participation in the distribution of the assets of the Corporation. Section 6. LIMITATIONS. In addition to any other rights provided by applicable law, so long as any shares of the Series B Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote, or the written consent as provided by law, of the holders of at least two-thirds (2/3) of the outstanding shares of the Series B Preferred Stock, voting separately, modify, amend or rescind the preferences, rights or powers with respect to the Series B Preferred Stock so as to affect the Series B Preferred Stock adversely; but (except as otherwise required by applicable law) nothing herein contained shall require such a vote or consent (i) in connection with any increase in the total number of authorized shares of the Common Stock, or (ii) in connection with the authorization or increase of any class or series of shares of preferred stock. The provisions of this Section 6 shall not in any way limit the right and power of the Corporation to issue its currently authorized but unissued shares or bonds, notes, mortgages, debentures, and other obligations, and to incur indebtedness to banks and to 12 PAGE 12 other lenders. Section 7. NO PREEMPTIVE RIGHTS. No holder of shares of the Series B Preferred Stock shall possess any preemptive rights to subscribe for or acquire any unissued shares of capital stock of the Corporation (whether now or hereafter authorized) or securities of the Corporation convertible into or carrying a right to subscribe to or acquire shares of capital stock of the Corporation. Section 8. RANK. Unless otherwise provided in the Articles of Incorporation of the Corporation or a Certificate of Designations relating to a subsequent series of preferred stock of the Corporation, the Series B Preferred Stock shall rank on a parity with the Series A Preferred Stock of the Corporation and junior to all other series of the Corporation's preferred stock as to the payment of dividends and the distribution of assets on liquidation, dissolution, or winding up, whether voluntary or involuntary, of the Corporation and senior to the Common Stock of the Corporation as to the foregoing. IN WITNESS WHEREOF, we have executed and subscribed this Certificate and do affirm the foregoing as true under penalties of perjury the 1st day of September, 1994. /s/ James T. Anderson --------------------- James T. Anderson Vice President and Treasurer Attest: /s/ Stephen E. Brilz - --------------------- Stephen E. Brilz Assistant Secretary EX-10.Q 3 1994 STOCK PLAN 1 PAGE 1 EXHIBIT 10q U S WEST, INC. 1994 STOCK PLAN I. Purpose. This 1994 Stock Plan (the "Plan"), is intended to promote the long term success of U S WEST, Inc. (the "Company") by affording certain eligible employees, executive officers, non-employee directors of the Company and its Subsidiaries (as defined below) and certain outside consultants or advisors to the Company and its affiliates with an opportunity to acquire a proprietary interest in the Company, in order to incentivize such persons and to align the financial interests of such persons with the shareholders of the Company. II. Successor 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. Options outstanding under the Predecessor Plans and restricted stock granted under the Predecessor Plans shall be administered pursuant to the provisions of the Plan, to the extent not inconsistent with the grant of such options and restricted stock under the Predecessor Plans. III. Definitions. The following defined terms are used in the Plan: A. "Agreement" shall mean the agreement or grant letter accepted by the Participant as described in Section IX. of the Plan between the Company and a Participant under which the Participant receives an Award pursuant to this Plan. B. "Award" shall mean individually, collectively or in tandem, an incentive award granted under the Plan, whether in the form of Options, SARs, Stock Awards or Phantom Units. C. "Board" or "Board of Directors" shall mean the Board of Directors of the Company. 2 PAGE 2 D. "Change of Control" shall mean any of the following: 1. any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) who is or becomes a beneficial owner of (or otherwise has the authority to vote), directly or indirectly, securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities, unless through a transaction arranged by, or consummated with the prior approval of the Board of Directors; 2. any period of two (2) consecutive calendar years during which there shall cease to be a majority of the Board of Directors comprised as follows: individuals who at the beginning of such period constitute the Board of Directors and any new director(s) whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; or 3. the Company becomes a party to a merger, consolidation or share exchange in which either (i) the Company will not be the surviving corporation or (ii) the Company will be the surviving corporation and any outstanding shares of Common Stock of the Company will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or 4. any other event that a majority of the Board of Directors, in its sole discretion, shall determine constitutes a Change of Control. E. "Code" shall mean the Internal Revenue Code of 1986, as amended. F. "Committee" shall mean the Human Resources Committee or the Employee Benefits Committee or their delegates, as applicable, pursuant to provisions of Section IV. of the Plan. G. "Common Stock" shall mean common stock, no par value, issued by the Company. 3 PAGE 3 H. "Company" shall mean U S WEST, Inc., a Colorado corporation, and any successor thereof. I. "Director Compensation" shall mean all cash or stock remuneration payable to an Outside Director for service to the Company as a director, other than reimbursement for expenses, and shall include retainer fees for service on, and fees for attendance at meetings of, the Board and any committees thereof. J. "Disabled" or "Disability" shall mean long-term disability as determined under the provisions of any U S WEST disability plan maintained for the benefit of eligible employees of the Company or any Related Entity, provided, however, that in the case of an Incentive Option, "disability" shall have the meaning specified in Section 22(e)(3) of the Code. K. "Disinterested Person" shall have the meaning set forth in Rule 16b-3(c)(2)(i) and its successor promulgated under the Exchange Act. L. "Dividend Equivalent Rights" shall mean the right to receive the amount of any dividends that are paid on an equivalent number of shares of Common Stock underlying an Option or Phantom Unit, which shall be payable either in cash or in the form of additional Phantom Units or Stock. M. "Effective Date" shall mean the date on which the Plan is approved by the shareholders of the Company. N. "Eligible Employee" shall mean any employee of the Company or any Related Entity who the Committee selects to receive an Award and who is so employed on the date of the grant of an Award. O. "Eligible Non-Employee" shall mean any consultant or advisor to the Company or any Related Entity, including any member of the State Executive Board(s) of the Company or any Related Entity that the Committee selects to receive an Award. P. "Employee Benefits Committee" shall mean a committee of the Company consisting of employees of the Company or any Related Entity appointed by the Human Resources Committee and which shall administer the Plan as provided in Section IV. hereof. 4 PAGE 4 Q. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. R. "Executive Officers" shall mean any Officer of the Company or any Related Entity who, at the time of an Award, is subject to the reporting requirements of Section 16(a) of the Exchange Act. S. "Fair Market Value" shall mean the closing price of a share of Common Stock as reported on the New York Stock Exchange for the applicable date, or if there were no sales on such date, on the last day on which there were sales. T. "Human Resources Committee" shall mean the human resources committee of the Board or any other committee of the Board appointed by the Board to administer the Plan in lieu of the Human Resources Committee, which committee shall consist of no fewer than three (3) persons, each of whom shall be a Disinterested Person. U. "Incentive Option" shall mean an incentive stock option under the provisions of Section 422 of the Code. V. "Indexed" shall mean the periodic adjustment of an Option Price based upon adjustment criteria determined by the Committee, but in no event shall the Option Price be adjusted to an amount less than the original Option Price. W. "Nonqualified Option" shall mean an Option which does not qualify under Section 422 of the Code. X. "Officer" shall mean any executive of the Company or any Related Entity who participates in the Company's executive compensation programs. Y. "Option" shall mean an option granted by the Company to purchase Common Stock pursuant to the provisions of this Plan, including Incentive Options, Nonqualified Options and Reload Options. Z. "Optionee" shall mean a Participant to whom one or more Options have been granted. 5 PAGE 5 AA. "Option Price" shall mean the price per share payable to the Company for shares of Common Stock upon the exercise of an Option. AB. "Outside Director" shall mean an individual not employed by the Company or any Related Entity and who serves on the Board. AC. "Parent Corporation" shall mean any corporation within the meaning of Section 424(e) of the Code. AD. "Participant" shall mean an Eligible Employee, Eligible Non-Employee, Executive Officer or Outside Director who is granted an Award. AE. "Phantom Unit" shall mean a notional account representing a value equivalent to one share of Common Stock on the Award date. AF. "Plan" shall mean the U S WEST, Inc. 1994 Stock Plan. AG. "Predecessor Plan" shall mean the U S WEST, Inc. Stock Incentive Plan and the U S WEST 1991 Stock Incentive Plan, as applicable. AH. "Related Entity" shall mean any Parent Corporation or Subsidiary of the Company. AI. "Reload Option" shall mean the right to receive a further Option for a number of shares equal to the number of shares of Common Stock surrendered by the Optionee upon exercise of the original Option as provided in Section X.E. of the Plan. AJ. "Restricted Period" shall mean the period of time from the date of grant of Restricted Stock until the lapse of restrictions attached thereto under the terms of the Agreement granting such Restricted Stock, pursuant to the provisions of the Plan or by action of the Committee. AK. "Restricted Stock" shall mean an Award made by the Committee entitling the Participant to acquire, at no cost or for a purchase price determined by the Committee at the time of grant, shares of Common Stock which are subject to restrictions in accordance with the provisions of Section XIII. hereof. 6 PAGE 6 AL. "Retirement" shall mean (i) with respect to any Eligible Employee, that such person has retired from the Company or any Related Entity and such person is currently eligible to receive a service pension benefit under the U S WEST Pension Plan or a pension benefit under any written agreement or arrangement that the Company or any Related Entity may have entered into with the Eligible Employee and (ii) with respect to any Eligible Non-Employee, that such person no longer provides consulting or advisory services to the Company or any Related Entity. AM. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. AN. "Stock Appreciation Right" or "SAR" shall mean a grant entitling the Participant to receive an amount in cash or shares of Common Stock or a combination thereof having a value equal to (or if the Committee shall so determine at the time of a grant, less than) the excess of the Fair Market Value of a share of Common Stock on the date of exercise over the Fair Market Value of a share of Common Stock on the date of grant (or over the Option Price, if the Stock Appreciation Right was granted in tandem with an Option) multiplied by the number of shares with respect to which the Stock Appreciation Right shall have been exercised, with the Committee having sole discretion to determine the form or forms of payment at the time of grant of the SAR. AO. "Stock Awards" shall mean any Award which is in the form of Restricted Stock and any outright grants of Common Stock approved by the Committee pursuant to the Plan. AP. "Subsidiary" shall mean with respect to any Award other than an Incentive Option, any corporation, joint venture or partnership in which the Company owns, directly or indirectly, (i) with respect to a corporation, stock possessing twenty percent (20%) or more of the total combined voting power of all classes of stock in the corporation or (ii) in the case of a joint venture or partnership, the Company possesses a twenty percent (20%) interest in the capital or profits of such joint venture or partnership. In the case of any Incentive Option, Subsidiary shall mean any corporation within the meaning of Section 424(f) of the Code. AQ. "Vested" shall mean the status that results with respect to an Option or other Award which may be immediately exercised under the terms of the Agreement granting such Option or 7 PAGE 7 other Award, pursuant to the provisions of the Plan or by action of the Committee. IV. Administration. A. The Plan shall be administered by the Human Resources Committee with respect to Officers, Executive Officers and Outside Directors and by the Employee Benefits Committee with respect to all other Eligible Employees and Eligible Non-Employees. The Human Resources Committee may adopt such rules, regulations and guidelines as it determines necessary for the administration of the Plan. Subject to any such rules, regulations and guidelines adopted by the Human Resources Committee, the Employee Benefits Committee shall have the power to adopt rules, regulations and guidelines to permit such Committee to administer the Plan with respect to Eligible Employees (other than Officers and Executive Officers) and with respect to Eligible Non-Employees. B. The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company or such Related Entity whose employees have benefitted from the Plan, as determined by the Committee. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company or a Related Entity against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's gross negligence or willful misconduct. C. In furtherance of and not in limitation of the Committee's discretionary authority, subject to the provisions of the Plan, the Committee shall have the authority to: 8 PAGE 8 1. determine the Participants to whom Awards shall be granted and the number of and terms and conditions upon which Awards shall be granted (which need not be the same for all Awards or types of Awards); 2. establish, in its sole discretion, annual or long-term financial goals of the Company, Related Entity, or division, department, or group of the Company or Related Entity, or individual goals which the Committee shall consider in granting Awards, if any; 3. determine the satisfaction of performance goals established by the Committee based upon periods of time or any combinations thereof; 4. determine the time when Awards shall be granted, the Option Price of each Option, the period(s) during which Options shall be exercisable (whether in whole or in part), the restrictions to be applicable to Awards, and the other terms and provisions of Awards; 5. modify grants of Awards pursuant to Paragraph D. of this Section IV. or rescind grants of Awards pursuant to Section X.H(v), respectively; 6. provide the establishment of a procedure whereby a number of shares of Common Stock or other securities may be withheld from the total number of shares of Common Stock or other securities to be issued upon exercise of an Option, the lapse of restrictions on Restricted Stock and the vesting of Phantom Units (other than an Incentive Option) to meet the obligation of withholding for income, social security and other taxes incurred by a Participant upon such exercise or required to be withheld by the Company in connection with such exercise; 7. adopt, modify and rescind rules and regulations and guidelines relating to the Plan; 8. adopt modifications to the Plan and procedures, as may be necessary to comply with provisions of the laws and applicable regulatory rulings of countries in which the Company or a Related Entity operates in order to assure the legality of Awards granted under the Plan to Participants who reside in such countries; and 9 PAGE 9 9. obtain the approval of the shareholders of the Company with respect to Awards consisting of Phantom Units or Restricted Stock; provided, however, no action shall be proposed to shareholders without the approval of the Board of Directors; 10. make all determinations, perform all other acts, exercise all other powers and establish any other procedures determined by the Committee to be necessary, appropriate or advisable in administering the Plan and to maintain compliance with any applicable law. D. The Committee may at any time, in its sole discretion, accelerate the exercisability of any Awards and waive or amend any and all restrictions and conditions of any Awards. E. Subject to and not inconsistent with the express provisions of the Plan, the Code and Rule 16b-3 of the Exchange Act, the Committee shall have the authority to require, as a condition to the granting of any Option, SAR or other Award (to the extent applicable) to any Executive Officer of the Company or any Related Entity that the Executive Officer receiving such Option, SAR or other Award agree not to sell or otherwise dispose of such Option, SAR or other Award or Common Stock acquired pursuant to such Option, SAR or other Award (to the extent applicable) or any other "derivative security" (as defined by Rule 16a-1(c) under the Exchange Act) for a period of six (6) months following the later of (i) the date of the grant of such Option, SAR or other Award (to the extent applicable) or (ii) the date when the other Option Price of such Option, SAR or other Award is fixed, if such Option Price is not fixed at the date of grant of such Option, SAR or other Award. V. Decisions Final. Any decision, interpretation or other action made or taken in good faith by the Committee arising out of or in connection with the Plan shall be final, binding and conclusive on the Company and all Participants and their respective heirs, executors, administrators, successors and assigns. 10 PAGE 10 VI. Arbitration. Any dispute that may arise in connection with the Plan or any Award under the Plan shall be determined solely by arbitration in Denver, Colorado under the rules of the American Arbitration Association. Any claim with respect to an Award must be established by a preponderance of the evidence submitted to the impartial arbitrator. The arbitrator shall have the authority to award the prevailing party damages incurred as a result of any breach, costs, reasonable attorneys' fees incurred in connection with the arbitration, and direct that the non-prevailing party pay the expenses of arbitration. The decision of the arbitrator (i) shall be final and binding; (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator; and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims. VII. Duration of the Plan. The Plan shall remain in effect for a period of ten (10) years from the Effective Date, unless terminated by the Board pursuant to Section XXI. VIII. Shares Available - Limitations. A. The maximum aggregate number of shares of Common Stock of the Company which may be granted in any calendar year for all purposes under the Plan shall be three-quarters of one percent (0.75%) of the shares of Common Stock outstanding (excluding shares of such Common Stock held in the Company's treasury) on the first day of such calendar year, provided, however, that in the event that fewer than the full aggregate number of shares of Common Stock available for issuance in any calendar year are issued in such year, the shares not issued shall be added to the shares available for issuance in any subsequent year or years. If, for any reason, any shares of Common Stock as to which Options, SARs, Restricted Stock, or Phantom Units have been granted cease to be subject to exercise or purchase hereunder (other than the exercise of SARs for cash), the underlying shares of Common Stock 11 PAGE 11 shall thereafter be available for grants to Participants under the Plan during any calendar year. Awards granted under the Plan may be fulfilled in accordance with the terms of the Plan with (i) authorized and unissued shares of the Common Stock or (ii) issued shares of Common Stock reacquired by the Company, in each situation, as the Board of Directors or the Committee may determine from time to time at its sole discretion. B. The maximum number of shares of Common Stock that shall be subject to the grant of an Award in any calendar year for Awards other than Options or SARs shall not exceed one-third (1/3) of the total number of shares of Common Stock subject to Awards granted under the Plan for such calendar year. C. The maximum number of shares of Common Stock with respect to which Awards may be granted to any individual Participant in any calendar year may not exceed the lesser of 250,000 or five percent (5%) of the total number of shares of Common Stock with respect to which Awards may be granted under the Plan for the calendar year. IX. Grant of Awards. A. The Committee shall determine the type or types of Award(s) to be made to each Participant. Awards may be granted singly, in combination or in tandem subject to restrictions set forth in Section X.C. for Incentive Options. The types of Awards that may be granted under the Plan are Options, with or without Reload Options, SARs, Stock Awards and Phantom Units, and with respect to Phantom Units and Restricted Stock, with or without Dividend Equivalent Rights. B. Each grant of an Award under this Plan shall be evidenced by an Agreement dated as of the date of the grant of the Award, other than Stock Awards consisting of an outright grant of shares of Common Stock. This Agreement shall set forth the terms and conditions of the Award, as may be determined by the Committee, and if the Agreement relates to the grant of an Option, shall indicate whether the Option that it evidences, is intended to be an Incentive Option or a Nonqualified Option. Each grant of an Award is conditioned upon the acceptance by the Participant of the terms of the Agreement. Unless otherwise extended by the 12 PAGE 12 Committee, a Participant shall have ninety (90) days from the date of the Agreement to accept its terms. X. Options. The Committee, in its sole discretion, may grant Incentive Options or Nonqualified Options to Eligible Employees, Officers and Executive Officers and Nonqualified Options to Eligible Non-Employees. Any Options granted to a Participant under the Predecessor Plan which remain outstanding as of the Effective Date shall be governed by the terms and conditions of the Plan, except to the extent the provisions of the Plan are inconsistent with the terms of the Options granted under the Predecessor Plans, in which event the applicable provisions of the Predecessor Plans shall govern; provided, however, that in no event shall there be a modification of the terms of any Incentive Option granted under the Predecessor Plan. The terms and conditions of the Options granted under this Section X. shall be determined from time to time by the Committee, as set forth in the Agreement granting the Option, and subject to the following conditions: A. Nonqualified Options. The Option Price for each share of Common Stock issuable pursuant to a Nonqualified Option may be an amount at or above the Fair Market Value on the date such Option is granted, may be Indexed from the original Option Price and may be granted with or without Dividend Equivalent Rights; provided, however, that with respect to Nonqualified Options granted to any Executive Officer, no Dividend Equivalent Rights may be granted. B. Incentive Options. The Option Price for each share of Common Stock issuable pursuant to an Incentive Option shall not be less than one hundred percent (100%) of the Fair Market Value on the date such Option is granted and may be Indexed from the original Option Price. C. Incentive Options - Special Rules. Options granted in the form of Incentive Options shall be subject to the following provisions: 1. Grant. No Incentive Option shall be granted pursuant to this Plan more than ten (10) years after the Effective Date. 13 PAGE 13 2. Annual Limit. The aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Common Stock with respect to which one or more Incentive Options are exercisable for the first time by any Optionee during any calendar year under the Plan or under any other stock plan of the Company or any Related Entity shall not exceed $100,000 or such other maximum amount permitted under Section 422 of the Code. Any Option purporting to constitute an Incentive Option in excess of such limitation shall constitute a Nonqualified Option. 3. 10% Stockholder. If any Optionee to whom an Incentive Option is to be granted pursuant to the provisions of the Plan is, on the date of grant, an individual described in Section 422(b)(6) of the Code, then the following special provisions shall be applicable to the Option granted to such individual: (a) the Option Price of shares subject to such Incentive Option shall not be less than 110% of the Fair Market Value of Common Stock on the date of grant; and (b) the Option shall not have a term in excess of (5) years from the date of grant. D. Other Options. The Committee may establish rules with respect to, and may grant to Eligible Employees, Options to comply with any amendment to the Code made after the Effective Date providing for special tax benefits for stock options. E. Reload Options. Without in any way limiting the authority of the Committee to make Awards hereunder, the Committee shall have the authority to grant Reload Options. Any such Reload Option shall be subject to such other terms and conditions as the Committee may determine. Notwithstanding the above, (i) the Committee shall have the right, in its sole discretion, to withdraw a Reload Option to the extent that the grant thereof will result in any adverse accounting consequences to the Company and (ii) no additional Reload Options shall be granted upon the exercise of a Reload Option. F. Term of Option. No Option shall be exercisable after the expiration of ten (10) years from the date of grant of the Option. 14 PAGE 14 G. Exercise of Stock Option. Each Option shall be exercisable in one or more installments as the Committee in its sole discretion may determine at the time of the Award and as provided in the Agreement. The right to purchase shares shall be cumulative so that when the right to purchase any shares has accrued such shares or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option, subject to rules on sequential exercise for Incentive Options pursuant to Paragraph C.2. of this Section X. The Option Price shall be payable (i) in cash or by an equivalent means acceptable to the Committee, (ii) by delivery (constructive or otherwise) to the Company of shares of Common Stock owned by the Optionee or (iii) by any combination of the above as provided in the Agreement. Shares delivered to the Company in payment of the Option Price shall be valued at the Fair Market Value on the date of the exercise of the Option. H. Vesting. The Agreement shall specify the date or dates on which the Optionee may begin to exercise all or a portion of his Option. Subsequent to such date or dates, the Option shall be deemed vested and fully exercisable. (i) Death. In the event of the death of any Optionee, all Options held by such Optionee on the date of his death shall become Vested Options and the estate of such Optionee, shall have the right, at any time and from time to time within one year after the date of death, or such other period, if any, as the Committee in its sole discretion may determine, to exercise the Options of the Optionee (but not after the earlier of the expiration date of the Option or, in the case of an Incentive Option, one (1) year from the date of death). (ii) Disability. If the employment of any Optionee is terminated because of Disability, all Options held by such Optionee on the date of his Disability shall become Vested Options and such Optionee shall have the right, at any time and from time to time within one year after the date of termination, or such other period, if any, as the Committee in its sole discretion may determine, to exercise the Options of the Optionee (but not after the earlier of the expiration date of the Option or one (1) year from the date of Disability in the case of an Incentive Option). 15 PAGE 15 (iii) Retirement. Upon an Optionee's Retirement (i) all Options held by such Optionee that are not Vested Options shall terminate unless the Committee, in its sole discretion, determines otherwise, and (ii) such Optionee shall have the right, at any time and from time to time within five (5) years after the date of his Retirement (but in no event after the expiration date of the Option), to exercise the Vested Options held by such Optionee immediately prior to the time of Retirement. (iv) Other Termination. If the employment with the Company or a Related Entity of an Optionee is terminated for any reason other than for death or Disability and other than "for cause" as defined in subparagraph (v) below, such Optionee shall have the right, in the case of a Vested Option, for a period of three (3) months after the date of such termination or such longer period as determined by the Committee, to exercise any such Vested Option, but in any event not after the expiration date of any such Option. (v) Termination For Cause. Notwithstanding any other provision of the Plan to the contrary, if the Optionee's employment is terminated by the Company or any Related Entity "for cause" (as defined below), such Optionee shall immediately forfeit all rights under his Options except as to the shares of Common Stock already purchased prior to such termination. Termination "for cause" shall mean (unless another definition is agreed to in writing by the Company and the Optionee) termination by the Company because of: (a) the Optionee's willful and continued failure to substantially perform his duties (other than any such failure resulting from the Optionee's incapacity due to physical or mental impairment) after a written demand for substantial performance is delivered to the Optionee by the Company, which demand specifically identifies the manner in which the Company believes the Optionee has not substantially performed his duties, (b) the willful conduct of the Optionee which is demonstrably and materially injurious to the Company or Related Entity, monetarily or otherwise, or (c) the conviction of the Optionee for a felony by a court of competent jurisdiction. 16 PAGE 16 XI. Foreign Options and Rights. The Committee may make Awards of Options to Eligible Employees, Officers, Executive Officers and Eligible Non-Employees who are subject to the tax laws of nations other than the United States, which Awards may have terms and conditions as determined by the Committee as necessary to comply with applicable foreign laws. The Committee may take any action which it deems advisable to obtain approval of such Option by the appropriate foreign governmental entity; provided, however, that no such Award may be granted pursuant to this Section XI. and no action may be taken which would result in a violation of the Exchange Act, the Code or any other applicable law. XII. Stock Appreciation Rights. The Committee shall have the authority to grant SARs to Eligible Employees, Officers, Executive Officers and Eligible Non-Employees either alone or in connection with an Option. SARs granted in connection with an Option shall be granted either at the time of grant of the Option or by amendment to the Option. SARs granted in connection with an Option shall be subject to the same terms and conditions as the related Option and shall be exercisable only at such times and to such extent as the related Option is exercisable. A SAR granted in connection with an Option may be exercised only when the Fair Market Value of the Common Stock of the Company exceeds the Option Price of the related Option. A SAR granted in connection with an Option shall entitle the Participant to surrender to the Company unexercised the related Option, or any portion thereof and to receive from the Company cash and/or shares of Common Stock equal to that number of shares of Common Stock having an aggregate value equal to the excess of (i) the Fair Market Value of one share of Common Stock on the day of the surrender of such Option over (ii) the Option Price per share of Common Stock multiplied by (iii) the number of shares of Common Stock that may be exercised under the Option, or surrendered; provided, however, that no fractional shares shall be issued. A SAR granted singly shall entitle the Participant to receive the excess of (i) the Fair Market Value of a share of Common Stock on the date of exercise over (ii) the Fair Market Value of a share of Common Stock on the date of the grant of the SAR multiplied by (iii) the number of SARs exercised. Payment of any fractional shares of Common Stock shall be made in cash. A SAR 17 PAGE 17 shall become a Vested Award upon (i) a Participant becoming Disabled, or (ii) the death of a Participant. XIII. Restricted Stock. The Committee may, in its sole discretion, grant Restricted Stock to Eligible Employees, Eligible Non-Employees, Officers or Executive Officers subject to the provisions below. A. Restrictions. A stock certificate representing the number of shares of Restricted Stock granted shall be held in custody by the Company for the Participant's account. The Participant shall have all rights and privileges of a stockholder as to such Restricted Stock, including the right to receive dividends and the right to vote such shares, except that, subject to the provisions of Paragraph B. below, the following restrictions shall apply: (i) the Participant shall not be entitled to delivery of the certificate until the expiration of the Restricted Period; (ii) none of the shares of Restricted Stock may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period; (iii) the Participant shall, if requested by the Company, execute and deliver to the Company, a stock power endorsed in blank. The Restricted Period shall lapse upon a Participant becoming Disabled or the death of a Participant. If a Participant ceases to be an employee of the Company or a Related Entity prior to the expiration of the Restricted Period applicable to such shares, except as a result of the death or Disability of the Participant, shares of Restricted Stock still subject to restrictions shall be forfeited unless otherwise determined by the Committee, and all rights of the Participant to such shares shall terminate without further obligation on the part of the Company. Upon the forfeiture (in whole or in part) of shares of Restricted Stock, such forfeited shares shall become shares of Common Stock held in the Company's treasury without further action by the Participant. B. Terms and Conditions. The Committee shall establish the terms and conditions for Restricted Stock pursuant to Section IV. of the Plan, including whether any shares of Restricted Stock shall have voting rights or a right to any dividends that are declared. Terms and conditions established by the Committee need not be the same for all grants of Restricted Stock. The Committee may provide for the restrictions to lapse with respect to a portion or portions of the Restricted Stock at different times or 18 PAGE 18 upon the occurrence of different events, and the Committee may waive, in whole or in part, any or all restrictions applicable to a grant of Restricted Stock. Restricted Stock Awards may be issued for no cash consideration or for such minimum consideration as may be required by applicable law or such other consideration as may be determined by the Committee. C. Delivery of Restricted Shares. At the end of the Restricted Period as herein provided, a stock certificate for the number of shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered (less any shares delivered pursuant to Section XX.C. in satisfaction of any withholding tax obligation), free of all such restrictions, except applicable securities law restrictions, to the Participant or the Participant's estate, as the case may be. The Company shall not be required to deliver any fractional share of Common Stock but shall pay, in lieu thereof, the Fair Market Value (measured as of the date the restrictions lapse) of such fractional share to the Participant or the Participant's estate, as the case may be. Notwithstanding the foregoing, the Committee may authorize the delivery of the Restricted Stock to a Participant during the Restricted Period, in which event any stock certificates in respect of shares of Restricted Stock thus delivered to a Participant during the Restricted Period applicable to such shares shall bear an appropriate legend referring to the terms and conditions, including the restrictions, applicable thereto. XIV. Phantom Units. A. General. The Committee may, in its sole discretion, grant the right to earn Phantom Units to Eligible Employees, Officers, Executive Officers and Eligible Non-Employees. The Committee shall determine the criteria for the earning of Phantom Units, pursuant to Section IV. of the Plan. Upon satisfaction of such criteria, a Phantom Unit shall be deemed a Vested Award. A Phantom Unit granted by the Committee shall provide for payment in shares of Common Stock. A Phantom Unit shall become a Vested Award upon (i) a Participant becoming Disabled, or (ii) the death of a Participant. Shares of Common Stock issued pursuant to this Section XIV. may be issued for no cash consideration or for such minimum consideration as may be required by applicable law or such other consideration as may be determined by the Committee. The Committee shall determine whether a Participant granted a Phantom 19 PAGE 19 Unit shall be entitled to a Dividend Equivalent Right. B. Unfunded Claim. The establishment of Phantom Units under the Plan are unfunded obligations of the Company. The interest of a Participant in any such units shall be considered a general unsecured claim against the Company to the extent that the conditions for the earning of the Phantom Units have been satisfied. Nothing contained herein shall be construed as creating a trust or fiduciary relationship between the Participant, the Company or the Committee. C. Issuance of Common Stock. Upon a Phantom Unit becoming a Vested Award, unless a Participant has elected to defer under Paragraph D. below, shares of Common Stock representing the Phantom Units shall be distributed to the Participant, unless the Committee, with the consent of the Participant, provides for the payment of the Phantom Units in cash or partly in cash and partly in shares of Common Stock equal to the value of the shares of Common Stock which would otherwise be distributed to the Participant. D. Deferral of Phantom Units. Prior to the year with respect to which a Phantom Unit may become a Vested Award, the Participant may elect not to receive Common Stock upon the vesting of such Phantom Unit and for the Company to continue to maintain the Phantom Unit on its books of account. In such event, the value of a Phantom Unit shall be payable in shares of Common Stock pursuant to the agreement of deferral. E. Financial Hardship. Notwithstanding any other provision hereof, at the written request of a Participant who has elected to defer pursuant to Paragraph D. above, the Committee, in its sole direction, upon a finding that continued deferral will result in financial hardship to the Participant, may authorize the payment of all or a part of Participant's Vested Phantom Units in a single installment or the acceleration of payment of any multiple installments thereof; provided, however, that distributions will not be made under this paragraph if such distribution would result in liability of an Executive Officer under Section 16 of the Exchange Act. F. Distribution upon Death. The Committee shall pay the Fair Market Value of the Phantom Units of a deceased Participant to the 20 PAGE 20 estate of the Participant, as soon as practicable following the death of the Participant. The value of the Phantom Units for the purpose of such distribution shall be based upon the Fair Market Value of shares of Common Stock underlying the Phantom Units on the date of the Participant's death. XV. Stock Awards to Outside Directors. Each Outside Director shall be granted a Stock Award consisting of 400 shares of Common Stock, without restrictions, on the date of the Annual Meeting of the Company's stockholders following the first anniversary date of such Outside Director's initial election to the Board, and a like amount on each of the next four Annual Meeting dates for a total maximum Stock Award of 2,000 shares of Common Stock. XVI. Outside Director's Compensation. A. Payment in Common Stock. Each Outside Director may elect to receive payment of all or any portion of Director Compensation comprised of retainer fees for service on the Board and any committees thereof in Common Stock. The amount of Common Stock then issuable shall be based on the Fair Market Value of the Common Stock on the dates such retainer fees are otherwise due and payable to the Outside Director. Certificates evidencing such Common Stock shall be delivered promptly following such date. If an Outside Director elects to receive payment of retainer fees in Common Stock as described in this Section XVI.A, the election shall be (i) in writing, (ii) delivered to the Secretary of the Company at least six months in advance of the payment date, and (iii) irrevocable. B. Deferral of Payment. Each Outside Director may elect to defer the receipt of Common Stock payable pursuant to Section XVI.A, in which event such Outside Director shall receive an equivalent number of Phantom Units with Dividend Equivalent Rights. Any such Phantom Units shall become Vested Awards at such time as the Outside Director no longer serves as a member of the Board. If an Outside Director elects to defer receipt of Common Stock and receive Phantom Units pursuant to this Section XVI.B, the election shall be (i) in writing, (ii) delivered to the Secretary of the Company in the year preceding the year in which the Director Compensation would otherwise be paid and at least six 21 PAGE 21 months in advance of the date when Common Stock would otherwise be issued, and (iii) irrevocable. XVII. Federal Securities Law. With respect to grants of Awards to Executive Officers, the Company intends that the provisions of this Plan and all transactions effected in accordance with Plan shall comply with Rule 16b-3 under the Exchange Act. Accordingly, the Committee shall administer and interpret the Plan to the extent practicable, to maintain compliance with such rule. XVIII. Change of Control - Acceleration. Upon the occurrence of a Change of Control: A. in the case of all outstanding Options and SARs, each such Option and SAR shall automatically become immediately fully exercisable by the Participant; B. restrictions applicable to Restricted Stock shall automatically be deemed lapsed and conditions applicable to Phantom Units shall automatically be deemed waived, and the Participants who receive such grants shall become immediately entitled to receipt of the Common Stock subject to such grants; and C. the Human Resources Committee, in its discretion, shall have the right to accelerate payment of any deferrals of Vested Phantom Units. XIX. Adjustment of Shares. A. In the event there is any change in the Common Stock by reason of any consolidation, combination, liquidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or other like change in capital structure of the Company, the number or kind of shares or interests subject to an Award and the per share price or value thereof shall be appropriately adjusted by the Committee at the time of such event, provided that each Participant's economic position with respect to the Award shall not, as a result of such adjustment, be worse than it had 22 PAGE 22 been immediately prior to such event. Any fractional shares or interests resulting from such adjustment shall be rounded up to the next whole share of Common Stock. Notwithstanding the foregoing, (i) each such adjustment with respect to an Incentive Option shall comply with the rules of Section 424(a) of the Code, and (ii) in no event shall any adjustment be made which would render any Incentive Option granted hereunder other than an "incentive stock option" for purposes of Section 422 of the Code. B. In the event of an acquisition by the Company of another corporation where the Company assumes outstanding stock options or similar obligations of such corporation, the number of Awards available under the Plan shall be appropriately increased to reflect the number of such options or other obligations assumed. XX. Miscellaneous Provisions. A. Assignment or Transfer. No grant of any "derivative security" (as defined by Rule 16a-1(c) under the Exchange Act) made under the Plan or any rights or interests therein shall be assignable or transferable by a Participant except by will or the laws of descent and distribution and except to the extent it is otherwise permissible under the Exchange Act, it being understood that no grant of any "derivative security" shall be assignable or transferable pursuant to a domestic relations order. During the lifetime of a Participant, Awards granted hereunder shall be exercisable only by the Participant, the Participant's guardian or his legal representative. B. Investment Representation; Legends. The Committee may require each Participant acquiring shares of Common Stock pursuant to an Award to represent to and agree with the Company in writing that such Participant is acquiring the shares without a view to distribution thereof. No shares of Common Stock shall be issued pursuant to an Award until all applicable securities law and other legal and stock exchange requirements have been satisfied. The Committee may require the placing of stop-orders and restrictive legends on certificates for Common Stock as it deems appropriate. 23 PAGE 23 C. Withholding Taxes. In the case of distributions of Common Stock or other securities hereunder, the Company, as a condition of such distribution, may require the payment (through withholding from the Participant's salary, payment of cash by the Participant, reduction of the number of shares of Common Stock or other securities to be issued (except in the case of an Incentive Option), or otherwise) of any federal, state, local or foreign taxes required by law to be withheld with respect to such distribution. D. Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any Award nor to any Participant receiving an Award. E. Other Incentive Plans. The adoption of the Plan does not preclude the adoption by appropriate means of any other incentive plan for employees. F. Effect on Employment. Nothing contained in the Plan or any agreement related hereto or referred to herein shall affect, or be construed as affecting, the terms of employment of any Participant except to the extent specifically provided herein or therein. Nothing contained in the Plan or any agreement related hereto or referred to herein shall impose, or be construed as imposing, an obligation on (i) the Company or any Related Entity to continue the employment of any Participant and (ii) any Participant to remain in the employ of the Company or any Related Entity. G. Noncompetition. Any Agreement may contain, among other things, provisions prohibiting Participants from competing with the Company or any Related Entity in a form or forms acceptable to the Committee, in its sole discretion. H. Governing Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Colorado. XXI. Amendment or Termination of Plan. The Board shall have the right to amend, modify, suspend or terminate the Plan at any time, provided that no amendment shall be made which shall (i) increase the total number of Awards with respect to Common Stock which may be granted in total or to any single Participant, (ii) to decrease the minimum Option Price in 24 PAGE 24 the case of an Incentive Option, or (iii) modify the provisions of the Plan with respect to Incentive Options, unless such amendment is made by or with the approval of the stockholders or unless the Board receives an opinion of counsel to the Company that shareholder approval is not necessary with respect to any modifications relating to Incentive Options. With respect to Awards made to Executive Officers or Outside Directors, no amendment shall be made which either (i) materially increases the benefits accruing to such Executive Officers or Outside Directors, (ii) materially increases the number of such Awards which may be issued under the Plan to Executive Officers or Outside Directors, or (iii) materially modifies the requirements as to eligibility for participation of Executive Officers or Outside Directors in the Plan unless such amendment is made with the approval of stockholders. No amendment, modification, suspension or termination of the Plan shall alter or impair any Awards previously granted under the Plan, without the consent of the holder thereof. XXII. Adoption of the Plan. The Plan shall become effective on the date on which the shareholders approve the Plan by a majority of the votes cast at the 1994 Annual Meeting. EX-10.U 4 NON-QUALIFIED STOCK OPTION 1 PAGE 1 Exhibit 10u U S WEST, INC. NON-QUALIFIED STOCK OPTION AGREEMENT (Grant #) THIS AGREEMENT is entered into as of [Grant Date], between U S WEST, Inc. (the "Company") and [Optionee Name] (the "Optionee"). RECITAL Pursuant to the U S WEST, Inc. 1994 Stock Plan (the "Plan"), the Human Resources Committee of the Board of Directors (the "Committee") has granted to the Optionee on [Grant Date], as a matter of separate inducement in connection with his/her engagement with the Company or a Related Entity, and not in lieu of salary or other compensation for his/her services, an option (the "Option") to purchase shares of Common Stock issued by the Company on the terms and conditions set forth herein. AGREEMENT In consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows: 1. Shares Optioned; Option Price. The Optionee may purchase all or any part of an aggregate of [No. of Shares] shares of Common Stock, at a purchase price per share of [Price] (which is not less than the Fair Market Value on the date hereof), on the terms and conditions set forth herein. The Option is granted pursuant to the Plan, the terms of which are incorporated by reference and apply to this Agreement as if they were set forth herein. Terms used in this Agreement and not otherwise defined shall have the meanings ascribed to them in the Plan. 2. Option Term; Times of Exercise. The Option shall become a Vested Option upon three years of continuous employment following the date of this Agreement, but shall not be exercisable after [Date] (the "Expiration Date"). Except as set forth below, the Option shall not become a Vested Option if the 2 PAGE 2 three-year continuous employment requirement is not satisfied, regardless of the circumstances under which the Optionee's employment is terminated. (i) Death. In the event of the death of the Optionee, the Option shall become a Vested Option and the estate of the Optionee shall have the right, at any time and from time to time within one year after the date of death or such longer period, if any, as the Committee in its sole discretion shall determine (but not after the Expiration Date), to exercise all or any portion of the Option. (ii) Disability. If the Optionee's employment with the Company or a Related Entity is terminated because of Disability, the Option shall become a Vested Option and the Optionee shall have the right, at any time and from time to time within one year of termination or such longer period, if any, as the Committee in its sole discretion shall determine (but not after the Expiration Date), to exercise all or any portion of the Option. (iii) Retirement. Upon the Optionee's Retirement, the Option shall terminate unless it is then a Vested Option or unless the Committee, in its sole discretion, determines that the Option is a Vested Option, and the Optionee shall have the right, at any time and from time to time within five years of the date of Retirement (but not after the Expiration Date), to exercise all or any portion of the Option that was a Vested Option immediately prior to the time of retirement. (iv) Other Termination. If the Optionee's employment with the Company or a Related Entity is terminated for any reason other than for death or Disability and other than "for cause," as such term is defined in the Plan, the Optionee shall have the right, if the Option is a Vested Option, at any time and from time to time within three months of termination or such longer period, if any, as the Committee in its sole discretion shall determine (but not after the Expiration Date), to exercise all or any portion of the Option. (v) Change of Control. Upon the occurrence of a Change of Control, as such term is defined in the Plan, the Option shall immediately become a Vested Option. 3 PAGE 3 (vi) Termination for Cause. Notwithstanding any other provision in this Agreement, if the Optionee's employment is terminated by the Company or any Related Entity "for cause," as such term is defined in the Plan, the Optionee shall immediately forfeit all rights under the Option except as to the shares of Common Stock already purchased prior to such termination. 3. Exercise: Payment for and Delivery of Stock. The Option may be exercised only by the Optionee or his or her transferee(s) by will or the laws of descent and distribution. The Option may be exercised by giving written notice of exercise to the Company specifying the number of shares (minimum of 100, unless the unexercised balance of the Option is less than 100) to be purchased and the total purchase price, accompanied by a personal check to the order of the Company or shares of Common Stock in payment of the purchase price. Any shares of Common Stock so tendered shall be valued at their Fair Market Value on the date of exercise. 4. Non-Transferability of Option. The Option is not transferable otherwise than by will or the laws of descent and distribution. The Option shall not be otherwise transferred or assigned, pledged, hypothecated or otherwise disposed of in any way, whether by operation of law or otherwise, and shall not be subject to execution, attachment or similar process, it being understood that the Option shall not be assignable or transferable pursuant to a domestic relations order. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee, the Optionee's guardian or his legal representative. Upon any attempt to transfer the Option otherwise than by will or the laws of descent and distribution, or to assign, pledge, hypothecate or otherwise dispose of the Option, or upon the levy of any execution, attachment or similar process upon the Option, the Option shall immediately terminate and become null and void. 5. Decisions of Committee. Any decision, interpretation or other action made or taken in good faith by the Committee arising out of or in connection with the Plan or the Option shall be final, binding and conclusive on the Company and the Optionee and any respective heir, executor, administrator, successor or assign. 4 PAGE 4 6. Arbitration. In consideration of the grant of the Option, the Optionee agrees that any dispute that may arise directly or indirectly in connection with the Plan, the Option, the Optionee's employment or the termination of the Optionee's employment, whether arising in contract, statute, tort, fraud, misrepresentation, or other legal theory, shall be determined solely by arbitration in Denver, Colorado under the rules of the American Arbitration Association. The only legal claims between the Optionee, on the one hand, and the Company or any Related Entity, on the other, that are not included in this agreement to arbitration are claims by the Optionee for workers' compensation or unemployment compensation benefits, and claims for benefits under a Company or Related Entity benefit plan if the plan does not provide for arbitration of such disputes. Any claim with respect to the Plan, the Option, the Optionee's employment or the termination of the Optionee's employment must be established by a preponderance of the evidence submitted to the impartial arbitrator. A single arbitrator engaged in the practice of law shall conduct the arbitration under the then current procedures of the American Arbitration Association (the "AAA") and under the AAA's then current Model Employment Arbitration Rules. The arbitrator shall have the authority to order a pre-hearing exchange of information by the parties including, without limitation, production of requested documents, and examination by deposition of parties and their authorized agents. Each party shall bear its own costs and attorneys' fees, and the parties shall share equally the fees and expenses of the arbitrator, provided, however, that notwithstanding the foregoing, the arbitrator shall have the authority to award the prevailing party damages incurred as a result of any breach, costs, reasonable attorneys' fees incurred in connection with the arbitration, and direct that the non-prevailing party pay the expenses of arbitration. The decision of the arbitrator (i) shall be final and binding, (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator, and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims. If any party hereto files a judicial or administrative action asserting claims subject to this arbitration provision, and another party successfully stays such action and/or compels arbitration of such claims, the party filing said action shall 5 PAGE 5 pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. 7. Performance for Competitors. Unless otherwise determined by the Committee, in its sole discretion, or unless in compliance with the Company's Outside Director Policy, as interpreted solely by the Company's Compliance Committee, if at any time following the date hereof and before the Option is fully exercised the Optionee directly or indirectly receives payment for services from, or is otherwise employed by, any person, firm or corporation in competition with the Company or engaged in providing any services whatever that are substantially the same as services provided by the Company, the Optionee shall immediately forfeit all rights under the Option except as to the shares of Common Stock already purchased. 8. Miscellaneous. (i) Notices. Any notice to be given to the Company shall be personally delivered to or addressed to its Vice President, Human Resources, and any notice to be given to the Optionee shall be addressed to him/her at the address given beneath his/her signature below or such other address as the Company reasonably believes to be his/her most current address. Any notice to the Company is deemed given when received on behalf of the Company by the Vice President, Human Resources, of the Company at 188 Inverness Drive West, Suite 800, Englewood, Colorado 80112. Any notice to the Optionee is deemed given when personally delivered or enclosed in a properly sealed envelope addressed as aforesaid and deposited, postage prepaid, in a post office or branch post office regularly maintained by the United States Government. (ii) Employment. The Company may terminate an employee's employment at any time, with or without cause, unless the employment is covered by separate conditions contained in a collective bargaining agreement or other authorized written agreement, and nothing contained in this Agreement creates or implies an employment contract or term of employment or any promise of specific treatment upon which the Optionee may rely. 6 PAGE 6 (iii) Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Colorado. (iv) Amendments. The Company may at any time propose to amend this Agreement, but any such alteration or amendment shall be effective only if in writing, signed by a duly authorized officer of the Company and by the Optionee. IN WITNESS WHEREOF, the undersigned have hereunto executed this Agreement as of the date first above written. U S WEST, Inc. OPTIONEE By:--------------------------- ------------------------------ [Name] ------------------------------ Address ------------------------------ City, State, Zip Social Security Number: EX-10.V 5 RESTRICTED STOCK AGREEMENT 1 PAGE 1 Exhibit 10v U S WEST, INC. RESTRICTED STOCK AGREEMENT Grant # THIS AGREEMENT is entered into as of [date] between U S WEST, Inc. (the "Company") and [Grantee Name] (the "Grantee"). RECITAL Pursuant to the U S WEST, Inc. 1994 Stock Plan (the "Plan"), the Human Resources Committee of the Board of Directors (the "Committee") has granted to the Grantee on [Date], as a matter of separate inducement in connection with his/her engagement with the Company or a Related Entity, and not in lieu of salary or other compensation for his/her services, restricted shares of Common Stock ("Restricted Stock") issued by the Company on the terms and conditions set forth herein. AGREEMENT In consideration of the foregoing and of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto agree as follows: 1. Grant of Restricted Stock. On the terms and conditions set forth herein, the Company hereby grants to the Grantee an aggregate of [No. Shares] shares of Restricted Stock. The Restricted Stock is granted pursuant to the Plan, the terms of which are incorporated by reference and apply to this Agreement as if they were set forth herein. Terms used in this Agreement and not otherwise defined shall have the meanings ascribed to them in the Plan. 2. Restricted Period. The Restricted Stock shall become Vested in accordance with the following schedule and is herein called the "Restricted Period." Except as set forth below, the Restricted Stock shall not become Vested before the expiration of the Restricted Period, regardless of the circumstances under which the Grantee's employment is terminated, and the Restricted Stock shall consequently remain subject to forfeiture during the Restricted Period. 2 PAGE 2 Restricted Period [Term of Restriction] (i) Death. In the event of the death of the Grantee, the Restricted Stock shall no longer be subject to any restriction and shall be immediately Vested. (ii) Disability. If the Grantee's employment with the Company or a Related Entity is terminated because of Disability, the Restricted Stock shall no longer be subject to any restriction and shall be immediately Vested. (iii) Other Termination. If the Grantee's employment with the Company or a Related Entity is terminated for any reason other than for death or Disability, the Restricted Stock shall be forfeited unless the Committee, in its sole discretion, determines that such Restricted Stock is then Vested or sets alternative terms on which such Restricted Stock may become Vested. (iv) Change of Control. Upon the occurrence of a Change of Control, the Restricted Stock shall no longer be subject to any restriction and shall be immediately Vested. 3. Custody; Voting and Dividends. The Company shall hold the Restricted Stock in an account on behalf of the Grantee. The Grantee shall execute and return the attached stock power in favor of the Company, to be exercised by the Company only in the case of the forfeiture or other return of the Restricted Stock to the Company as provided herein. The Grantee shall receive such dividends as may be declared on such Restricted Stock, and shall be entitled to voting privileges associated with such Restricted Stock. 4. Non-Transferability of Restricted Stock. The Restricted Stock is not transferable other than by will or the laws of descent and distribution. The Restricted Stock shall not be otherwise transferred or assigned, pledged, hypothecated or otherwise disposed of in any way, whether by operation of law or otherwise, and shall not be subject to execution, attachment or similar process, it being understood that the Restricted Stock shall not be assignable or transferable pursuant to a domestic relations order. Upon any attempt to transfer the Restricted 3 PAGE 3 Stock other than by will or the laws of descent and distribution, or to assign, pledge, hypothecate or otherwise dispose of the Restricted Stock, or upon the levy of any execution, attachment or similar process upon the Restricted Stock, the Restricted Stock shall immediately be canceled. 5. Decisions of Committee. Any decision, interpretation or other action made or taken in good faith by the Committee arising out of or in connection with the Plan or the Restricted Stock shall be final, binding and conclusive on the Company and the Grantee and any respective heir, executor, administrator, successor or assign. 6. Arbitration. In consideration of the grant of the Restricted Stock, the Grantee agrees that any dispute that may arise directly or indirectly in connection with the Plan, the Restricted Stock, the Grantee's employment or the termination of the Grantee's employment, whether arising in contract, statute, tort, fraud, misrepresentation, or other legal theory, shall be determined solely by arbitration in Denver, Colorado under the rules of the American Arbitration Association. The only legal claims between the Grantee, on the one hand, and the Company or any Related Entity, on the other, that are not included in this agreement to arbitration are claims by the Grantee for workers' compensation or unemployment compensation benefits, and claims for benefits under a Company or Related Entity benefit plan if the plan does not provide for arbitration of such disputes. Any claim with respect to the Plan, the Restricted Stock, the Grantee's employment, or the termination of the Grantee's employment, must be established by a preponderance of the evidence submitted to the impartial arbitrator. A single arbitrator engaged in the practice of law shall conduct the arbitration under the then current procedures of the American Arbitration Association (the "AAA") and under the AAA's then current Model Employment Arbitration Rules. The arbitrator shall have the authority to order a pre-hearing exchange of information by the parties including, without limitation, production of requested documents, and examination by deposition of parties and their authorized agents. Each party shall bear its own costs and attorneys' fees, and the parties shall share equally the fees and expenses of the arbitrator, provided, however, that notwithstanding the foregoing, the arbitrator shall have the authority to award the prevailing party damages incurred as a result of any breach, costs, reasonable attorneys' fees incurred 4 PAGE 4 in connection with the arbitration, and direct that the non- prevailing party pay the expenses of arbitration. The decision of the arbitrator (i) shall be final and binding, (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator, and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims. If any party hereto files a judicial or administrative action asserting claims subject to this arbitration provision, and another party successfully stays such action and/or compels arbitration of such claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees. 7. Performance for Competitors. Unless otherwise determined by the Committee, in its sole discretion, or unless in compliance with the Company's Outside Director Policy, as interpreted solely by the Company's Compliance Committee, if at any time following the date hereof and before the Restricted Stock is Vested the Grantee directly or indirectly receives payment for services from, or is otherwise employed by, any person, firm or corporation in competition with the Company or engaged in providing any services whatever that are substantially the same as services provided by the Company, the Grantee shall immediately forfeit all rights under the Restricted Stock to the extent that such Restricted Stock is not Vested. 8. Miscellaneous. (i) Notices. Any notice to be given to the Company shall be personally delivered to or addressed to its Vice President, Human Resources, and any notice to be given to the Grantee shall be addressed to him/her at the address given beneath his/her signature below or such other address as the Company reasonably believes to be his/her most current address. Any notice to the Company is deemed given when received on behalf of the Company by the Vice President, Human Resources, of the Company at 188 Inverness Drive West, Suite 800, Englewood, Colorado 80112. Any notice to the Grantee is deemed given when personally 5 PAGE 5 delivered or enclosed in a properly sealed envelope addressed as aforesaid and deposited, postage prepaid, in a post office or branch post office regularly maintained by the United States Government. (ii) Employment. The Company may terminate an employee's employment at any time, with or without cause, unless the employment is covered by separate conditions contained in a collective bargaining agreement or other authorized written agreement, and nothing contained in this Agreement creates or implies an employment contract or term of employment or any promise of specific treatment upon which the Grantee may rely. (iii) Governing Law. This Agreement shall be construed and enforced in accordance with the laws of the State of Colorado. (iv) Amendments. The Company may at any time propose to amend this Agreement, but any such alteration or amendment shall be effective only if in writing, signed by a duly authorized officer of the Company and by the Grantee. IN WITNESS WHEREOF, the undersigned have hereunto executed this Agreement as of the date first above written. U S WEST, Inc. GRANTEE By:---------------------------- --------------------------------- [Grantee Name] --------------------------------- Street Address --------------------------------- City, State and Zip Code --------------------------------- Social Security Number 6 PAGE 6 IRREVOCABLE STOCK POWER FOR VALUE RECEIVED, the undersigned does (do) hereby sell, assign and transfer to: U S WEST, Inc. 84-0926774 (Tax Identification Number) [No. shares] shares of the common stock of U S WEST, Inc. (the "Company") represented by Grant Number [Grant No.], standing in the name of the undersigned on the books of the Company. The undersigned does (do) hereby irrevocably constitute and appoint the Senior Vice President and Chief Human Resources Officer for the Company attorney to transfer the said stock on the books of the Company, with full power of substitution in the premises. ______________________________ Dated:_____________________ [Grantee Name] ______________________________ Dated:_____________________ IMPORTANT -- READ CAREFULLY: The signature(s) of this Stock Power must correspond with the name(s) as written upon the face of the certificate(s) or account(s) in every particular without alternation or enlargement or any change whatever. EX-10.W 6 EMPLOYMENT LETTER DATED 5/11/92 1 PAGE 1 Exhibit 10w U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 303 793-6482 Richard D. McCormick President and Chief Executive Officer May 11, 1992 Mr. Charles P. Russ 745 Oakwood Ave. Dayton, OH 45419 Dear Charlie: I am pleased to formally offer you employment at U S WEST, Inc. in the capacity of Executive Vice President, General Counsel and Secretary based in our Corporate Headquarters in Englewood, Colorado. The purpose of this letter is to cover the essential elements of our relationship. The U S WEST Board of Directors has authorized me to select and appoint you as Executive Vice President, General Counsel and Secretary. Your formal election will occur at the next meeting of the Board to be held in August. Assuming your acceptance, we look forward to you joining us no later than July 1. As compensation for the services you will be performing, you will receive an annual salary of $350,000 paid on a bi-monthly basis. You will be eligible for salary review in twelve to eighteen months from your employment date. In addition, you will participate in the U S WEST Inc. Short-Term Incentive Plan and be eligible for a target annual bonus of 40% of your base salary. That plan has a range of 0% to 100%. For 1992, we will guarantee a payment to you of $140,000 under that plan. 2 PAGE 2 In consideration of the forfeiture of your contract as a result of leaving your present employer and as an incentive to be employed by U S WEST, we will pay you upon employment a lump sum of $1,449,000. In the event you voluntarily resign from U S WEST before December 31, 1996, you agree to repay U S WEST on a pro rata basis the portion of this amount in relationship to the remaining period of time from your resignation until December 31, 1996. The foregoing repayment obligation shall not apply in the event you voluntarily resign following a Change of Control as defined in the Change of Control Plan referred to later in this letter or, absent a Change of Control, and during the period ending December 31, 1996, you voluntarily resign as a result of a change in your "position and duties" or "compensation" or "for good reason" as such terms are defined and described in the Change of Control Plan except under circumstances in which all the members of U S WEST's senior management group are similarly and proportionately affected (e.g., salary freeze or reduction affecting all such group members). In addition, the foregoing repayment obligation shall not apply in the event of your death or disability (such term as used in this letter being always defined as it is in Section 5(a)(i) only of the Change of Control Plan). We will grant you 20,000 shares of U S WEST stock options upon your employment and a minimum of 15,000 per year for four years thereafter (typically in November or December) commencing in and including 1992. Such options are non-qualified ten year grants with cliff vesting after three years. You will, however, be immediately vested for each grant in the event of termination, retirement, death or disability with three years to exercise those vested shares. Upon employment you will be granted 45,000 performance shares as a participant in the U S WEST Long-Term Incentive Plan. That plan will operate through 1996 and earn out on an annual basis as a result of total shareowner return results and is paid annually in restricted stock of U S WEST, Inc. You will commence participation upon your employment and be eligible for an earn out for 1992 on a pro rata basis from your date of employment. Also upon employment U S WEST will pay you a lump sum of $110,000 as replacement value for any difference between the total cash compensation (base, bonus and long-term incentive) that you would have otherwise earned had you stayed at NCR for 3 PAGE 3 1992 and your actual total cash compensation for base and short-term bonus payments at U S WEST in 1992 as well as any vested and exercisable stock options at NCR that you are forfeiting. You will be eligible to participate in the U S WEST Deferred Compensation Plan whereby you can defer up to 50% of your base salary (to retirement) starting January 1, 1993. Any deferred portion earns interest at a rate of Treasury bills plus 2% (currently 9.3%). Any difference between the maximum qualified 401K company match ($8,728 in 1992) and 6% of your base salary will also be matched at .833 if you participate in this plan. You will be a participant in the U S WEST, Inc. Change of Control Plan and will have an individual agreement to that effect. Should U S WEST terminate your employment from your date of hire through December 31, 1996, you will be paid an amount equal to two times your base salary ("Severance"). In the event the Change of Control takes effect, you will receive the greater of (1) the severance payment under the Change of Control Plan or (2) Severance. You will be eligible to participate in the U S WEST Management Pension Plan (requires five-year vesting) and in the U S WEST Executive Non-Qualified Pension Plan after one year of service with the company. In addition, you will receive a supplemental retirement benefit as follows: - - For each year of service that you complete with U S WEST, you will receive, on a non-qualified basis, a $14,000 benefit accrual - up to a maximum of seven years of service. This benefit is to equal the difference in value between the NCR SERP that commences payment at age 50 and the value of what the NCR SERP would have been (had you stayed employed with NCR) for each additional year of service that you work for U S WEST after age 50, up to age 55. - - This benefit becomes payable on the earlier of your separation of service from U S WEST or your retirement. - - You will have the option of receiving this benefit in either a lump sum or in equal annual installments until age 65, whereupon payments to you from the qualified and non- 4 PAGE 4 qualified plans equaling that amount will commence. The lump sum option represents the present value of this supplemental benefit. You will be required to elect one of these two options within ninety days of acceptance of employment with U S WEST. - - In the event of your death prior to receipt of this benefit, the value of the benefit at the time of death will be paid to your estate. The benefits that you accrue in the U S WEST Management Pension Plan and in the U S WEST Executive Non-Qualified Pension Plan after age 55 will be vested. The accruals under these two plans after age 55 will be in addition to the $14,000 annual benefit accrual up to age 55 discussed above. You will be provided annual financial counseling reimbursement in an amount up to $10,000 for 1993 and 1994 (grossed up). Thereafter you will be eligible for $2,000 per year. U S WEST, Inc. will also reimburse (on a tax grossed-up basis), membership initiation fees for a gold club. Monthly country club dues, luncheon club dues, and associated business expenses will also be reimbursed by the Company. As we have discussed, you will be entitled to five weeks of annual vacation. You will be eligible to participate in our relocation plan which will reimburse you for certain reasonable costs incurred by you in relocating to Denver. The relocation benefits include: guaranteed purchase of the home you sell if you so desire, interim living expenses, house hunting trips, in transit moving expenses for you and your family, the moving of your household goods, certain home purchase costs, financing options and certain miscellaneous allowances. During this period, U S WEST, Inc. will also reimburse your expenses for trips home at your election. Spouse and child trips to Denver will be reimbursed on the same basis. Because of the complexity of relocation, we have asked Pat Vigil at (303) 292-0638, who leads our relocation group, to work directly with you and your family. Of course, Tom Bouchard will be available to assist. Other reasonable business 5 PAGE 5 expenses will be reimbursed in accordance with the Company's established expense reimbursement policies. Finally, you will be eligible to participate in all of the established benefit programs regularly maintained by the Company. At the present time, these include: - - Medical, dental and vision coverage which provides four options of coverage at your choice paid for by the Company (no employee contribution at this time other than plan deductibles and co-pays). - - Life insurance in an amount equivalent to your base salary and bonus at Company expense, with an opportunity to purchase additional split dollar coverage of up to four times your base salary at a shared expense. - - 401(k) savings plan with matching Company contributions of .833 up to 6% pre-tax of base salary. In all cases, you will be entitled to receive all benefits of employment applicable generally to all employees of the Company at the same level of responsibility which you have. These benefits will be pursuant to the specific provisions of such plans and programs. You will report directly to me in my capacity as Chairman and Chief Executive Officer. We expect that you will devote substantially all of your time to your job duties on behalf and comply with all corporate policies and decisions relating to business matters. Some of these policies are set out in the Company's "Code of Business Ethics" which you will be expected to sign. Among other things, this Code precludes you from directly or indirectly engaging in any competitive business. In addition, Company policy requires that you may not disclose to any third person any information concerning the business or affairs of the Company which you may acquire in the course of your employment. This applies both during and after your employment. This letter does not bind either party to any specific period of employment. Our relationship will be at-will. While we assume that the business will continue to grow and prosper, and our relationship will be good, nothing is guaranteed for all time. Thus, just as you may terminate your relationship with us at any time and without cause, we reserve the same right. 6 PAGE 6 We understand that under your severance letter agreement with NCR (the "Severance Agreement") and the NCR Senior Executive Retirement, Death and Disability Plan (the "Retirement Plan"), for a period of one year following the voluntary termination of your employment with NCR you are prohibited from becoming an employee of a company which is in competition with NCR. You have advised us that from your knowledge of NCR's activities you do not believe that U S WEST is engaged in direct or substantial competition with NCR. We have reviewed our current and future planned activities, products and services and determined that a minor activity in which we are engaged, while economically insubstantial in relation to our primary activities, might be construed as overlapping in a competitive manner with activities of NCR. We have discussed the nature of such activity with two outside legal counsel, both of whom independently concluded, as did we, that the degree of possible competition was so insignificant and indirect and the nature of your duties and responsibilities so far removed from the conduct of such activities as not co constitute direct or substantial competition with NCR and, accordingly, not to justify on any reasonable basis a denial of your benefits by NCR under the Severance Agreement or the Retirement Plan. Nevertheless, in consideration of your agreement to become a U S WEST employee, we agree to indemnify and hold you harmless against any losses, costs and/or liabilities you may incur or suffer (including loss of payments otherwise due to you under the Severance Agreement and the Retirement Plan) which might arise out of or result from the non- competition requirement of the Severance Agreement and the Retirement Plan due to your becoming an employee of U S WEST. In the event that NCR seeks to deny payment of any amount to you under the Severance Agreement or the Retirement Plan or to obtain reimbursement from us or from you of any amount paid by NCR to you under the Severance Agreement or Retirement Plan based on an allegation that we are engaged in competition with NCR, then you agree to cooperate fully and assist us, consistent with your ethical obligations, in any and all actions in which we may choose to engage with respect to such actions by NCR, including, without limitation, the commencement of litigation against NCR, by us in our name or at our direction but in your name, to collect any amounts NCR causes not to be paid to you, to contest any effort by NCR to obtain reimbursement of any amounts previously paid to you, or to obtain reimbursement from NCR of any amounts paid by us to you pursuant to this indemnification. 7 PAGE 7 As you are aware, U S WEST is subject to a consent decree (the "Modified Final Judgment" or "MFJ") which divested the Bell System and continues to restrict the types of businesses in which U S WEST may engage. With respect to U S WEST, the MFJ has been modified from time to time, notably by a Civil Enforcement Consent Order ("CECO") in 1989, and an Enforcement Order ("EO") in 1991. You will receive, and are required to review, additional information on MFJ/CECO/EO. Signed certificates of review will be required from you within ten (10) days of hire date to comply with the laws. We have included that material for your review and signature to be returned to us within ten days of your employment (on the payroll). Any offer or employment at U S WEST, Inc. is conditioned upon the applicant undergoing and passing pre-employment drug testing, subject to applicable Federal, state, and local law. A consent form is attached for you to sign and return with this letter. Upon receipt, you will be contacted to set up an appointment for the test. If you agree with the above terms of employment, please indicate by signing below and returning one original to me in the enclosed envelope. Sincerely, /s/ Richard D. McCormick Richard D. McCormick Accepted: Signed: /s/ Charles P. Russ III Date: /s/ 5-11-92 -------------------------- ------------------------- Charles P. Russ Attachments EX-10.AB 7 EXECUTIVE CHANGE OF CONTROL 1 PAGE 1 Exhibit 10ab December 30, 1994 Mr. James H. Stever Executive Vice President U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 Dear Mr. Stever: U S WEST, Inc. (the "Company"), on behalf of itself, its subsidiaries and its shareholders, wishes to encourage your continued service and dedication in the performance of your duties, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Subsection I(h)) of the Company. The Board of Directors of the Company (the "Board") believes that the prospect of a pending or threatened Change of Control inevitably creates distractions and personal risks and uncertainties for its executives, and that it is in the best interests of the Company to minimize such distractions to certain executives and the Company. The Board further believes that it is in the best interests of the Company to encourage its executives' full attention and dedication to their duties, both currently and in the event of any threatened or pending Change of Control. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued retention of certain members of the Company's management, including yourself, and the attention and dedication of management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change of Control of the Company. In order to induce you (the "Executive") to remain in the employ of the Company and in consideration of your continued service to the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event that your employment with the Company is terminated subsequent to a Change of Control of the Company in the 2 PAGE 2 circumstances hereinafter described. For purposes of this Agreement, references to employment with the Company shall include employment with a Subsidiary of the Company (as defined in Subsection I(w)). I. Definitions The meaning of each defined term that is used in this Agreement is set forth below. (a) AAA. The American Arbitration Association. (b) Additional Pay. The meaning of this term is set forth in Subsection IV(b). (c) Agreement. The meaning of this term is set forth in the third paragraph of this Agreement. (d) Agreement Payments. The meaning of this term is set forth in Subsection IV(e)(i). (e) Beneficiaries. The meaning of this term is set forth in Subsection VI(b). (f) Board. The meaning of this term is set forth in the first paragraph of this Agreement. (g) Cause. For purposes of this Agreement, "Cause" shall mean the Executive's willfully breaching or failing to perform his employment duties. For purposes of this Subsection I(g), no act, or failure to act, on the part of the Executive shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that such action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a certificate of a resolution duly adopted by the affirmative vote of not less than seventy-five percent (75%) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Executive has engaged in the conduct set forth in this Subsection 3 PAGE 3 I(g) and specifying the particulars thereof in detail. (h) Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if there is a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as determined for purposes of Regulation 13D-G under the Exchange Act as currently in effect), directly or indirectly, of securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities, unless through a transaction consummated with the prior approval of the Board; or (ii) during any period of two consecutive calendar years, individuals who at the beginning of such period constitute the Board and any new director(s) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (iii) the Company becomes a party to a merger, plan of reorganization, consolidation or share exchange in which either (x) the Company will not be the surviving corporation or (y) the Company will be the surviving corporation and any outstanding shares of the Company's common stock will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or 4 PAGE 4 (iv) the shareholders of the Company approve a merger, plan of reorganization, consolidation or share exchange with any other corporation, and immediately following such merger, plan of reorganization, consolidation or share exchange the holders of the voting securities of the Company outstanding immediately prior thereto hold securities representing fifty percent (50%) or less of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger, plan of reorganization, consolidation or share exchange; provided, however, that notwithstanding the foregoing, no Change of Control for purposes of this Agreement shall be deemed to have occurred if one-half (1/2) or more of the members of the Board of the Company or such surviving entity immediately after such merger, plan of reorganization, consolidation or share exchange is comprised of persons who served as directors of the Company immediately prior to such merger, plan of reorganization, consolidation or share exchange or who are otherwise designees of the Company; or (v) any other event that a majority of the Board, in its sole discretion, shall determine constitutes a Change of Control. (i) Code. The meaning of this term is set forth in Subsection IV(e)(i). (j) Company. The meaning of this term is set forth in the first paragraph of this Agreement and Subsection VI(a). (k) Controlled Group. For purposes of this Agreement, "Controlled Group" shall mean the Company and all of the Company's Subsidiaries. (l) Disability. For purposes of this Agreement, "Disability" shall mean an illness, injury or similar incapacity which 52 weeks after its commencement continues to render the Executive unable to perform the material and substantial duties of the Executive's position or any occupation or employment for which the Executive is qualified or may reasonably become qualified by training, education or experience. Any question as to the existence of a Disability upon which the Executive and the Company cannot agree shall be determined by a qualified independent physician selected by the Executive (or, if the Executive is unable to make such 5 PAGE 5 selection, by any adult member of the Executive's immediate family or the Executive's legal representative), and approved by the Company, such approval not to be unreasonably withheld. The determination of such physician made in writing to the Company, and to the Executive, shall be final and conclusive for all purposes of this Agreement. (m) Employer. For purposes of this Agreement, "Employer" shall mean the Company or the Subsidiary, as the case may be, with which the Executive has an employment relationship. (n) Exchange Act. This term shall have the meaning set forth in Subsection I(h). (o) Executive. This term shall have the meaning set forth in the third paragraph of this Agreement. (p) Excise Tax. This term shall have the meaning set forth in Subsection IV(e)(i). (q) Good Reason. For purposes of this Agreement, "Good Reason" shall mean the occurrence, without the Executive's express written consent, of any of the following circumstances: (i) The assignment to the Executive of any duties inconsistent with, or any substantial diminution in, such Executive's status or responsibilities as in effect immediately prior to a Change of Control of the Company, including imposition of travel obligations which differ materially from required business travel immediately prior to the Change of Control; (ii) Any diminution in the status or responsibilities of the Executive's position from that which existed immediately prior to the Change of Control, whether by reason of the Company ceasing to be a public company under the Exchange Act, becoming a subsidiary of a successor public company, or otherwise; (iii) (A) A reduction in the Executive's annual base salary as in effect immediately before the Change of Control; or (B) the failure to pay a bonus award to which the Executive is otherwise entitled under any of the short-term incentive plan in which the Executive participates, the U S WEST Executive Long-Term Incentive Plan, or any successor 6 PAGE 6 incentive compensation plans at the time such awards are usually paid; (iv) A change in the principal place of the Executive's employment, as in effect immediately prior to the Change of Control of the Company, to a location more than thirty-five (35) miles distant from the location of such principal place at such time; (v) The failure by the Company to continue in effect any incentive compensation plan or stock option plan in which the Executive participates immediately prior to the Change of Control, unless an equivalent alternative compensation arrangement (embodied in an ongoing substitute or alternative plan) has been provided to the Executive, or the failure by the Company to continue the Executive's participation in any such incentive or stock option plan on substantially the same basis, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the time of the Change of Control; (vi) (A) Except as required by law, the failure by the Company to continue to provide to the Executive benefits substantially equivalent, in the aggregate, to those enjoyed by the Executive under the qualified and non-qualified employee benefit and welfare plans of the Company, including, without limitation, any pension, life insurance, medical, dental, health and accident, disability, retirement or savings plans in which the Executive was eligible to participate immediately prior to the Change of Control; (B) the taking of any action by the Company which would directly or indirectly materially reduce or deprive the Executive of any other perquisite enjoyed by the Executive immediately prior to the Change of Control (including Company-paid and/or reimbursed club memberships, financial counseling fees and the like); or (C) the failure by the Company or its successor to treat the Executive under the Company's vacation policy, past practice or special agreement in the same manner and to the same extent as was in effect immediately prior to the Change of Control; (vii) The failure of the Company or any successor to obtain a satisfactory written agreement from any successor to 7 PAGE 7 assume and agree to perform this Agreement, as contemplated in Subsection VI(a); or (viii) Any purported termination of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection III(b) or, if applicable, Subsection I(g). For purposes of this Agreement, no such purported termination shall be effective except as constituting Good Reason. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. (r) Gross-Up Payment. The meaning of this term is set forth in Subsection IV(e)(i). (s) Notice of Termination. The meaning of this term is set forth in Subsection III(b). (t) Other Payments. The meaning of this term is set forth in Subsection IV(e)(i). (u) Payments. The meaning of this term is set forth in Subsection IV(e)(i). (v) Retirement. For purposes of this Agreement, "Retirement" shall mean the Executive's voluntary termination of employment with the Company, other than for Good Reason, and in accordance with the Company's retirement policy generally applicable to its employees or in accordance with any prior or contemporaneous retirement arrangement established with the Executive's consent with respect to the Executive. (w) Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the voting stock is owned directly or indirectly by the Company. (x) Tax Counsel. The meaning of this term is set forth in Subsection IV(e)(ii). (y) Termination. The meaning of this term is set forth in Subsection III(a). 8 PAGE 8 (z) Termination Date. For purposes of this Agreement, "Termination Date" shall mean: (i) If the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of his duties during such thirty-day period); and (ii) If the Executive's employment is terminated for Cause or Good Reason or for any reason other than death or Disability, the date specified in the Notice of Termination (which in the case of a termination for Cause shall not be less than thirty (30) days and in the case of a termination for Good Reason shall not be less than thirty (30) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). II. Term of Agreement (a) General. Upon execution by the Executive, this Agreement shall commence as of January 1, 1995. This Agreement shall continue in effect through December 31, 1997; provided, however, that commencing on January 1, 1998, and every third January 1 thereafter, the term of this Agreement shall automatically be extended for three additional years unless, not later than ninety days prior to the January 1 on which this Agreement would otherwise automatically be extended, the Company shall have given notice that it does not wish to extend this Agreement; provided further, however, that if a Change of Control of the Company shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six months beyond the month in which the Change of Control occurred. (b) Disposition of Employer. In the event the Executive is employed by a Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold or otherwise disposed of prior to a Change of Control unless the Executive continues in employment with the Controlled Group after such sale or other disposition. If the Executive's Employer is sold or disposed of following a Change of Control, this Agreement shall continue through its original term or any extended term then in effect. 9 PAGE 9 (c) Deemed Change of Control. If the Executive's employment with the Employer is terminated prior to the date on which a Change of Control occurs, and such termination was at the request of a third party who has taken steps to effect a Change of Control or was otherwise caused by the Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to have occurred prior to such termination. (d) Expiration of Agreement. No termination or expiration of this Agreement shall affect any rights, obligations or liabilities of either party that shall have accrued on or prior to the date of such termination or expiration. III. Termination Following Change of Control (a) Entitlement to Benefits. If a Change of Control of the Company shall have occurred, the Executive shall be entitled to the benefits provided in Section IV hereof upon the subsequent termination of his employment with the Company within three years after the date of the Change of Control unless such termination is (i) a result of the Executive's death or Retirement, (ii) for Cause, (iii) a result of the Executive's Disability, or (iv) by the Executive other than for Good Reason. A termination of the Executive's employment which is not as a result of the Executive's death, Retirement or Disability and (x) if by the Company, is not for Cause, or (y) if by the Executive, is for Good Reason, shall be referred to hereinafter as a "Termination." (b) Notice of Termination. Any purported termination of the Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section VIII. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific provision of this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. If the Executive's employment shall be terminated for Cause or by the Executive for other than Good Reason, the Company shall pay the Executive his full base salary through the Termination Date at the rate in effect at the time Notice of Termination is given and shall pay any amounts to be paid to the Executive pursuant to any other compensation plans, programs or employment agreements then in effect, and the Company shall have no further obligations to 10 PAGE 10 the Executive under this Agreement. If within thirty (30) days after any Notice of Termination is given, the party receiving such Notice notifies the other party that a dispute exists concerning the grounds for termination, then, notwithstanding the meaning of "Termination Date" set forth in Subsection I(z), the Termination Date shall be the date on which the dispute is finally resolved, whether by mutual written agreement of the parties or by a decision rendered pursuant to Section XI; provided that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay the Executive his full compensation in effect when the notice giving rise to the dispute was given, and continue the Executive as a participant in all benefits plans or perquisites in which the Executive was participating or which he was enjoying when the Notice of Termination giving rise to the dispute was given, until the dispute is finally resolved. Amounts paid under this Subsection III(b) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. IV. Compensation Upon a Termination Following a Change of Control of the Company, upon a Termination of the Executive's employment, the Executive shall be entitled to the following benefits, provided that the Termination occurs during the three-year period immediately following the date of the Change of Control: (a) Standard Benefits. The Company shall pay the Executive his full base salary through the Termination Date at the rate in effect at the time the Notice of Termination is given, no later than the second day following the Termination Date, plus all other amounts to which the Executive is entitled under any compensation plan of the Company applicable to the Executive at the time such payments are due. Without limitation, amounts payable pursuant to this Subsection IV(a) shall include, pursuant to the express terms of the short-term incentive plan in which the Executive participates or otherwise, the Executive's annual bonus under such short-term incentive plan, pro-rated to the Termination Date. 11 PAGE 11 (b) Additional Benefits. The Company shall pay to the Executive as additional pay ("Additional Pay"), the product of (i) the lesser of (x) three (3) or (y) the difference between sixty-five (65) and the Executive's age as of the date of the Notice of Termination (calculated to the nearest twelfth of a year), multiplied by (ii) the sum of (x) the Executive's annual base salary rate in effect immediately prior to the Termination Date and (y) the Executive's annual bonus amount under the short-term incentive plan in which the Executive participates, such bonus amount to be calculated on the basis of the extent to which the performance factors targeted by the Human Resources Committee of the Board have been achieved (for this purpose, the Company's performance through the Termination Date shall be annualized based upon the actual number of days elapsed from the beginning of the fiscal year in which the Termination occurs through the Termination Date over a year of 360 days), which shall be deemed to be 100% unless the performance actually achieved is greater than 100%, in which case the actual performance levels shall be utilized. The Company shall pay to the Executive the Additional Pay in a lump sum, in cash, not later than the fifteenth day following the Termination Date. (c) Retirement Plan Benefits. If not already vested, the Executive shall be deemed fully vested in all Company retirement plans and/or other written agreements relating to pay upon retirement in which the Executive was a participant, party or beneficiary immediately preceding a Change of Control, and any additional plans and/or agreements in which such Executive became a participant, party or beneficiary thereafter. In addition to the foregoing, for purposes of determining the amounts to be paid to the Executive under such plans and/or agreements, the years of service with the Company and the age of the Executive under all such plans and agreements shall be deemed increased by the lesser of thirty-six (36) months or such shorter period of time as would render the Executive sixty-five (65) years of age. For purposes of this Subsection IV(c), "plans" include, without limitation, the Company's qualified pension plan, non-qualified and mid-career retirement plans, and "agreements" encompass the terms of any offer letters leading to the Executive's employment with the Company where the Executive was a signatory thereto and any written amendments to the foregoing. In the event that the terms of the plans referenced in this Subsection IV(c) do not for any reason (e.g., if plan amendments would cause disqualification of qualified plans) coincide with the provisions of this Subsection 12 PAGE 12 IV(c), the Executive shall be entitled to receive from the Company under the terms of this Agreement an amount equivalent to all amounts he would have received had all such plans continued in existence as in effect on the date of this Agreement after being amended to coincide with the terms of this Subsection IV(c). (d) Health Benefits. Following the Termination Date, the Company shall continue to provide health, vision and dental benefits to the Executive and the Executive's eligible dependents on terms substantially equivalent to those on which the Company provides such benefits to retired employees who were service pension-eligible at the time of the Change of Control and whose retirement date most closely approximates the date of the Change of Control. The eligibility of the Executive's dependents shall be determined by the terms of the health, vision and dental benefit plans in effect prior to the Change of Control. (e) Gross-Up Payments. (i) In the event that any payment or the value of any benefit received or to be received by the Executive in connection with the Executive's Termination or contingent upon a Change of Control of the Company (whether received or to be received pursuant to the terms of this Agreement (the "Agreement Payments") or of any other plan, arrangement or agreement of the Company, its successors, any person whose actions result in a Change of Control of the Company or any person affiliated with any of them (or which, as a result of the completion of the transactions causing a Change of Control, will become affiliated with any of them) ("Other Payments" and, together with the Agreement Payments, the "Payments")) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any comparable federal, state or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), as determined as provided below, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the Excise Tax on Agreement Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Subsection IV(e)(i), and any interest, penalties or additions to tax payable by the Executive with respect 13 PAGE 13 thereto shall be equal to the total present value of the Agreement Payments and Other Payments at the time such Payments are to be made. The intent of the parties is that the Company shall be solely responsible for and shall pay, any Excise Tax on any Payments and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payments as well as any loss of deduction caused by the Gross-Up Payment. (ii) All determinations required to be made under this Subsection IV(e), including, without limitation, whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by tax counsel selected by the Company and reasonably acceptable to the Executive ("Tax Counsel"). The Company shall cause the Tax Counsel to provide detailed supporting calculations to the Company and the Executive within fifteen (15) business days after notice is given by the Executive to the Company that any or all of the Payments have occurred, or such earlier time as is requested by the Company. Within two (2) business days after such notice is given to the Company, the Company shall instruct the Tax Counsel to timely provide the data required by this Subsection IV(e) to the Executive. All fees and expenses of the Tax Counsel shall be paid solely by the Company. Any Excise Tax as determined pursuant to this Subsection IV(e) shall be paid by the Company to the Internal Revenue Service and/or other appropriate taxing authority on the Executive's behalf within five (5) days after receipt of the Tax Counsel's determination. If the Tax Counsel determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Tax is payable by the Executive, the Tax Counsel shall furnish the Executive with a written opinion that failure to disclose or report the Excise Tax on the Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or similar penalty. Any determination by the Tax Counsel shall be binding upon the Company and the Executive in the absence of material mathematical or legal error. As a result of the uncertainty in the application of Section 4999 of the Code at the time the initial determination by the Tax Counsel hereunder, it is possible that Gross-Up Payments will not have been made by the Corporation that should have been 14 PAGE 14 made or that Gross-Up Payments have been made that should not have been made, in each case, consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Subsection IV(e)(iii) below and the Executive is thereafter required to make a payment of any Excise Tax, the Tax Counsel shall determine the amount of underpayment of Excise Taxes that has occurred and any such underpayment shall be promptly paid by the Company to the Internal Revenue Service or other appropriate taxing authority on the Executive's behalf or, if such underpayment has been previously paid by the Executive, to the Executive. In the event that the Tax Counsel determines that an overpayment of Gross-Up Payments has occurred, any such overpayment shall be treated for all purposes as a loan to the Executive with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, due and payable within ninety (90) days after written demand to the Executive by the Company; provided, however, that the Executive shall have no duty or obligation whatsoever to repay such loan unless the Executive's receipt of the overpayment, or any portion thereof, is includible in the Executive's income and the Executive's repayment of the same is not deductible by the Executive for federal and state income tax purposes. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or state or local taxing authority, that, if successful, would result in any Excise Tax or an underpayment of Gross-Up Payments. Such notice shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of the claim and shall inform the Company of the nature of the claim, the administrative or judicial appeal period, and the date on which any payment of the claim must be paid. The Executive shall not pay any portion of the claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any amount under the claim is due). If the Company notifies the Executive in writing prior to the expiration of such thirty (30) day period that it desires to contest the claim, the Executive shall: 15 PAGE 15 (A) give the Company any information reasonably requested by the Company relating to the claim; (B) take such action in connection with contesting the claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation concerning the claim by an attorney selected by the Company who is reasonably acceptable to the Executive; and (C) cooperate with the Company in good faith in order to effectively contest the claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, without limitation, additional interest and penalties and attorneys' fees) incurred in such contests and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed as a result of such representation. Without limitation upon the foregoing provisions of this Subsection IV(e) (iii), except as provided below, the Company shall control all proceedings concerning such contest and, in its sole opinion, may pursue or forego any and all administrative appeal, proceedings, hearings and conferences with the taxing authority pertaining to the claim. At the written request of the Company and upon payment to the Executive of an amount at least equal to the claim plus any additional amount necessary to obtain the jurisdiction of the appropriate tribunal and/or court, the Executive shall pay the same and sue for a refund. The Executive agrees to prosecute any contest of a claim to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company requests the Executive to pay the claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless on an after-tax basis, from any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed on such advance or for any imputed income on such advance. Any extension of the statute of limitations relating to assessment of any Excise Tax for the taxable year of the Executive which is the subject of the claim is to be limited 16 PAGE 16 solely to the claim. Furthermore, the Company's control of the contest shall be limited to issues for which a Gross-Up Payment would be payable hereunder. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, the Executive receives any refund of a claim and/or any additional amount that was necessary to obtain jurisdiction, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, a determination is made that the Executive shall not be entitled to any refund of the claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund of a claim prior to the expiration of thirty (30) days after such determination, then the portion of such advance attributable to a claim shall be forgiven and shall not be required to be repaid. The amount of such advance attributable to a claim shall offset, to the extent thereof, the amount of the underpayment required to be paid by the Company to the Executive. (v) If, after the advance by the Company of an additional amount necessary to obtain jurisdiction, there is a final determination made by the taxing authority that the Executive is not entitled to any refund of such amount, or any portion thereof, then such nonrefundable amount shall be repaid to the Company by the Executive within thirty (30) days after the Executive receives notice of such final determination. A final determination shall occur when the period to contest or otherwise appeal any decision by an administrative tribunal or court of initial jurisdiction has been waived or the time for contesting or appealing the same has expired. (f) Legal Fees and Expenses. The Company shall pay to the Executive all legal fees and expenses as and when incurred by the Executive in connection with this Agreement, including all such fees and expenses, if any, incurred in contesting or disputing any 17 PAGE 17 Termination or in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome, unless, in the case of a legal action brought by or in the name of the Executive, a decision is rendered pursuant to Section X that such action was not brought by the Executive in good faith. (g) No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Section IV by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section IV be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement or other benefits received after the Termination Date or otherwise, except as specifically provided in this Section IV. The Company's obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or Employer may have against the Executive or other parties. V. Death and Disability Benefits In the event of the death or Disability of the Executive after a Change of Control of the Company, the Executive, or in the case of death, the Executive's beneficiaries, shall receive the benefits to which they are entitled under the retirement plans, disability policies and other applicable plans of the Company. VI. Successors; Binding Agreement (a) Obligations of Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive had terminated employment for Good Reason following a Change of Control of the Company, except that for purposes of implementing the foregoing, 18 PAGE 18 the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, the "Company" shall mean the Company as hereinabove defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) Enforceable by Beneficiaries. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees (the "Beneficiaries"). In the event of the death of the Executive while any amount would still be payable hereunder if such death had not occurred, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's Beneficiaries. (c) Employment. Except in the event of a Change of Control and, thereafter, only as specifically set forth in this Agreement, nothing in this Agreement shall be construed to (i) limit in any way the right of the Company or a Subsidiary to terminate the Executive's employment at any time for any reason or for no reason; or (ii) be evidence of any agreement or understanding, expressed or implied, that the Company or a Subsidiary will employ the Executive in any particular position, on any particular terms or at any particular rate of remuneration. VII. Confidential Information. The Executive shall hold in fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company, the Subsidiaries and their respective businesses, which shall have been obtained during the Executive's employment by the Employer and which shall not be public knowledge (other than by acts by the Executive or his representatives in violation of this Agreement). After termination of the Executive's employment with the Company or any Employer within the Controlled Group, the Executive shall not, without prior written consent of the Company or the Employer, communicate or divulge any such information, knowledge or data to anyone other than the Company, the Employer or those designated by them. In no event shall an asserted violation of this Section VII constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 19 PAGE 19 VIII. Notice All notices and communications hereunder shall be in writing and shall be given by hand delivery to the other party, by registered or certified mail, return receipt requested, postage prepaid, or by overnight mail, addressed as follows: If to the Executive: Mr. James H. Stever U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 If to the Company: U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 Attn.: Executive Vice President, General Counsel and Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. IX. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company's Chief Executive Officer. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado. All references to sections of the Code or the 20 PAGE 20 Exchange Act shall be deemed also to refer to any successor provisions of such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Sections IV and V shall survive the expiration of the term of this Agreement. X. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. XI. Arbitration The Executive may agree in writing with the Company (in which case this Article XI shall have effect but not otherwise) that any dispute that may arise directly or indirectly in connection with this Agreement, the Executive's employment or the termination of the Executive's employment, whether arising in contract, statute, tort, fraud, misrepresentation, or other legal theory, shall be determined solely by arbitration in Denver, Colorado under the rules of the AAA. The only legal claims between the Executive, on the one hand, and the Company or any Subsidiary, on the other, that would not be included in this agreement to arbitration are claims by the Executive for workers' compensation or unemployment compensation benefits, claims for benefits under a Company or Subsidiary benefit plan if the plan does not provide for arbitration of such disputes, and claims by the Executive that seek judicial relief in the form of specific performance of the right to be paid until the Termination Date during the pendency of any dispute or controversy arising under or Subsection III(b). If this Article XI is in effect, any claim with respect to this Agreement, the Executive's employment or the termination of the Executive's employment must be established by a preponderance of the evidence submitted to the impartial arbitrator. A single arbitrator engaged in the practice of law shall conduct any arbitration under the then current procedures of the American Arbitration Association (the "AAA") and under the AAA's then current Model Employment Arbitration Rules. The arbitrator shall have the authority to order a pre-hearing exchange of information by the parties including, without limitation, production of requested documents, and examination by deposition of parties and 21 PAGE 21 their authorized agents. If this Article XI is in effect, the decision of the arbitrator (i) shall be final and binding, (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator, and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims. If this letter sets forth our agreement on the subject matter hereof, kindly sign both originals of this letter and return to the Executive Vice President, General Counsel and Secretary of the Company one of the fully executed originals of this letter which will then constitute our agreement on this subject. Sincerely, U S WEST, Inc. By: /s/ Richard D. McCormick Richard D. McCormick Chairman, President and Chief Executive Officer /s/ James H. Stever James H. Stever EX-10.AC 8 CHANGE OF CONTROL FOR CEO 1 PAGE 1 Exhibit 10ac December 30, 1994 Mr. Richard D. McCormick Chairman, President and Chief Executive Officer U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 Dear Mr. McCormick: U S WEST, Inc. (the "Company"), on behalf of itself, its subsidiaries and its shareholders, wishes to encourage your continued service and dedication in the performance of your duties, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Subsection I(g)) of the Company. The Board of Directors of the Company (the "Board") believes that the prospect of a pending or threatened Change of Control inevitably creates distractions and personal risks and uncertainties for its executives, and that it is in the best interests of the Company to minimize such distractions to certain executives and the Company. The Board further believes that it is in the best interests of the Company to encourage its executives' full attention and dedication to their duties, both currently and in the event of any threatened or pending Change of Control. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued retention of certain members of the Company's management, including yourself, and the attention and dedication of management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change of Control of the Company. In order to induce you (the "Executive") to remain in the employ of the Company and in consideration of your continued service to the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event that your employment with the Company is terminated 2 PAGE 2 for any reason subsequent to a Change of Control of the Company. For purposes of this Agreement, references to employment with the Company shall include employment with a Subsidiary of the Company (as defined in Subsection I(s)). I. Definitions The meaning of each defined term that is used in this Agreement is set forth below. (a) AAA. The American Arbitration Association. (b) Additional Pay. The meaning of this term is set forth in Subsection IV(b). (c) Agreement. The meaning of this term is set forth in the third paragraph of this Agreement. (d) Agreement Payments. The meaning of this term is set forth in Subsection IV(e)(i). (e) Beneficiaries. The meaning of this term is set forth in Subsection VI(b). (f) Board. The meaning of this term is set forth in the first paragraph of this Agreement. (g) Change of Control. For purposes of this Agreement, a "Change of Control" shall be deemed to have occurred if there is a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change of Control shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes a "beneficial owner" (as determined for purposes of Regulation 13D-G under the Exchange Act as currently in effect), directly or indirectly, of securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities, unless through 3 PAGE 3 a transaction consummated with the prior approval of the Board; or (ii) during any period of two consecutive calendar years, individuals who at the beginning of such period constitute the Board and any new director(s) whose election by the Board or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board; or (iii) the Company becomes a party to a merger, plan of reorganization, consolidation or share exchange in which either (x) the Company will not be the surviving corporation or (y) the Company will be the surviving corporation and any outstanding shares of the Company's common stock will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or (iv) the shareholders of the Company approve a merger, plan of reorganization, consolidation or share exchange with any other corporation, and immediately following such merger, plan of reorganization, consolidation or share exchange the holders of the voting securities of the Company outstanding immediately prior thereto hold securities representing fifty percent (50%) or less of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger, plan of reorganization, consolidation or share exchange; provided, however, that notwithstanding the foregoing, no Change of Control for purposes of this Agreement shall be deemed to have occurred if one-half (1/2) or more of the members of the Board of the Company or such surviving entity immediately after such merger, plan of reorganization, consolidation or share exchange is comprised of persons who served as directors of the Company immediately prior to such merger, plan of reorganization, consolidation or share exchange or who are otherwise designees of the Company; or 4 PAGE 4 (v) any other event that a majority of the Board, in its sole discretion, shall determine constitutes a Change of Control. (h) Code. The meaning of this term is set forth in Subsection IV(e)(i). (i) Company. The meaning of this term is set forth in the first paragraph of this Agreement and Subsection VI(a). (j) Controlled Group. For purposes of this Agreement, "Controlled Group" shall mean the Company and all of the Company's Subsidiaries. (k) Employer. For purposes of this Agreement, "Employer" shall mean the Company or the Subsidiary, as the case may be, with which the Executive has an employment relationship. (l) Exchange Act. This term shall have the meaning set forth in Subsection I(g). (m) Executive. This term shall have the meaning set forth in the third paragraph of this Agreement. (n) Excise Tax. This term shall have the meaning set forth in Subsection IV(e)(i). (o) Gross-Up Payment. The meaning of this term is set forth in Subsection IV(e)(i). (p) Notice of Termination. The meaning of this term is set forth in Subsection III(b). (q) Other Payments. The meaning of this term is set forth in Subsection IV(e)(i). (r) Payments. The meaning of this term is set forth in Subsection IV(e)(i). (s) Subsidiary. For purposes of this Agreement, "Subsidiary" shall mean any corporation of which more than fifty percent (50%) of the voting stock is owned directly or indirectly by the Company. 5 PAGE 5 (t) Tax Counsel. The meaning of this term is set forth in Subsection IV(e)(ii). (u) Termination. The meaning of this term is set forth in Subsection III(a). (v) Termination Date. For purposes of this Agreement, "Termination Date" shall mean the date that is thirty (30) days following the date that a Notice of Termination is given by either party to this Agreement. II. Term of Agreement (a) General. Upon execution by the Executive, this Agreement shall commence as of January 1, 1995. This Agreement shall continue in effect through December 31, 1997; provided, however, that commencing on January 1, 1998, and every third January 1 thereafter, the term of this Agreement shall automatically be extended for three additional years unless, not later than ninety days prior to the January 1 on which this Agreement would otherwise automatically be extended, the Company shall have given notice that it does not wish to extend this Agreement; provided further, however, that if a Change of Control of the Company shall have occurred during the original or any extended term of this Agreement, this Agreement shall continue in effect for a period of thirty-six months beyond the month in which the Change of Control occurred. (b) Disposition of Employer. In the event the Executive is employed by a Subsidiary, the terms of this Agreement shall expire if such Subsidiary is sold or otherwise disposed of prior to a Change of Control unless the Executive continues in employment with the Controlled Group after such sale or other disposition. If the Executive's Employer is sold or disposed of following a Change of Control, this Agreement shall continue through its original term or any extended term then in effect. (c) Deemed Change of Control. If the Executive's employment with the Employer is terminated prior to the date on which a Change of Control occurs, and such termination was at the request of a third party who has taken steps to effect a Change of Control or was otherwise caused by the Change of Control, then for all purposes of this Agreement, a Change of Control shall be deemed to 6 PAGE 6 have occurred prior to such termination. (d) Expiration of Agreement. No termination or expiration of this Agreement shall affect any rights, obligations or liabilities of either party that shall have accrued on or prior to the date of such termination or expiration. III. Termination Following Change of Control (a) Entitlement to Benefits. If a Change of Control of the Company shall have occurred, the Executive shall be entitled to the benefits provided in Section IV hereof upon the subsequent termination of his employment with the Company for any reason within three years after the date of the Change of Control. A termination of the Executive's employment shall be referred to hereinafter as a "Termination." (b) Notice of Termination. Any purported termination of the Executive's employment by the Company or by the Executive shall be communicated by written Notice of Termination to the other party hereto in accordance with Section VIII. For purposes of this Agreement, a "Notice of Termination" shall mean a notice form a party to this Agreement that purports to terminate the Executive's employment. Once a Notice of Termination is given, the Company shall pay the Executive his full base salary through the Termination Date at the rate in effect at the time Notice of Termination is given and shall pay any amounts to be paid to the Executive pursuant to any other compensation plans, programs or employment agreements then in effect. If within thirty (30) days after any Notice of Termination is given, the party receiving such Notice notifies the other party that a dispute exists concerning the grounds for termination, then, notwithstanding the meaning of "Termination Date" set forth in Subsection I(v), the Termination Date shall be the date on which the dispute is finally resolved, whether by mutual written agreement of the parties or by a decision rendered pursuant to Section XI; provided that the Termination Date shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay the Executive his full compensation in effect when the notice giving 7 PAGE 7 rise to the dispute was given, and continue the Executive as a participant in all benefits plans or perquisites in which the Executive was participating or which he was enjoying when the Notice of Termination giving rise to the dispute was given, until the dispute is finally resolved. Amounts paid under this Subsection III(b) are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. IV. Compensation Upon a Termination Following a Change of Control of the Company, upon a Termination of the Executive's employment, the Executive shall be entitled to the following benefits, provided that the Termination occurs during the three-year period immediately following the date of the Change of Control: (a) Standard Benefits. The Company shall pay the Executive his full base salary through the Termination Date at the rate in effect at the time the Notice of Termination is given, no later than the second day following the Termination Date, plus all other amounts to which the Executive is entitled under any compensation plan of the Company applicable to the Executive at the time such payments are due. Without limitation, amounts payable pursuant to this Subsection IV(a) shall include, pursuant to the express terms of the short-term incentive plan in which the Executive participates or otherwise, the Executive's annual bonus under such short-term incentive plan, pro-rated to the Termination Date. (b) Additional Benefits. The Company shall pay to the Executive as additional pay ("Additional Pay"), the product of (i) the lesser of (x) three (3) or (y) the difference between sixty-five (65) and the Executive's age as of the date of the Notice of Termination (calculated to the nearest twelfth of a year), multiplied by (ii) the sum of (x) the Executive's annual base salary rate in effect immediately prior to the Termination Date and (y) the Executive's annual bonus amount under the short-term incentive plan in which the Executive participates, such bonus amount to be calculated on the basis of the extent to which the performance factors targeted by the Human Resources Committee of the Board have been achieved (for this purpose, the Company's performance through the Termination Date shall be annualized based upon the actual number of days elapsed from the beginning of the fiscal year in which the Termination occurs through the 8 PAGE 8 Termination Date over a year of 360 days), which shall be deemed to be 100% unless the performance actually achieved is greater than 100%, in which case the actual performance levels shall be utilized. The Company shall pay to the Executive the Additional Pay in a lump sum, in cash, not later than the fifteenth day following the Termination Date. (c) Retirement Plan Benefits. If not already vested, the Executive shall be deemed fully vested in all Company retirement plans and/or other written agreements relating to pay upon retirement in which the Executive was a participant, party or beneficiary immediately preceding a Change of Control, and any additional plans and/or agreements in which such Executive became a participant, party or beneficiary thereafter. In addition to the foregoing, for purposes of determining the amounts to be paid to the Executive under such plans and/or agreements, the years of service with the Company and the age of the Executive under all such plans and agreements shall be deemed increased by the lesser of thirty-six (36) months or such shorter period of time as would render the Executive sixty-five (65) years of age. For purposes of this Subsection IV(c), "plans" include, without limitation, the Company's qualified pension plan, non-qualified and mid-career retirement plans, and "agreements" encompass the terms of any offer letters leading to the Executive's employment with the Company where the Executive was a signatory thereto and any written amendments to the foregoing. In the event that the terms of the plans referenced in this Subsection IV(c) do not for any reason (e.g., if plan amendments would cause disqualification of qualified plans) coincide with the provisions of this Subsection IV(c), the Executive shall be entitled to receive from the Company under the terms of this Agreement an amount equivalent to all amounts he would have received had all such plans continued in existence as in effect on the date of this Agreement after being amended to coincide with the terms of this Subsection IV(c). (d) Health Benefits. Following the Termination Date, the Company shall continue to provide health, vision and dental benefits to the Executive and the Executive's eligible dependents on terms substantially equivalent to those on which the Company provides such benefits to retired employees who were service pension-eligible at the time of the Change of Control and whose retirement date most closely approximates the date of the Change of Control. The eligibility of the Executive's dependents shall be determined by the terms of the health, vision and dental 9 PAGE 9 benefit plans in effect immediately prior to the Change of Control. (e) Gross-Up Payments. (i) In the event that any payment or the value of any benefit received or to be received by the Executive in connection with the Executive's Termination or contingent upon a Change of Control of the Company (whether received or to be received pursuant to the terms of this Agreement (the "Agreement Payments") or of any other plan, arrangement or agreement of the Company, its successors, any person whose actions result in a Change of Control of the Company or any person affiliated with any of them (or which, as a result of the completion of the transactions causing a Change of Control, will become affiliated with any of them) ("Other Payments" and, together with the Agreement Payments, the "Payments")) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") or any comparable federal, state or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), as determined as provided below, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of the Excise Tax on Agreement Payments and Other Payments and any federal, state and local income tax and Excise Tax upon the payment provided for by this Subsection IV(e)(i), and any interest, penalties or additions to tax payable by the Executive with respect thereto shall be equal to the total present value of the Agreement Payments and Other Payments at the time such Payments are to be made. The intent of the parties is that the Company shall be solely responsible for and shall pay, any Excise Tax on any Payments and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payments as well as any loss of deduction caused by the Gross-Up Payment. (ii) All determinations required to be made under this Subsection IV(e), including, without limitation, whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by tax counsel 10 PAGE 10 selected by the Company and reasonably acceptable to the Executive ("Tax Counsel"). The Company shall cause the Tax Counsel to provide detailed supporting calculations to the Company and the Executive within fifteen (15) business days after notice is given by the Executive to the Company that any or all of the Payments have occurred, or such earlier time as is requested by the Company. Within two (2) business days after such notice is given to the Company, the Company shall instruct the Tax Counsel to timely provide the data required by this Subsection IV(e) to the Executive. All fees and expenses of the Tax Counsel shall be paid solely by the Company. Any Excise Tax as determined pursuant to this Subsection IV(e) shall be paid by the Company to the Internal Revenue Service and/or other appropriate taxing authority on the Executive's behalf within five (5) days after receipt of the Tax Counsel's determination. If the Tax Counsel determines that there is substantial authority (within the meaning of Section 6662 of the Code) that no Excise Tax is payable by the Executive, the Tax Counsel shall furnish the Executive with a written opinion that failure to disclose or report the Excise Tax on the Executive's federal income tax return will not constitute a substantial understatement of tax or be reasonably likely to result in the imposition of a negligence or similar penalty. Any determination by the Tax Counsel shall be binding upon the Company and the Executive in the absence of material mathematical or legal error. As a result of the uncertainty in the application of Section 4999 of the Code at the time the initial determination by the Tax Counsel hereunder, it is possible that Gross-Up Payments will not have been made by the Corporation that should have been made or that Gross-Up Payments have been made that should not have been made, in each case, consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Subsection IV(e)(iii) below and the Executive is thereafter required to make a payment of any Excise Tax, the Tax Counsel shall determine the amount of underpayment of Excise Taxes that has occurred and any such underpayment shall be promptly paid by the Company to the Internal Revenue Service or other appropriate taxing authority on the Executive's behalf or, if such underpayment has been previously paid by the Executive, to the Executive. In the event that the Tax Counsel determines that an overpayment of Gross-Up Payments has occurred, any such overpayment shall be treated for all 11 PAGE 11 purposes as a loan to the Executive with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code, due and payable within ninety (90) days after written demand to the Executive by the Company; provided, however, that the Executive shall have no duty or obligation whatsoever to repay such loan unless the Executive's receipt of the overpayment, or any portion thereof, is includible in the Executive's income and the Executive's repayment of the same is not deductible by the Executive for federal and state income tax purposes. (iii) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service or state or local taxing authority, that, if successful, would result in any Excise Tax or an underpayment of Gross-Up Payments. Such notice shall be given as soon as practicable but no later than fifteen (15) business days after the Executive is informed in writing of the claim and shall inform the Company of the nature of the claim, the administrative or judicial appeal period, and the date on which any payment of the claim must be paid. The Executive shall not pay any portion of the claim prior to the expiration of the thirty (30) day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any amount under the claim is due). If the Company notifies the Executive in writing prior to the expiration of such thirty (30) day period that it desires to contest the claim, the Executive shall: (A) give the Company any information reasonably requested by the Company relating to the claim; (B) take such action in connection with contesting the claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation concerning the claim by an attorney selected by the Company who is reasonably acceptable to the Executive; and (C) cooperate with the Company in good faith in order to effectively contest the claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including, without 12 PAGE 12 limitation, additional interest and penalties and attorneys' fees) incurred in such contests and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed as a result of such representation. Without limitation upon the foregoing provisions of this Subsection IV(e) (iii), except as provided below, the Company shall control all proceedings concerning such contest and, in its sole opinion, may pursue or forego any and all administrative appeal, proceedings, hearings and conferences with the taxing authority pertaining to the claim. At the written request of the Company and upon payment to the Executive of an amount at least equal to the claim plus any additional amount necessary to obtain the jurisdiction of the appropriate tribunal and/or court, the Executive shall pay the same and sue for a refund. The Executive agrees to prosecute any contest of a claim to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company requests the Executive to pay the claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless on an after-tax basis, from any Excise Tax or income tax (including, without limitation, interest and penalties thereon) imposed on such advance or for any imputed income on such advance. Any extension of the statute of limitations relating to assessment of any Excise Tax for the taxable year of the Executive which is the subject of the claim is to be limited solely to the claim. Furthermore, the Company's control of the contest shall be limited to issues for which a Gross-Up Payment would be payable hereunder. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (iv) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, the Executive receives any refund of a claim and/or any additional amount that was necessary to obtain jurisdiction, the Executive shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). 13 PAGE 13 If, after the receipt by the Executive of an amount advanced by the Company pursuant to Subsection IV(e)(iii) above, a determination is made that the Executive shall not be entitled to any refund of the claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund of a claim prior to the expiration of thirty (30) days after such determination, then the portion of such advance attributable to a claim shall be forgiven and shall not be required to be repaid. The amount of such advance attributable to a claim shall offset, to the extent thereof, the amount of the underpayment required to be paid by the Company to the Executive. (v) If, after the advance by the Company of an additional amount necessary to obtain jurisdiction, there is a final determination made by the taxing authority that the Executive is not entitled to any refund of such amount, or any portion thereof, then such nonrefundable amount shall be repaid to the Company by the Executive within thirty (30) days after the Executive receives notice of such final determination. A final determination shall occur when the period to contest or otherwise appeal any decision by an administrative tribunal or court of initial jurisdiction has been waived or the time for contesting or appealing the same has expired. (f) Legal Fees and Expenses. The Company shall pay to the Executive all legal fees and expenses as and when incurred by the Executive in connection with this Agreement, including all such fees and expenses, if any, incurred in contesting or disputing any Termination or in seeking to obtain or enforce any right or benefit provided by this Agreement, regardless of the outcome, unless, in the case of a legal action brought by or in the name of the Executive, a decision is rendered pursuant to Section X that such action was not brought by the Executive in good faith. (g) No Mitigation. The Executive shall not be required to mitigate the amount of any payment provided for in this Section IV by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section IV be reduced by any compensation earned by the Executive as the result of employment by another employer or by retirement or other benefits received after the Termination Date or otherwise, except as specifically provided in this Section IV. The Company's 14 PAGE 14 obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company or Employer may have against the Executive or other parties. V. Death and Disability Benefits In the event of the death or Disability of the Executive after a Change of Control of the Company, the Executive, or in the case of death, the Executive's beneficiaries, shall receive the benefits to which they are entitled under the retirement plans, disability policies and other applicable plans of the Company. VI. Successors; Binding Agreement (a) Obligations of Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company is required to perform it. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive had terminated his employment following a Change of Control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Termination Date. As used in this Agreement, the "Company" shall mean the Company as hereinabove defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) Enforceable by Beneficiaries. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees (the "Beneficiaries"). In the event of the death of the Executive while any amount would still be payable hereunder if such death had not occurred, all such amounts, unless otherwise provided herein, shall be paid in 15 PAGE 15 accordance with the terms of this Agreement to the Executive's Beneficiaries. (c) Employment. Except in the event of a Change of Control and, thereafter, only as specifically set forth in this Agreement, nothing in this Agreement shall be construed to (i) limit in any way the right of the Company or a Subsidiary to terminate the Executive's employment at any time for any reason or for no reason; or (ii) be evidence of any agreement or understanding, expressed or implied, that the Company or a Subsidiary will employ the Executive in any particular position, on any particular terms or at any particular rate of remuneration. VII. Confidential Information. The Executive shall hold in fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company, the Subsidiaries and their respective businesses, which shall have been obtained during the Executive's employment by the Employer and which shall not be public knowledge (other than by acts by the Executive or his representatives in violation of this Agreement). After termination of the Executive's employment with the Company or any Employer within the Controlled Group, the Executive shall not, without prior written consent of the Company or the Employer, communicate or divulge any such information, knowledge or data to anyone other than the Company, the Employer or those designated by them. In no event shall an asserted violation of this Section VII constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. VIII. Notice All notices and communications hereunder shall be in writing and shall be given by hand delivery to the other party, by registered or certified mail, return receipt requested, postage prepaid, or by overnight mail, addressed as follows: 16 PAGE 16 If to the Executive: Mr. Richard D. McCormick U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 If to the Company: U S WEST, Inc. 7800 East Orchard Road Englewood, Colorado 80111 Attn.: Executive Vice President, General Counsel and Secretary or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. IX. Miscellaneous No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and the Company's Chief Executive Officer. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any conditions or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado. All references to sections of the Code or the Exchange Act shall be deemed also to refer to any successor provisions of such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Sections IV and V shall survive the expiration of the term of this Agreement. 17 PAGE 17 X. Validity The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. XI. Arbitration The Executive may agree in writing with the Company (in which case this Article XI shall have effect but not otherwise) that any dispute that may arise directly or indirectly in connection with this Agreement, the Executive's employment or the termination of the Executive's employment, whether arising in contract, statute, tort, fraud, misrepresentation, or other legal theory, shall be determined solely by arbitration in Denver, Colorado under the rules of the AAA. The only legal claims between the Executive, on the one hand, and the Company or any Subsidiary, on the other, that would not be included in this agreement to arbitration are claims by the Executive for workers' compensation or unemployment compensation benefits, claims for benefits under a Company or Subsidiary benefit plan if the plan does not provide for arbitration of such disputes, and claims by the Executive that seek judicial relief in the form of specific performance of the right to be paid until the Termination Date during the pendency of any dispute or controversy arising under or Subsection III(b). If this Article XI is in effect, any claim with respect to this Agreement, the Executive's employment or the termination of the Executive's employment must be established by a preponderance of the evidence submitted to the impartial arbitrator. A single arbitrator engaged in the practice of law shall conduct any arbitration under the then current procedures of the American Arbitration Association (the "AAA") and under the AAA's then current Model Employment Arbitration Rules. The arbitrator shall have the authority to order a pre-hearing exchange of information by the parties including, without limitation, production of requested documents, and examination by deposition of parties and their authorized agents. If this Article XI is in effect, the decision of the arbitrator (i) shall be final and binding, (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator, and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal 18 PAGE 18 Arbitration Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims. If this letter sets forth our agreement on the subject matter hereof, kindly sign both originals of this letter and return to the Executive Vice President, General Counsel and Secretary of the Company one of the fully executed originals of this letter which will then constitute our agreement on this subject. Sincerely, U S WEST, Inc. By: /s/ Chairman --------------------------------- Chairman, Human Resources Committee of the Board of Directors /s/ Richard D. McCormick - ----------------------------- Richard D. McCormick EX-10.AD 9 EXECUTIVE LONG-TERM INCENTIVE PLAN 1 PAGE 1 EXHIBIT 10ad U S WEST, INC. EXECUTIVE LONG-TERM INCENTIVE PLAN Section I PURPOSE The purpose of the U S WEST, Inc. Executive Long-Term Incentive Plan (the "Plan") is to provide key executives of U S WEST, Inc. and its subsidiaries (the "Company") with incentive compensation based upon the achievement of long-term corporate objectives. The achievement of these objectives is measured by the return on investment derived from ownership of U S WEST common stock. This Plan succeeds the performance-based program that U S WEST implemented in 1990 (the "Performance Program") in connection with the restricted stock feature of the U S WEST, Inc. Stock Incentive Plan. Section II ELIGIBILITY Individuals eligible to participate in the Company's executive compensation plan shall be eligible to participate in the Plan. At its sole discretion, the Human Resources Committee of the U S WEST, Inc. Board of Directors (the "Committee") may expand participation in the Plan to additional individuals. Individuals eligible to participate in the Plan are herein called "participants." Section III PERFORMANCE UNITS At the beginning of each performance period (as described in Section IV below), upon the attainment of eligibility for participation in the Plan, and upon such other occasions as the Committee shall determine, the Committee shall assign to a participant "performance units," each of which shall represent an opportunity to receive one share of common stock of U S WEST, Inc. The payment of shares of common stock of U S WEST in connection with performance units shall occur, if at all, only in connection with the performance formula set forth in Section V. Section IV PERFORMANCE PERIODS Each performance period shall have a duration of six calendar years. The initial performance period commenced on January 1, 1991 in connection 2 PAGE 2 with the Performance Program and will terminate on December 31, 1996. Section V PERFORMANCE FORMULA 5.1 Payment of Shares. Each year, the total number of performance units granted to a participant will be multiplied by "Total Shareholder Return" to determine the number of shares of U S WEST common stock to be paid to such participant. If any shares are to be paid to a participant, they shall be paid in the first quarter of the year following the year for which Total Shareholder Return has most recently been measured. At the discretion of the Committee, such shares may be unrestricted or subject to a vesting period. If such shares are subject to a vesting period, the participant, subject to Section VI, will not be entitled to certificates representing such shares unless (i) the participant remains an employee of the Company for the full duration of the vesting period or (ii) the Committee waives the vesting period. 5.2 Total Shareholder Return. Total Shareholder Return is the return that shareholders derive over the course of a year ("TSR Measurement Period") from dividends and any increase in the market value of U S WEST common stock. Share price appreciation is derived using the average beginning and end-of-year closing prices of U S WEST common stock for a 20-business day period commencing ten business days prior to the end of the year. If Total Shareholder Return is negative in any year, no payment would occur for that year, and the negative Total Shareholder Return would have to be offset in the following year(s) before further payouts could occur. The calculation of Total Shareholder Return is illustrated by the following formula: (A-B) + C Total Shareholder Return = --------------- minus E D where: A = Average closing share price of U S WEST stock at the conclusion of a TSR Measurement Period. Average closing share price of U S WEST stock is determined over a 20-business day period beginning 10 business days prior to the end of each year 3 PAGE 3 B = Average closing share price of U S WEST stock at the beginning of a TSR Measurement Period. Average closing share price of U S WEST stock is determined over a 20-business day period beginning 10 business days prior to the end of each year C = Dividends D = Average closing price of U S WEST stock for a 20-day business period beginning 10 business days prior to the end of the year that precedes the first year of the six-year performance period E = Negative Total Shareholder Return, if any, from any prior year that is yet to be offset on a cumulative basis by positive Total Shareholder Return 5.3 Taxation. Any shares paid pursuant to this Plan are taxable at the time they are paid unless they are subject to a vesting period. Shares subject to a vesting period are taxable when the vesting period lapses. 5.4 Shares Available; Maximum Payout. The maximum aggregate number of shares of U S WEST common stock that may be granted over the life of this Plan is four million. No participant will be entitled to receive more than 400,000 shares of U S WEST common stock over the life of this Plan. Section VI SPECIAL DISTRIBUTION RULES 6.1 Death or Long-Term Disability. If termination of a participant's employment occurs during any year by reason of death or long-term disability (as determined under the provisions of the U S WEST Disability Plan maintained for participants), (i) any vesting period applicable to stock theretofore issued under the Plan shall immediately lapse, and (ii) the performance units of such participant used in connection with the formula described in Section V shall be reduced pro rata based on the number of months remaining in the year following the month of termination and any shares of U S WEST common stock payable to the participant or his or her estate shall then be calculated and paid pursuant to the provisions of Section V. Any shares payable pursuant to this Subsection 6.1 shall not be subject to a vesting period. 4 PAGE 4 6.2 Change of Control. Notwithstanding any other provision of this Plan, in the event of a Change of Control, as defined below, the following shall occur: (a) Total Shareholder Return shall be calculated as if the end of the TSR Measurement Period were the date of the Change of Control; (b) Each participant's performance units shall be multiplied by such Total Shareholder Return; (c) Each participant shall be immediately paid the number of U S WEST shares that results in his or her case from the foregoing calculation. Such shares shall not be subject to a vesting period; and (d) Any vesting period applicable to stock theretofore issued under the Plan shall immediately lapse. For purposes of this Plan, a "Change of Control" shall mean any of the following: (i) Any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes a beneficial owner of (or otherwise has the authority to vote), directly or indirectly, securities representing twenty percent (20%) or more of the total voting power of all of the Company's then outstanding voting securities, unless through a transaction arranged by, or consummated with the prior approval of the U S WEST Board of Directors; (ii) any period of two (2) consecutive calendar years during which there shall cease to be a majority of the U S WEST Board of Directors comprised as follows: individuals who at the beginning of such period constitute the Board of Directors and any new director(s) whose election by the Board of Directors or nominations for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; or (iii) the Company becomes a party to a merger, consolidation or share exchange in which either (i) the Company will not be the surviving corporation or (ii) the Company will be the surviving corporation and any outstanding shares of Common Stock of the Company will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the 5 PAGE 5 Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or (iv) any other event that a majority of the U S WEST Board of Directors, in its sole discretion, shall determine constitutes a Change of Control. 6.3 Other Termination. In the event of any other termination of employment of a participant, the performance units of such participant shall immediately terminate and no payments of U S WEST common stock shall thereafter be made, unless the Committee, in its sole discretion, determines otherwise. Section VII ADJUSTMENT OF SHARES In the event there is any change in the common stock of U S WEST by reason of any consolidation, combination, liquidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or other like change in capital structure of the Company, the number of performance units or the number or kind of shares or interests subject to performance units and the price per share or value thereof shall be appropriately adjusted by the Committee at or about the time of such event, provided that each participant's position with respect to performance units or shares or other interests payable under this Plan shall not, as a result of such adjustment, be worse than it had been immediately prior to such event. Any fractional performance units, shares or other interests resulting from such adjustment shall be rounded up to the next whole performance unit, share or other interest, as the case may be. Section VIII MISCELLANEOUS PROVISIONS 8.1 Assignment or Transfer. No performance units shall be assignable or transferable by a participant. 8.2 Securities Law Compliance. No shares of U S WEST common stock shall be issued under this Plan until all applicable securities law and other legal and stock exchange requirements have been satisfied. The Committee may require the placing of stop-orders and restrictive legends on certificates for common stock as it deems appropriate. 6 PAGE 6 8.3 Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any participant. 8.4 Other Incentive Plans. The adoption of this Plan does not preclude the adoption by appropriate means of any other incentive plan for employees. 8.5 Effect on Employment. Nothing contained in this Plan or any agreement related hereto or referred to herein shall affect, or be construed as affecting, the terms of employment of any participant except to the extent specifically provided herein or therein. Nothing contained in this Plan or any agreement related hereto or referred to herein shall impose, or be construed as imposing, any obligation on (i) the Company to continue the employment of any participant and (ii) any participant to remain in the employ of the Company. 8.6 Amendment of Plan. The U S WEST Board of Directors shall have the right to amend, modify, suspend or terminate this Plan at any time, provided that, in the case of participants who are subject to Section 16(a) of the Exchange Act, no amendment shall be made which (i) materially increases the benefits accruing to such participants, (ii) materially increases the number of shares of common stock that may be issued under this Plan, or (iii) materially modifies the requirements as to eligibility for such participants, unless such amendment is made by or with the approval of shareholders. 8.7 Federal Securities Law. With respect to grants of U S WEST common stock to individuals subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company intends that the provisions of this Plan and all transactions effected in accordance with the Plan shall comply with Rule 16b-3 under the Exchange Act. Accordingly, the Committee shall administer and interpret the Plan to the extent practicable to maintain compliance with such rule. 8.8 Arbitration. Any dispute that may arise in connection with this Plan or any issuance of stock under this Plan shall be determined solely by arbitration in Denver, Colorado under the rules of the American Arbitration Association. Any claim with respect to any benefit under this Plan must be established by a preponderance of the evidence submitted to the impartial arbitrator. The arbitrator shall have the authority to award the prevailing party damages incurred as a result of any breach, costs, reasonable attorneys' fees incurred in connection with the arbitration, and direct that the non- prevailing party pay the expenses of arbitration. The decision of the arbitrator (i) shall be final and binding; (ii) shall be rendered within 7 PAGE 7 ninety (90) days after the impanelment of the arbitrator; and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. 1-15, not state law, shall govern the arbitrability of all claims. 8.9 Administration. The Plan shall be administered by the Committee, which may adopt such rules, regulations and guidelines as it determines necessary for the administration of the Plan. The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. The Company shall indemnify members of the Committee and any agent of the Committee who is an employee of the Company against any and all liabilities or expenses to which they may be subject by reason of any act or failure to act with respect to their duties on behalf of the Plan, except in circumstances involving such person's gross negligence or willful misconduct. 8.10 Governing Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Colorado. Section IX ADOPTION OF THE PLAN This Plan shall become effective on the date on which it is approved by shareholders of U S WEST, Inc. EX-10.AE 10 EXECUTIVE SHORT-TERM INCENTIVE PLAN 1 PAGE 1 EXHIBIT 10ae U S WEST, INC. EXECUTIVE SHORT-TERM INCENTIVE PLAN Section 1 PURPOSE The purpose of the U S WEST, Inc. Executive Short-Term Incentive Plan (the "Plan") is to provide key executives of U S WEST, Inc. and its subsidiaries (the "Company") with incentive compensation based upon the achievement of established performance goals. Section 2 ELIGIBILITY Eligibility for the Plan is limited to the Chief Executive Officer of U S WEST, Inc. and any individuals employed by the Company (at the end of any calendar year) who appear in the Summary Compensation Table of the Company's Proxy Statement to Shareholders for that year. The Human Resources Committee of the U S WEST Board of Directors (the "Committee") shall certify eligibility for participation. Individuals eligible to participate in the Plan are herein called "Participants." Section 3 AWARDS Participants will be eligible to receive equal shares of a cash bonus pool established annually, as described in Section 5, provided that the Committee shall have the authority to reduce the share of any participant to the extent it deems appropriate. Any such reduction of a participant's share will not result in an increase of another participant's share. 2 PAGE 2 Section 4 PERFORMANCE PERIODS Each performance period ("Period") shall have a duration of one calendar year, commencing on January 1, and terminating on December 31. Section 5 PERFORMANCE FORMULA 5.1 At the end of each Period the Committee will certify the amount of the cash bonus pool pursuant to Section 5.2. 5.2 The cash bonus pool for any Period will be 0.25% (one-quarter of one percent) of Cash Provided by Operating Activities for U S WEST, Inc. and its consolidated subsidiaries, determined in accordance with the standards of the Financial Accounting Standards Board, less any amount that the Committee deems appropriate. In the event that the Committee elects to reduce the cash bonus pool to an amount that is less than 0.25% of Cash Provided by Operating Activities, the amount by which the pool is reduced may, at the Committee's sole discretion, be added to the cash bonus pool that is available for any subsequent Period or Periods. 5.3 A Participant's share of the cash bonus pool shall be calculated by dividing the amount of the cash bonus pool by the number of participants in the Plan. The Committee shall have the authority to reduce any participant's share of the cash bonus pool to the extent it deems appropriate. In determining the amount to be paid to a participant for any Period, the Committee will consider a number of performance factors, including, but not limited to, the Company's net income and cash flow, quality indicators, and other relative operating and strategic results. 5.4 Shares of the cash bonus pool will be paid in the year following the completion of the performance period. Section 6 SPECIAL DISTRIBUTION RULES 6.1 Change of Control. Notwithstanding any other provision of this Plan, in the event of a Change of Control, as defined below, the following shall occur: 3 PAGE 3 (a) The cash bonus pool shall be calculated as if the end of the Period were the date of the Change of Control; (b) Each Participant's share of the cash bonus pool shall be determined subject to Section 5.3; and (c) Each Participant shall be immediately paid his or her share of the cash bonus pool that results from the foregoing calculation. For purposes of the Plan, a "Change of Control" shall mean any of the following: (i) Any "person" (as such term is used in Sections 13 (d) and 14 (d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") is or becomes a beneficial owner of (or otherwise has the authority to vote), directly or indirectly, securities representing twenty percent (20%) or more of the total voting power of all the Company's then outstanding voting securities, unless through a transaction arranged by, or consummated with the prior approval of the U S WEST Board of Directors; (ii) Any period of two (2) consecutive calendar years during which there shall cease to be a majority of the U S WEST Board of Directors comprised as follows: individuals who at the beginning of such period constitute the Board of Directors any new director(s) whose election by the Board of Directors or nominations for election by the Company's shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved; (iii) the Company becomes a party to a merger, consolidation or share exchange in which either (i) the Company will not be the surviving corporation or (ii) the Company will be the surviving corporation and any outstanding shares of Common Stock of the Company will be converted into shares of any other company (other than a reincorporation or the establishment of a holding company involving no change of ownership of the Company) or other securities or cash or other property (excluding payments made solely for fractional shares); or 4 PAGE 4 (iv) Any other event that a majority of the U S WEST Board of Directors, in its sole discretion, shall determine constitutes a Change of Control. 6.2 Special Circumstances. If, prior to a distribution from the cash bonus pool, a participant (i) is discharged by the Company, (ii) is demoted, or (iii) becomes associated with, employed by or renders services to, or owns a material interest in any business that is competitive with the Company, the Committee shall have the authority to (a) reduce or cancel payments that would otherwise be paid from the cash bonus pool, (b) permit continued participation in the Plan or an early distribution therefrom, or (c) any combination of the foregoing. Section 7 MISCELLANEOUS PROVISIONS 7.1 Assignment or Transfer. No opportunity shall be assignable or transferable by a participant. 7.2 Costs and Expenses. The costs and expenses of administering the Plan shall be borne by the Company and shall not be charged against any participant. 7.3 Other Incentive Plans. The adoption of the Plan does not preclude the adoption by appropriate means of any other incentive plan for employees. 7.4 Effect on Employment. Nothing contained in this Plan or any agreement related hereto or referred to herein shall affect, or be construed as affecting, the terms of employment of any participant except to the extent specifically provided herein or therein. Nothing contained in this Plan or any agreement related hereto or referred to herein shall impose, or be construed as imposing, any obligation on (i) the Company to continue the employment of any participant and (ii) any participant to remain in the employ of the Company. 5 PAGE 5 7.5 Pension Formula. Unless otherwise prohibited by the Committee, awards under the Plan shall be used to compute a pension amount in the U S WEST Executive Non-Qualified Pension Plan and will be used to calculate coverage in the U S WEST Executive Life Insurance Program (if such coverage is elected). Awards shall not be considered compensation for purposes of the U S WEST Savings Plan/ESOP. 7.6 Taxation. The Company shall have the right to deduct from any award to be paid under the Plan any federal, state or local taxes required by law to be withheld with respect to such payment. 7.7 Amendment of Plan. The U S WEST Board of Directors shall have the right to suspend or terminate this Plan at any time and may amend or modify the Plan prior to the beginning of any Period. Section 8 PLAN ADMINISTRATION 8.1 Committee Authority Delegation. The Committee shall have full power to administer and interpret the Plan and to establish rules for its administration. The Committee may designate Company employees to act in its behalf to engage in daily administration of the Plan. The Committee or its designee may administer the Plan in all respects including the proration or adjustment of awards in the case of retirements, terminations, entrance to or exit from a level of management, changes in base salary, dismissal or death and other conditions as appropriate. 8.2 Governing Law. The Plan shall be governed by the laws of the state of Colorado and applicable federal law. 8.3 Committee Reliance. The Committee, in making any determination under or referred to in the Plan shall be entitled to rely on opinions, reports or statements of officers or employees of the Company and other entities and of counsel, public accountants and other professional expert persons. 6 PAGE 6 Section 9 CLAIMS AND APPEALS 9.1 Committee Procedure. Claims and appeals will be processed in accordance with the following procedures: (a) Any claim under the Plan by a participant or anyone claiming through a participant shall be presented to the Committee. (b) Any person whose claim under the Plan has been denied may, within sixty (60) days after receipt of notice of denial, submit to the Committee a written request for review of the decision denying the claim. (c) The Committee shall determine conclusively for all parties all questions arising in the administration of the Plan. 9.2 Arbitration. Any dispute that may arise in connection with this Plan shall be determined solely by arbitration in Denver, Colorado under the rules of the American Arbitration Association. Any claim with respect to any benefit under this Plan must be established by a preponderance of the evidence submitted to the impartial arbitrator. The arbitrator shall have the authority to award the prevailing party damages incurred as a result of any breach, costs, reasonable attorneys' fees incurred in connection with the arbitration, and direct that the non-prevailing party pay the expenses of arbitration. The decision of the arbitrator (i) shall be final and binding; (ii) shall be rendered within ninety (90) days after the impanelment of the arbitrator; and (iii) shall be kept confidential by the parties to such arbitration. The arbitration award may be enforced in any court of competent jurisdiction. The Federal Arbitration Act, 9 U.S.C. Sections 1-15, not state law, shall govern the arbitrability of all claims. Section 10 ADOPTION OF THE PLAN This Plan shall become effective on the date on which it is approved by shareholders of U S WEST, Inc. EX-11 11 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
1994 1993 4th Quarter YTD 4th Quarter YTD ----------- ---------- ----------- ----------- Income from continuing operations $409,523 $1,426,505 $264,025 $475,858 Discontinued operations: Income to June 1, 1993, net of tax - - - 38,526 Estimated loss from June 1, 1993 through disposal, net of tax - - - (100,000) Income tax rate change - - - (20,000) ----------- ---------- ----------- ----------- Income before extraordinary items 409,523 1,426,505 264,025 394,384 Extraordinary items (net of tax): Discontinuance of SFAS No. 71 - - - (3,123,000) Early extinguishment of debt - - - (77,220) ----------- ---------- ----------- ----------- Net income (loss) 409,523 1,426,505 264,025 (2,805,836) Less preferred dividends 875 1,167 - - ----------- ---------- ----------- ----------- Net income (loss) available for common share calculation $408,648 $1,425,338 $264,025 ($2,805,836) =========== ========== =========== =========== EARNINGS (LOSS) PER COMMON SHARE: Weighted average common shares 460,079 453,316 429,196 419,365 outstanding =========== ========== =========== =========== Income from continuing operations $0.89 $3.14 $0.62 $1.13 Discontinued operations: Income to June 1, 1993, net of tax - - - 0.09 Estimated loss from June 1, 1993 through disposal, net of tax - - - (0.24) Income tax rate change - - - (0.04) ----------- ---------- ----------- ----------- Income before extraordinary items 0.89 3.14 0.62 0.94 Extraordinary items (net of tax): Discontinuance of SFAS No. 71 - - - (7.45) Early extinguishment of debt - - - (0.18) ----------- ---------- ----------- ----------- Earnings (loss) per common share $0.89 $3.14 $0.62 ($6.69) =========== ========== =========== ===========
1 2 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
EARNINGS (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: 1994 1993 4th Quarter YTD 4th Quarter YTD ----------- ---------- ----------- -------- Weighted average common shares 460,079 453,316 429,196 419,365 outstanding Incremental shares from assumed exercise of stock options 344 469 482 424 ----------- ---------- ----------- -------- Total common shares 460,423 453,785 429,678 419,789 =========== ========== =========== ======== Income from continuing operations $0.89 $3.14 $0.61 $1.13 Discontinued operations: Income to June 1, 1993, net of tax - - - 0.09 Estimated loss from June 1, 1993 through disposal, net of tax - - - (0.24) Income tax rate change - - - (0.04) ----------- ---------- ----------- -------- Income before extraordinary items 0.89 3.14 0.61 0.94 Extraordinary items (net of tax): Discontinuance of SFAS No. 71 - - - (7.45) Early extinguishment of debt - - - (0.18) ----------- ---------- ----------- -------- Earnings (loss) per common and $0.89 $3.14 $0.61 ($6.69) common equivalent share =========== ========== =========== ========
2 3 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
EARNINGS (LOSS) PER COMMON SHARE-ASSUMING FULL DILUTION: 1994 1993 4th Quarter YTD 4th Quarter YTD ----------- ---------- ----------- -------- Income from continuing operations $409,523 $1,426,505 $264,025 $475,858 Interest on Convertible Liquid Yield Option Notes (LYONS) 5,635 21,872 5,417 * ----------- ---------- ----------- -------- Adjusted income from continuing operations 415,158 1,448,377 269,442 475,858 Less preferred dividends 875 1,167 - - ----------- ---------- ----------- -------- Adjusted income from continuing operations available for common $414,283 $1,447,210 $269,442 $475,858 share calculation =========== ========== =========== ======== Weighted average common shares outstanding 460,079 453,316 429,196 419,365 Incremental shares from assumed exercise of stock options 344 469 482 464 Shares issued upon conversion of LYONS 9,894 10,057 10,233 * ----------- ---------- ----------- -------- Total common shares 470,317 463,842 439,911 419,829 =========== ========== =========== ======== Adjusted income from continuing operations $0.88 $3.12 $0.61 $1.13 Discontinued operations: Income to June 1, 1993, net of tax - - - 0.09 Estimated loss from June 1, 1993 through disposal, net of tax - - - (0.24) Income tax rate change - - - (0.04) ----------- ---------- ----------- -------- Income before extraordinary items 0.88 3.12 0.61 0.94 Extraordinary items (net of tax): Discontinuance of SFAS No. 71 - - - (7.45) Early extinguishment of debt - - - (0.18) Earnings (loss) per common share $0.88 $3.12 $0.61 ($6.69) assuming full dilution =========== ========== =========== ========
* Amounts are excluded from fully diluted earnings (loss) per common share calculation due to their anti-dilutive effect. 3 EX-12 12 RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended 12/31/94 12/31/93 - --------------------------------------------------- --------- --------- Income from continuing operations before income taxes $638 $394 Interest expense (net of amounts capitalized) 119 125 Interest factor on rentals (1/3) 26 28 --------- --------- Earnings $783 $547 Interest expense 138 125 Interest factor on rentals (1/3) 26 28 --------- --------- Fixed charges $164 $153 Ratio of earnings to fixed charges 4.77 3.58 - --------------------------------------------------- --------- --------- Year to Date 12/31/94 12/31/93 - --------------------------------------------------- --------- --------- Income from continuing operations before income taxes and extraordinary items (1) $2,283 $745 Interest expense (net of amounts capitalized) 442 439 Interest factor on rentals (1/3) 96 102 --------- --------- Earnings $2,821 $1,286 Interest expense 486 439 Interest factor on rentals (1/3) 96 102 --------- --------- Fixed charges $582 $541 Ratio of earnings to fixed charges 4.85 2.38 - --------------------------------------------------- --------- ---------
(1) The year end 1993 ratio includes a one-time restructuring charge of $1,000. Excluding the restructuring charge the ratio of earnings to fixed charges would have been 4.22. 2 EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Year Ended 1994 1993 1992 1991 1990 - -------------------------------------------- --------- -------- --------- --------- --------- Income from continuing operations $2,283 $745 $1,569 $1,209 $1,681 before income taxes Interest expense 442 439 453 482 459 Interest factor on rentals (1/3) 96 102 98 90 89 --------- -------- --------- --------- --------- Earnings $2,821 $1,286 $2,120 $1,781 $2,229 Interest expense 486 439 453 482 459 Interest factor on rentals (1/3) 96 102 98 90 89 --------- -------- --------- --------- --------- Fixed charges $582 $541 $551 $572 $548 Ratio of earnings to fixed charges 4.85 2.38 3.85 3.11 4.07 - -------------------------------------------- --------- -------- --------- --------- ---------
The 1993 ratio is based on earnings from continuing operations before extraordinary charges associated with the decision to discontinue accounting for the operations of the Company in accordance with SFAS No. 71 of $3,123 and the early extinguishment of debt of $77. The 1993 and 1991 ratios include restructuring charges of $1,000 and $364, respectively. Excluding the restructuring charges the 1993 and 1991 ratios of earnings to fixed charges would have been 4.22 and 3.75, respectively. The 1992 ratio is based on earnings before the cummulative effect of change in accounting principles which reduced net income by $1,793. 3 EXHIBIT 12 U S WEST Financial Services, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Thousands)
Quarter Ended 12/31/94 12/31/93 - ---------------------------------------------------- --------- ---------- Income before income taxes $7,578 $65,453 Interest expense 8,388 50,809 Interest factor on rentals (1/3) 25 183 --------- ---------- Earnings $15,991 $116,445 Interest expense 8,388 50,809 Interest factor on rentals (1/3) 25 183 --------- ---------- Fixed charges $8,413 $50,992 Ratio of earnings to fixed charges 1.90 2.28 - ---------------------------------------------------- --------- ---------- Year-to-Date 12/31/94 12/31/93 - ---------------------------------------------------- --------- ---------- Income before income taxes $12,217 $123,596 Interest expense 40,816 144,980 Interest factor on rentals (1/3) 123 789 --------- ---------- Earnings $53,156 $269,365 Interest expense 40,816 144,980 Interest factor on rentals (1/3) 123 789 --------- ---------- Fixed charges $40,939 $145,769 Ratio of earnings to fixed charges 1.30 1.85 - ---------------------------------------------------- --------- ----------
Note: A Termination Agreement and Guarantee was entered into on June 24, 1994 between U S WEST, Inc., U S WEST Capital Corporation and U S WEST Financial Services, Inc. (USWFS). The Agreement terminates the Support Agreement dated January 5, 1990 whereby U S WEST, Inc. agreed to provide financial support to USWFS. The Agreement provides replacement financial support in the form of a direct guarantee by U S WEST of all outstanding indebtedness of USWFS. EX-13 13 1994 ANNUAL REPORT 1 U S WEST -------------------- Making the RIGHT Connections -------------------- Annual Report 1994 2 1 Financial Highlights 2 Letter to Shareowners 6 Financial Index 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 32 Reports of Management and Independent Accountants 33 Consolidated Financial Statements 55 Board of Directors 56 Executive and Subsidiary Officers 57 Shareowner Information - -------------------------------------------------------------------------------- CORPORATE PROFILE: U S WEST Inc. is in the connections business, helping customers share communications, entertainment and information services in local markets worldwide. U S WEST is headquartered in Englewood, Colo., a suburb of Denver. The company's major subsidiary, U S WEST Communications, provides services to more than 25 million residential and business customers in 14 western and midwestern states. U S WEST Communications was created from three former Bell telephone companies: Mountain Bell, Northwestern Bell and Pacific Northwest Bell. CORPORATE MISSION: U S WEST's mission is to be a leading provider of integrated communications, entertainment and information services over wired broadband and wireless networks in selected local markets worldwide. CORPORATE VISION: By the year 2000, U S WEST will be the finest company in the world at connecting people with their world. 3 1994 FINANCIAL HIGHLIGHTS Dollars in millions (except per share amounts)
- ----------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------------------------------------------------------------- Financial Data Sales and other revenues $10,953 $10,294 $ 9,823 $ 9,528 $ 9,369 Income from continuing operations (Note 1) 1,426 476 1,076 840 1,145 Net income (loss) 1,426 (2,806) (614) 553 1,199 ---------------------------------------------------------------- Total assets $23,204 $20,680 $23,461 $ 23,375 $22,160 Total debt (Note 2) 7,938 7,199 5,430 5,969 5,147 Shareowners' equity 7,382 5,861 8,268 9,587 9,240 ---------------------------------------------------------------- Earnings per common share (continuing operations) (Note 1) $ 3.14 $ 1.13 $ 2.61 $ 2.09 $ 2.97 Earnings (loss) per common share 3.14 (6.69) (1.49) 1.38 3.11 Dividends per common share 2.14 2.14 2.12 2.08 2.00 Book value per common share 15.73 13.29 19.95 23.39 23.48 Return on common shareowners' equity (Note 3) 21.6% -- 14.4% 5.7% 13.7% Debt-to-capital ratio (Note 2) 51.8% 55.1% 39.6% 38.4% 35.8% ---------------------------------------------------------------- Capital expenditures (Note 2) $ 2,820 $ 2,441 $ 2,554 $ 2,425 $ 2,217 OTHER SELECTED DATA (WHOLLY OWNED DOMESTIC OPERATIONS ) Telephone network access lines in service (thousands) 14,336 13,843 13,345 12,935 12,562 Billed access minutes of use (millions) 52,275 48,123 44,369 41,701 38,832 Cellular subscribers 968,000 601,000 415,000 300,000 219,000 Cable television basic subscribers served 486,000 -- -- -- -- ---------------------------------------------------------------- Employees 61,505 60,778 63,707 65,829 65,469 Number of common shareowners 816,099 836,328 867,773 899,082 935,530 Weighted average common shares outstanding (thousands) 453,316 419,365 412,518 401,332 386,012 - -----------------------------------------------------------------------------------------------------------------
Note 1 - 1994 income from continuing operations includes a gain of $105 ($.23 per share) on the sale of 24.4 percent of U S WEST's joint venture interest in cable television/telephone operations in the United Kingdom (TeleWest Communications plc), a gain of $41 ($.09 per share) on the sale of the company's paging unit and a gain of $51 ($.11 per share) on the sale of certain rural telephone exchanges. 1993 income from continuing operations was reduced by a restructuring charge of $610 ($1.46 per share) and $54 ($.13 per share) for the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. 1991 income from continuing operations was reduced by a restructuring charge of $230 ($.57 per share). Note 2 - Capital expenditures, debt and the debt-to-capital ratio exclude discontinued operations. Note 3 - 1993 return on shareowners' equity is not presented. Return on shareowners' equity for fourth quarter 1993 was 19.9 percent based on income from continuing operations. 1992 return on shareowners' equity is based on income before the cumulative effect of change in accounting principles. NORMALIZED INCOME FROM REVENUES CONTINUING OPERATIONS (Dollars in Millions) (Dollars in Millions) ===================== ====================== [GRAPH] [GRAPH] Excludes one-time items described in Note 1 above. 1 4 L E T T E R T O S H A R E O W N E R S -------------------- An exciting year of MAKING THE RIGHT CONNECTIONS Chairman and Chief Executive Officer Richard D. McCormick looks back on the highlights and challenges of 1994, and ahead to a larger, more exciting role for the company in "connecting people with their world." [PICTURE] When you think of peoples' need to talk to each other...to exchange business information...to shop...to choose entertainment...and to learn...you're thinking about the exciting new world of telecommunications we're creating at U S WEST. It's a world as familiar as a telephone call; as novel as a video store inside your remote control. And USWEST is "making the right connections" to bring that world to our customers. 1994 was a year of solid growth and earnings in our basic businesses: local telephone service and telephone directories. We also made great strides in revitalizing those businesses - and building new businesses - for the future. I'm especially excited about those new opportunities - such as customer-controlled video services and "personal" wireless phone service - that we'll bring to millions more customers than we serve today. U S WEST 2 5 U S W E S T I N C. -------------------- U S WEST INC. COMMUNICATIONS ACCESS LINES (In millions) [GRAPH] Annual Growth * Excludes the effects of 1994 rural exchange sales My only disappointments last year were in two areas. First: Our stock performance. Rising interest rates and other concerns caused investors to focus more on short-term earnings than long-term opportunities. As a result, the price of U S WEST shares declined. Second: Temporary delays in installing new phone lines. In a period of extraordinary growth, these delays caused customer dissatisfaction in some areas. To address the problems, we temporarily slowed the streamlining of our customer-service operations. (We've fixed most service problems and are back on track with our service-improvement program.) Strong '94 results. Despite those concerns, I feel very good about 1994. We set out to increase sales, sustain healthy profits in our basic businesses and boost the earning-power of our new businesses. And we did: o At U S WEST Communications, which provides local telephone services in 14 western and midwestern states, we were second among the regional Bell companies in growth-increasing lines by 4.0 percent over 1993. Minutes of use, reflecting the volume of traffic we carry for long-distance companies, were up 8.6 percent. Earnings grew 9.9 percent (excluding one-time items). Earnings before interest, taxes, depreciation and amortization (EBITDA) were up 7.4 percent (excluding one-time items). o U S WEST Direct, which publishes 300 telephone directories, increased sales 6.5 percent, almost double the industry average. Earnings climbed 4.0 percent. o U S WEST Cellular, which provides wireless telephone services in 50 markets, added an unprecedented 367,000 customers, a 61-percent increase. o Our TeleWest partnership, the largest provider of combined cable-television and telephone service in the United Kingdom, reported growth rates of 42 percent and 94 percent in those businesses, respectively. Underscoring this company's value: In a recent stock offering, U S WEST's $300 million net investment in TeleWest was valued by the market at $1.1 billion. o Our wireless communications businesses in Europe served more than 367,000 customers-nearly three times more than in the previous year. The leader was our Mercury One-2-One partnership in the U.K., which provided the new "personal communications service" to 205,000 customers. We reached this number in slightly more than a year by emphasizing convenience and low price per call, proving that wireless communication is indeed a mass-market service. U S WEST CELLULAR SUBSCRIBERS (In thousands) [GRAPH] Annual Growth U S WEST 3 6 L E T T E R T O S H A R E O W N E R S -------------------- EBITDA* (Dollars in millions) [GRAPH] Annual Growth * Earnings before interest, taxes, depreciation and amortization. Excludes equity losses, other income and one-time items. Revenues, earnings up o Companywide, total revenues for the year were $10.95 billion, up 6.4 percent. o We achieved a 7.8-percent increase in total-company EBITDA. o 1994 net income was $1.229 billion, a 7.8-percent increase from 1993 (after both years were adjusted for one-time items). But earnings per share remained about the same as in 1993, because net income was spread over 34 million additional shares of stock we issued largely to fund major long-term investments. o We continued to pay a healthy dividend: $2.14 per share. So, we have the strength to carry us into the future. We also have a strategy we believe will assure our success in this dramatically changing world of telecommunications. In previous reports, I've told you that our business is being transformed by two technologies: digital communications (the language of computers and CD players), and high-capacity networks. They will change not only the ways we carry information, but-more important-the services we can deliver to our customers. The world at your fingertips Today, customers press a few digits to reach another person. Tomorrow, they'll still do that-but they may be pressing a remote control and seeing the other person on a TV screen. Or selecting the movie or TV show they want, whenever they want it. Or connecting with the store of their choice to see the item they want-and ordering it. Or calling the bank to look at their balance. The possibilities are tremendous-both in the variety of services and their potential to save people time, money and hassle. The key to success is making these new services as easy to use as our Voice Messaging and Caller ID. To deliver these services, we'll need networks that are capable of two-way, or interactive, video, as well as voice and data communications. So will our competitors. Cable-TV companies have networks that excel in carrying the same one-way video signals to everyone. Telephone companies are best at connecting specific locations for two-way messages. Both industries face a dilemma: either they upgrade their networks and seize these opportunities, or sit back and become victims of change. U S WEST has chosen to benefit from change-on two fronts. We're upgrading our network in our 14-state service territory. And we've invested in cable-TV networks outside our region. The point: to increase volume-and value-by carrying more messages, more kinds of messages, to more customers, in more markets. And that's what we're doing. U S WEST 4 7 U S W E S T I N C. -------------------- "The Point: to increase volume- and value - by carrying more messages, more kinds of messages, to more customers, in more markets. And that's what we're doing." Building tomorrow's networks today U S WEST Communications was the first telephone company to announce plans to build and operate multimedia networks in its region. Begun in 1994, this mammoth project will continue past the year 2000. The first of these networks, in Omaha, is almost finished, and we've begun technical trials. This year, we'll learn, firsthand, how customers prefer to use the services these networks make possible. Looking ahead, we've announced plans for similar networks in Denver and Colorado Springs; Minneapolis-St. Paul; Salt Lake City; Boise, Idaho; Portland, Ore.; Albuquerque, N.M.; Des Moines and Cedar Rapids, Iowa. And we're not stopping at the borders of our home territory. We're investing to reach new customers outside our region. In Atlanta - one of the top U. S. markets-we acquired two major cable-TV systems that serve nearly a half-million customers. Meanwhile, our partner Time Warner has added to its cable holdings. Including those recently announced acquisitions, U S WEST and Time Warner will serve customers in 37 of the nation's top 50 markets. Combined, the in-and out-of-region networks will make U S WEST a leading provider of exciting new multimedia services. In an early demonstration to reporters in Orlando, Fla., the consensus reaction was most positive. Doing it right But will customers use these services? If they're easy to use, the answer is "yes." So we're working with partners and developing our own user-friendly menus and new on-screen services, such as our "GOtv" entertainment guide and our "U S Avenue" shopping service. Beyond these "wired" network opportunities, U S WEST established two strategic alliances to capture a larger share of the nation's "wireless" markets. First, we reached an agreement to combine our domestic cellular telephone business with that of AirTouch Communications. Second, the two companies agreed to join with Bell Atlantic and NYNEX to seek licenses for, and operate, personal communications networks in several major U.S. markets. Connecting the world 1994 was the foundation for our future. We're building on that foundation to make the most of the tremendous opportunities in meeting peoples' needs for communications, entertainment and information. Our goal is simple: making the right connections for our customers, our employees and our shareowners. And that's what we're doing. Sincerely, /s/RICHARD D. MCCORMICK Richard D. McCormick Chairman and Chief Executive Officer U S WEST 5 8 FINANCIAL INDEX 7 Management's Discussion and Analysis Results of Operations - 1994 Compared with 1993 8 Income from Continuing Operations 11 Sales and Other Revenues 13 Costs and Expenses 17 Competitive Environment 23 Liquidity and Capital Resources 26 Results of Operations - 1993 Compared with 1992 32 Reports of Management and Independent Accountants 33 Consolidated Financial Statements 37 Notes to Consolidated Financial Statements 9 U S W E S T I N C. -------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per share amounts) RESULTS OF OPERATIONS - 1994 COMPARED WITH 1993
- ---------------------------------------------------------------------------------------------------- 1994 (1) 1993 (2) Increase ---------------------------------------------- Income from continuing operations $1,426 $ 476 $ 950 Loss from discontinued operations - (82) 82 Extraordinary items: Discontinuance of SFAS No. 71, net of tax - (3,123) 3,123 Early extinguishment of debt, net of tax - (77) 77 ---------------------------------------------- Net income (loss) $1,426 $(2,806) $4,232 - ---------------------------------------------------------------------------------------------------- Earnings per common share from continuing operations $ 3.14 $ 1.13 $2.01 Loss per common share from discontinued operations - (.19) .19 Extraordinary items: Discontinuance of SFAS No. 71 - (7.45) 7.45 Early extinguishment of debt - (.18) .18 ---------------------------------------------- Income (loss) per common share $ 3.14 $ (6.69) $9.83 - ----------------------------------------------------------------------------------------------------
(1) 1994 income from continuing operations includes a gain of $105, or $.23 per share, from the sale of 24.4 percent of U S WEST's joint venture interest in cable television/telephone operations in the United Kingdom (TeleWest Communications plc), a gain of $41, or $.09 per share, on the sale of the company's paging operations and a gain of $51, or $.11 per share, on the sale of certain rural telephone exchanges. (2) 1993 income from continuing operations was reduced by $610, or $1.46 per share, for a restructuring charge and $54, or $.13 per share, for the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. In 1994, U S WEST Inc. ("U S WEST" or "company") income from continuing operations and related earnings per common share ("earnings per share") were $1,426 and $3.14, respectively. Included in 1994 results are one-time, after-tax gains described in note (1) to the table above. Excluding these gains, income from continuing operations and related earnings per share were $1,229 and $2.71, respectively. In 1993, income from continuing operations was $476, or $1.13 per share, including the effects of one-time charges described in note (2) to the table above. Excluding the one-time effects, 1993 income from continuing operations and related earnings per share were $1,140 and $2.72, respectively. As normalized for one-time effects, 1994 income from continuing operations increased $89, or 7.8 percent, and related earnings per share decreased $.01 on an 8.1 percent increase in average shares outstanding. The increase in normalized income from continuing operations is primarily attributable to increased demand for telecommunications and domestic wireless services, partially offset by increased start-up losses associated with developing businesses. In 1993, U S WEST discontinued the operations of its Capital Assets segment. Also in 1993, the company incurred extraordinary charges for the discontinuance of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation," and the early extinguishment of debt. See further discussion in "Results of Operations - 1993 Compared with 1992," starting on page 26. Revenue growth, partially offset by higher operating expenses, provided a 7.8 percent increase in the company's earnings before interest, taxes, depreciation and amortization ("EBITDA"). EBITDA also excludes equity losses in unconsolidated ventures, gains on sales of assets, restructuring charges and other income. The company considers EBITDA an important indicator of the operational strength of its businesses. U S WEST 7 10 U S W E S T I N C. -------------------- INCOME FROM CONTINUING OPERATIONS - BASE AND DEVELOPING BUSINESSES
- --------------------------------------------------------------------------------------------------------- Percent Increase Ownership 1994 (1) 1993 (2) (Decrease) --------------------------------------------------- BASE BUSINESSES: U S WEST Communications Inc. 100 $1,175 $435 $ 740 Publishing and other 100 232 180 52 -------------------------------------- Total base 1,407 615 792 -------------------------------------- DEVELOPING BUSINESSES: Consolidated: Domestic wireless 100 67 (46) 113 Domestic cable 100 (2) - (2) Unconsolidated equity investments: Time Warner Entertainment L.P.(3) 25.5 (30) (19) (11) TeleWest Communications plc 37.8 76 (21) 97 Mercury One-2-One 50.0 (58) (22) (36) Other(4) (34) (31) (3) -------------------------------------- Total developing 19 (139) 158 -------------------------------------- Income from continuing operations $1,426 $476 $ 950 - ---------------------------------------------------------------------------------------------------------
(1) 1994 income from continuing operations includes a gain of $105 from the sale of 24.4 percent of U S WEST's joint venture interest in TeleWest Communications plc, a gain of $41 for the sale of the company's paging operations and a gain of $51 for the sale of certain rural telephone exchanges. (2) 1993 income from continuing operations was reduced by $610 for a restructuring charge and $54 for the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. (3) Percent ownership represents pro-rata priority capital and residual equity interests. (4) Includes divisional expenses associated with developing businesses. U S WEST's operations consist of "base" businesses that have moderate, though consistent, growth and generate substantial income and cash flows, and "developing" businesses. Most of the company's developing businesses are in a stage of rapid customer and network expansion, which will result in near-term earnings dilution. U S WEST 8 11 1 9 9 4 -------------------- BASE BUSINESSES The major component of U S WEST's base businesses is U S WEST Communications Inc. ("USWC"), which provides telecommunications services in 14 western and mid-western states, serving approximately 80 percent of the region's population and approximately 40 percent of its geographic area. USWC offers local, exchange access and long-distance network services. About 28 percent of the company's access lines are devoted to providing services to business customers. The access line growth rate for business customers, who tend to be heavier users of the telephone network, has consistently exceeded the growth rate for residential customers. During 1994, business access lines grew by 4.6 percent compared with 3.1 percent for consumer lines. Total access line growth in 1994 was 3.6 percent. Excluding the effects of the sale of certain rural telephone exchanges, total access lines grew by 4.0 percent in 1994. USWC Serves Seven of the Ten Fastest-growing States 1994 Percentage Population Growth ================================== [GRAPH] in USWC Region Source: U. S. Census Bureau (12/31/94) The majority of USWC's revenues are derived from traditional telephone services. USWC will incur future capital and operating expenditures for deployment of a broadband or "multimedia" network. The company expects this network to generate new revenues through a variety of new product and service offerings. However, the amount and timing of future revenues related to multimedia service offerings are difficult to predict. The company believes the multimedia network also will improve the quality of customer service and result in greater network efficiency and lower maintenance costs. Summary of USWC 1994 Revenues (Dollars in millions) ================================== [GRAPH] USWC 1994 Revenues: $8,998 Base businesses also include the publishing of approximately 300 White and Yellow Pages directories in the western United States and the provision of database marketing and interactive multimedia information services. During 1994, income from the company's base operations increased to $1,356, excluding the gain on the sale of certain rural telephone exchanges. This represents a 1994 increase of $119, or 9.6 percent, also excluding the effects of the 1993 restructuring charge and the cumulative effect in 1993 of higher income tax rates. As normalized, the increase is attributable to higher demand for telephone services, including the effects of strong growth in access lines, and increased publishing revenue, partially offset by lower telephone rates and higher costs for developing new products in the publishing operations. Funding of new products and other growth initiatives in publishing and other marketing services operations offset growth in core Yellow Pages operations. Income related to Yellow Pages operations continues to grow due to increased business volume and higher prices. The company anticipates that accelerated investments in new products and services in 1995 will more than offset expected income growth related to the Yellow Pages business. U S WEST 9 12 U S W E S T I N C. -------------------- DEVELOPING BUSINESSES Developing businesses include both domestic and international wholly owned subsidiaries and equity investments. Domestic businesses include cable television and wireless operations. International businesses include cable television/telephone, wireless communications (including personal communications services), international networks and directory publishing. Significant recent investments include the December 1994 purchase of Wometco Cable Corp. and subsidiaries and the assets of Georgia Cable Holdings (the "Atlanta Cable Properties") for $1.2 billion, and the September 1993 $2.5 billion investment in Time Warner Entertainment Company L.P. ("TWE"). While the company's Central European wireless ventures generate positive net income and cash flow, most of the company's international equity investments are in start-up phases and will not show positive net income or cash flow until they mature. DEVELOPING BUSINESSES - CONSOLIDATED Domestic wireless income increased by $30 over 1993, excluding the gain on the sale of the company's paging operations and a $42 restructuring charge in 1993. The increase is due to the addition of 367,000 subscribers in 1994, a 61 percent increase over 1993. Additionally, cellular service operating cash flow increased by $57, or 46.1 percent, over 1993. U S WEST anticipates continued growth in income and cash flows from domestic wireless operations as the customer base expands. The December 1994 acquisition of the Atlanta Cable Properties did not have a material impact on 1994 income. The company anticipates that the acquisition will dilute 1995 earnings per share by approximately 5 to 6 percent. DEVELOPING BUSINESSES - UNCONSOLIDATED EQUITY INVESTMENTS The majority of U S WEST's international equity investments relate to ventures in the United Kingdom ("U.K."). These include TeleWest Communications plc ("TeleWest"), a cable television/telephone business, and Mercury One-2-One, a personal communications service ("PCS") joint venture. These businesses are experiencing rapid growth, and will continue to incur near-term start-up losses related to expansion of the customer base at Mercury One-2-One and build out of the network at TeleWest. Cable television subscribers of TeleWest and its affiliates increased 42 percent to 320,000 at year-end 1994, and telephone access lines increased 94 percent to 271,000. Subscribers to U S WEST's inter-national wireless joint venture operations in the U.K., Hungary, the Czech Republic, Slovakia and Russia grew to 367,000 in 1994, nearly three times the customer base of the prior year. Subscribers to other European cable television ventures totaled 586,000 at December 31, 1994. International Customers* (In thousands) ==================== [GRAPH] * Includes wireless customers, directory contracts sold and customer equivalents for gateway switches and cable TV/telephone services. TWE partnership losses increased over the previous year primarily due to the full-year impact (including financing costs) of the company's investment, as compared with three months in 1993. The effects of lower prices for cable services also contributed to the higher loss in 1994. In early 1995, Time Warner Inc. announced its intention to simplify its corporate structure by establishing a separate, self-financing enterprise to house its cable and telecommunications properties. Any change in the structure of TWE would require the approval of U S WEST and its TWE partners. U S WEST 10 13 1 9 9 4 -------------------- SALES AND OTHER REVENUES
- ---------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------ 1994 1993 $ % ------------------------------------------------------ BASE BUSINESSES: USWC operations: Local service $ 4,067 $ 3,829 $ 238 6.2 Access charges - interstate 2,269 2,147 122 5.7 Access charges - intrastate 729 682 47 6.9 Long-distance network service 1,329 1,442 (113) (7.8) Other services 604 556 48 8.6 ------------------------------------------------------ Total USWC 8,998 8,656 342 4.0 Publishing and other 1,077 1,070 7 0.7 ------------------------------------------------------ Total base 10,075 9,726 349 3.6 ------------------------------------------------------ DEVELOPING BUSINESSES: (1) Domestic wireless 781 561 220 39.2 International directories 79 7 72 - Domestic cable 18 - 18 - ------------------------------------------------------ Total developing 878 568 310 54.6 ------------------------------------------------------ Total revenues $10,953 $10,294 $ 659 6.4 - ----------------------------------------------------------------------------------------------------
(1) Includes consolidated subsidiaries. All other developing businesses are accounted for using the equity method. BASE BUSINESSES USWC comprises approximately 89 percent of base businesses revenues and 82 percent of the total revenues of U S WEST. Approximately 58 percent of USWC's revenues are derived in the states of Arizona, Colorado, Minnesota and Washington. The primary factors that influence changes in revenues at USWC are customer demand for products and services (through access line growth and new service offerings), and regulatory proceedings, including price changes and customer refunds. An analysis of the change in USWC's revenues follows: LOCAL SERVICE
- --------------------------------------------------------------------------------------------------------- Increase Price Refund ----------------- Changes Activity Demand Other $ % - --------------------------------------------------------------------------------------------------------- ($12) $30 $216 $4 $238 6.2 - ---------------------------------------------------------------------------------------------------------
Local service revenues include local telephone exchange, local private line and public telephone services. The increase in local service revenues was primarily attributable to access line growth, which exceeded 5 percent in the states of Arizona, Colorado, Idaho and Utah. ACCESS CHARGES Access charges are collected primarily from the 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 35 percent of USWC's access revenues and 13 percent of its total revenues are derived from providing access service to AT&T. INTERSTATE ACCESS CHARGES
- --------------------------------------------------------------------------------------------------------- Increase Price Refund --------------- Changes Activity Demand Other $ % - --------------------------------------------------------------------------------------------------------- ($39) $18 $148 ($5) $122 5.7 - ---------------------------------------------------------------------------------------------------------
An increase of 7.8 percent in interstate billed access minutes of use more than offset the effects of price decreases. Interstate price reductions have been phased in by the Federal Communications Commission ("FCC") over a number of years. In response to competitive pressure and FCC orders, USWC reduced its annual interstate access prices by approximately $40 during 1994, in addition to $60, effective July 1, 1993. The company believes access prices will continue to decline, whether mandated by the FCC or as a result of an increasingly competitive market for access services. INTRASTATE ACCESS CHARGES
- ---------------------------------------------------------------------------------------------------------- Increase Price Refund ----------------- Changes Activity Demand Other $ % - ---------------------------------------------------------------------------------------------------------- ($10) ($4) $51 $10 $47 6.9 - ----------------------------------------------------------------------------------------------------------
Intrastate access charges increased primarily as a result of higher demand. Intrastate minutes of use grew by 13 percent in 1994. Demand for private line services, for which revenues are generally not usage-sensitive, also increased. U S WEST 11 14 U S W E S T I N C. -------------------- LONG-DISTANCE NETWORK SERVICE
- ------------------------------------------------------------------------------------------------------------ Decrease Price Refund --------------- Changes Activity Demand Other $ % - ------------------------------------------------------------------------------------------------------------ ($8) $1 ($43) ($63) ($113) (7.8) - ------------------------------------------------------------------------------------------------------------
Long-distance network service ("long-distance") revenues are derived from calls made within the service area boundaries of USWC, commonly referred to as "LATAs." Long-distance revenues decreased principally due to the effects of multiple toll carrier plans implemented in Oregon and Washington in May and July 1994, respectively. These regulatory arrangements allow independent telephone companies to act as toll carriers. The impact on USWC in 1994 was a loss of $68 in long-distance revenue, partially offset by a decrease of $48 in other operating expenses (i.e. access expense otherwise paid to independent companies) and an increase of $10 in intrastate access revenue. These regulatory arrangements decreased net income by approximately $6 in 1994 and will decrease 1995 income by $10 to $12. Competition from interexchange carriers continues to erode USWC's market share of intraLATA long-distance services such as WATS and "800." These revenues have declined over the last several years as customers have migrated to interexchange carriers that have the ability to offer these services on both an intraLATA and interLATA basis. U S WEST and its affiliates are prohibited from providing interLATA long-distance services. OTHER SERVICES Other services revenues are derived from billing and collection services provided to interexchange carriers, and new services such as voice messaging. Other services revenues increased 8.6 percent in 1994 due to higher revenue from these billing and collection services and continued market penetration of new service offerings. Voice messaging, for example, is now four years old with an installed customer base of approximately 885,000, compared with 690,000 in 1993. PUBLISHING AND OTHER
- ---------------------------------------------------------------------------------------------------- Increase (Decrease) ---------------------- 1994 1993 $ % ----------------------------------------------- Domestic publishing $ 997 $ 949 $ 48 5.1 Other - net 80 121 (41) (33.9) ----------------------------------------------- Total $1,077 $1,070 $ 7 0.7 - ----------------------------------------------------------------------------------------------------
Revenue from domestic publishing operations increased 7.4 percent in 1994, excluding the sales of certain publishing, and software development and marketing operations. The increase is attributable to both price and volume increases. Other revenues decreased principally due to the 1993 sale of telephone equipment distribution operations and completion of large telephone network installation contracts. DEVELOPING BUSINESSES - CONSOLIDATED DOMESTIC WIRELESS
- ---------------------------------------------------------------------------------------------------- Increase ----------------------- 1994 1993 $ % ------------------------------------------------ Domestic wireless $781 $561 $220 39.2 - ----------------------------------------------------------------------------------------------------
Domestic wireless revenues increased as a result of the 61 percent growth in the cellular customer base, partially offset by the effects of the 1994 sale of the paging operations that reduced revenues by $26. The customer growth reflects increased penetration and a strengthening of the retail distribution network. The cellular customer base is expected to continue its rapid growth, though rates of growth will be affected by consumer demand, market positioning by the company and increased competition in coming years. Average cellular revenues declined by approximately 8 percent during 1994 to approximately $70 per subscriber, per month. OTHER DEVELOPING BUSINESSES
- ------------------------------------------------------------------------------------------------------- Increase ------------------------- 1994 1993 $ % ----------------------------------------------------- International directories $79 $7 $72 - Domestic cable 18 - 18 - - -------------------------------------------------------------------------------------------------------
The increase in international directories revenue is attributable to the company's May 1994 purchase of Thomson Directories in the U.K. Thomson Directories revenues are expected to approximate $100 in 1995. Domestic cable revenues reflect the December 1994 acquisition of the Atlanta Cable Properties. These revenues are expected to exceed $200 in 1995. U S WEST 12 15 1 9 9 4 -------------------- COSTS AND EXPENSES
- ---------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------- 1994 1993 $ % ------------------------------------------------------ Employee-related expenses $3,779 $3,584 $ 195 5.4 Other operating expenses 2,203 2,065 138 6.7 Taxes other than income taxes 412 417 (5) (1.2) Depreciation and amortization 2,052 1,955 97 5.0 Restructuring charge - 1,000 (1,000) - Interest expense 442 439 3 0.7 Equity losses in unconsolidated ventures 121 74 47 63.5 Other income (expense) - net 25 (15) 40 - - ----------------------------------------------------------------------------------------------------
Employee-related expenses include basic salaries and wages, overtime, contract labor, benefits (including pension and health care) and payroll taxes. A reduction in the pension credit of approximately $80 contributed to the increase in employee-related expenses. Actuarial assumptions, which include decreases in the discount rate and the expected long-term rate of return on plan assets, contributed to the pension credit reduction. Approximately $150 for overtime payments, contract labor and basic salaries and wages, all related to the implementation of major customer service and streamlining initiatives at USWC, also contributed to the increase. Additionally, employee-related expenses at the company's publishing operations increased in connection with new product initiatives. Partially offsetting these increases were the effects of employees leaving the company under the restructuring program, lower health-care benefit costs, including a reduction in the accrual for postretirement benefits, and lower incentive compensation payments to employees. During the summer of 1994, increased customer demand at USWC put additional stress on current processes and systems, and affected the quality of customer service in certain markets. The pace of USWC's restructuring program also contributed to quality of service issues. However, the issues pertaining to quality of service underscore the need to re-engineer the business. The company achieved target levels of service at year end by implementing customer service initiatives and slowing the pace of its restructuring program. To continue improving upon the level of service quality achieved by year-end 1994, the company will incur additional near-term costs for temporary employees, overtime and contract labor. The company also will stretch out its 1993 restructuring plan an additional year, to 1997. As a result of these actions, the annual benefits related to restructuring will not be fully realized until 1998. (See "Restructuring Charges.") Other operating expenses include access charges (incurred by USWC for the routing of its long-distance traffic through the facilities of independent companies), network software expenses, wireless marketing and operating costs, and marketing and related costs associated with publishing activities. Selling and other operating costs related to growth in the cellular subscriber base increased approximately $166 in 1994. Partially offsetting this increase was the $48 decrease in access expense related to the effects of the new multiple toll carrier plan arrangements. (See "Long-Distance Network Service.") The increase in depreciation and amortization expense was primarily a result of a higher depreciable asset base and increased rates of depreciation at USWC. The company's discontinuance of SFAS No. 71 in September 1993 has resulted in the use of shorter asset lives (for financial reporting purposes) to more closely reflect the economic lives of telephone plant. USWC continues to pursue improved capital recovery within the regulated environment. Interest expense in 1994 was essentially unchanged from 1993. Incremental financing costs associated with the September 1993 TWE investment were offset by the effects of refinancing debt at lower rates in 1993 at USWC, and a reclassification of capitalized interest in 1994. Since the discontinuance of SFAS No. 71, interest capitalized as a component of telephone plant construction is recorded as an offset to interest expense, rather than to other income (expense). U S WEST's average borrowing cost decreased to 6.6 percent, from 6.7 percent in 1993. Equity losses related to developing businesses increased over 1993, primarily due to the build out of the network and the expansion of the customer base at Mercury One-2-One. Other income increased over 1993 primarily due to an increase in the management fee associated with the company's TWE investment and a gain on the sale of certain publishing operations, partially offset by the reclassification of capitalized interest to interest expense. U S WEST 13 16 U S W E S T I N C. -------------------- PROVISION FOR INCOME TAXES
- ---------------------------------------------------------------------------------------------------- Increase ---------------------- 1994 1993 $ % ---------------------------------------------------- Provision for income taxes $ 857 $ 269 $ 588 - Effective tax rate 37.5% 36.1% - - - ----------------------------------------------------------------------------------------------------
The increase in the effective tax rate resulted primarily from the effects of discontinuing SFAS No. 71, an increase in 1994 income before income taxes and the 1993 restructuring charge, partially offset by the cumulative effect on deferred income taxes of the 1993 federally mandated increase in income tax rates. RESTRUCTURING CHARGES The company's 1993 results reflect a $1 billion restructuring charge (pretax). The related restructuring plan (the "Plan") is designed to provide faster, more responsive customer services while reducing the costs of providing these services. As part of the Plan, the company is developing new systems that will enable it to monitor networks to reduce the risk of service interruptions, activate telephone service on demand, provide automated inventory systems and centralize its service centers so that customers can have their telecommunications needs resolved with one phone call. The company is consolidating its existing 560 customer service centers into 26 centers in 10 cities and reducing its total work force by approximately 9,000 employees (including the remaining employee reductions associated with the restructuring plan announced in 1991). Implementation of the Plan is expected to extend into 1997, rather than being completed in 1996 as originally scheduled. Implementation schedules are driven by customer demand and related service issues, concerns with system stability as major customer impacting systems are integrated, and staffing agreements negotiated with the company's unions. These changes do not alter the company's plan to fundamentally re-engineer the way it conducts business in the emerging competitive environment. The total cash expenditures of $935 under the Plan remain unchanged. Following is a schedule of the costs included in the Plan:
- ---------------------------------------------------------------------------------------------------------- Actual Estimate ------------ ----------------------------- 1993 1994 1995 1996 1997 Total ------------------------------------------------------------- Cash expenditures: Employee separation $ - $ 19 $ 62 $ 75 $ 74 $ 230 Systems development - 127 144 129 - 400 Real estate - 50 80 - - 130 Relocation - 21 54 4 31 110 Retraining and other - 16 19 10 20 65 ------------------------------------------------------------- Total cash expenditures - 233 359 218 125 935 Asset write-down 65 - - - - 65 ------------------------------------------------------------- Total Plan 65 233 359 218 125 1,000 ------------------------------------------------------------- Remaining 1991 plan employee costs - 56 - - - 56 ------------------------------------------------------------- Total (1) $65 $289 $359 $218 $125 $1,056 - ----------------------------------------------------------------------------------------------------------
(1) The Plan also provides for capital expenditures of $490 over the life of the restructuring plan. In 1994, capital expenditures related to restructuring were $265. U S WEST 14 17 1 9 9 4 -------------------- Employee separation costs include severance payments, healthcare coverage and postemployment education benefits. Systems development costs include the replacement of existing, single-purpose systems with new systems designed to provide integrated, end-to-end customer service. The work-force reductions would not be possible without the development and installation of the new systems, which will eliminate the current, labor-intensive interfaces between existing processes. Real estate costs include preparation costs for the new service centers. The relocation and retraining costs are related to moving employees to the new service centers and retraining employees on the methods and systems required in the new, restructured mode of operation. The company estimates that full implementation of the Plan will reduce employee-related expenses by approximately $400 per year. These savings are expected to be offset by the effects of inflation. EMPLOYEE SEPARATION The following estimates of employee separations and related amounts reflect the extension of employee reductions into 1997.
- --------------------------------------------------------------------------------------------------------- Estimate Actual Estimate --------- -------- ------------------------------- 1994 1994(2) 1995 1996 1997 Total ----------------------------------------------------------------- Employee separations (1) Managerial 1,061 497 814 580 559 2,450 Occupational 1,887 1,683 1,136 1,845 1,886 6,550 ----------------------------------------------------------------- Total 2,948 2,180 1,950 2,425 2,445 9,000 - ---------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------- Estimate Actual Estimate -------- ------ ------------------------------ 1994 1994(2) 1995 1996 1997 Total ------------------------------------------------------------------ Employee separation amounts (1) Managerial $25 $ 5 $30 $24 $21 $ 80 Occupational 15 14 32 51 53 150 ------------------------------------------------------------------ Total 40 19 62 75 74 230 Remaining 1991 reserve 56 56 - - - 56 ------------------------------------------------------------------ Total $96 $75 $62 $75 $74 $286 - -----------------------------------------------------------------------------------------------------------
(1) The "network" and "all other" categories previously displayed are no longer used in this schedule due to the changes in organizational boundaries occurring as a result of re-engineering. The new consolidated service centers consist of employees grouped by processes rather than by organization. (2) Includes the remaining employees and the separation amounts associated with the balance of the 1991 restructuring reserve at December 31, 1993. As a result of extending the Plan into 1997, employee separations and separation amounts shown above have been reduced by 1,519 and $41 in 1995, and 175 and $12 in 1996, respectively, and increased by 2,445 and $74, respectively, in 1997. U S WEST 15 18 U S W E S T I N C. -------------------- SYSTEMS DEVELOPMENT USWC's existing information management systems were largely developed to support analog technology in a monopoly environment. These systems are increasingly inadequate due to the effects of increased competition, new forms of regulation and changing technology that have driven consumer demand for new services that can be delivered quickly, reliably and economically. The sequential systems currently in place are slow, labor-intensive and costly to maintain, and often cannot be adapted to support new product and service offerings, including future multimedia services envisioned by U S WEST. The systems re-engineering program in place involves development of new systems for the following core processes: Service delivery - to support service on demand for all products and services, including repair. These systems will permit one customer service representative to handle all facets of a customer's requirements as contrasted to the numerous points of customer interface required today. Service assurance - for performance monitoring from one location and remote testing in the new environment, including identification and resolution of faults prior to customer impact, and one-system dispatch environment. Capacity provisioning - for integrated planning of future network capacity, including the installation of software controllable service components. The direct, incremental and non-recurring systems development costs contained in the Plan follow:
- ------------------------------------------------------------------------------------------------ Estimate Actual Estimate -------- ------ ------------------ 1994 1994 1995 1996 Total ------------------------------------------------------- Service delivery $35 $21 $15 $37 $73 Service assurance 45 12 17 35 64 Capacity provisioning 17 57 92 30 179 All other 28 37 20 27 84 ------------------------------------------------------- Total $125 $127 $144 $129 $400 - ------------------------------------------------------------------------------------------------
Original estimates of system expenditures in 1995 and 1996 were $150 and $125, respectively. Though current estimates in total are not materially different, the timing and amount of expenditures by category has changed. The majority of systems development labor will be supplied through the use of temporary employees, contractors and new employees with special skills. While it is likely that a small number of the new employees will be retained after completion of the Plan due to their specialized skills, it is planned that any related increase in headcount will be offset through other employee reductions. Systems expenses charged to current operations at USWC consist of all costs associated with the information management function, including planning, developing, testing and maintaining databases for general purpose computers, in addition to systems costs related to maintenance of telephone network applications. The key related administrative (i.e. general purpose) systems include customer service, order entry, billing and collection, accounts payable, payroll, human resources and property records. Ongoing systems costs comprised approximately six percent of total operating expenses at USWC in 1994, 1993 and 1992. USWC expects systems costs charged to current operations as a percent of total operating expenses to approximate the current level throughout the life of the Plan. However, systems costs could increase relative to other operating costs as the business becomes more technology dependent. U S WEST 16 19 1 9 9 4 -------------------- Progress under the Plan Following is a schedule of progress achieved under the Plan in 1994:
- ------------------------------------------------------------ Expenditures -------------------- Estimate Actual -------------------- Employee separation $ 96 $ 75 Systems development 125 127 Real estate 119 50 Relocation 70 21 Retraining and other 36 16 -------------------- Total $446 $289 - ------------------------------------------------------------
The company anticipated Plan expenditures of approximately $446 in 1994. However, the company slowed the pace of its restructuring implementation to address issues pertaining to the quality of service. The company's 1991 restructuring plan included a pretax charge of $364 due to planned work-force reductions and the write-off of certain intangible and other assets. The portion of the 1991 restructuring charge related to work-force reductions was $240, and covered approximately 6,000 employees. All expenditures and work-force reductions associated with the 1991 plan were completed by the end of 1994. COMPETITIVE ENVIRONMENT Rapid technological and regulatory changes continue to bring about actual and projected competition in the company's markets including local, access and long-distance. Current and potential competitors include local telephone companies, interexchange companies, competitive access providers ("CAPs"), cable television companies and future providers of PCS, the next generation of wireless communications. USWC's principal current competitors are CAPs. Competition from CAPs is largely limited to providing large business customers (with high traffic volume) private line access to the facilities of interexchange carriers. In coming years, CAPs also could become significant competitors for other local exchange services. Teleport Communications Group Inc., for example, has announced its intention to offer competitive local services. AT&T's entrance into the cellular communications market through its acquisition of McCaw Cellular Communications Inc. also has the potential to create increased competition in local exchange as well as wireless services. The company believes that competitors will target business customers in densely populated, urban areas in offering local exchange services. The loss of local exchange customers to competitors will affect multiple revenue streams of the company and could have a material, adverse effect on the company's operations. The actions of public policymakers play an important role in determining how increased competition affects U S WEST. The company is working with regulators and legislators to help ensure that public policies keep pace with the rapidly changing industry -- and allow the company to bring new services to the marketplace. U S WEST 17 20 U S W E S T I N C. -------------------- U S WEST COMPETITIVE STRATEGY U S WEST's corporate mission is to be a leading provider of interactive communications, entertainment and information services over wired multimedia and wireless networks in selected local markets worldwide. U S WEST will deploy its own and others' wired and wireless communications, entertainment and information services in packages tailored to customer needs. The company will implement its competitive strategy both domestically and internationally by focusing on three key objectives, or "value drivers": 1) growth through the development of multimedia networks and a broadened wireless presence; 2) customer loyalty through continuous improvement in customer service; and 3) improved productivity through systems re- engineering and other cost controls. NEW CUSTOMER COST CASH FLOW REVENUE RETENTION REDUCTION IMPROVEMENT U S WEST "VALUE DRIVERS" BASE BUSINESSES In 1993, the company announced its intention to build a high speed, interactive multimedia network in major metropolitan markets in the U S WEST region. This network will position USWC to compete with other providers of communications, entertainment and information services. USWC began limited testing of its multimedia network in Omaha, Neb., in December 1994. A market trial will begin in 1995 in an area that will cover up to 50,000 homes. The market trial will offer consumers a variety of integrated services in addition to traditional cable television and telephone services. These include video-on-demand, video games, interactive shopping and other services. The results of the technical and market trials will be incorporated in the network configuration and future service offerings. The 1993 re-engineering program supports U S WEST's objective to improve customer service, increase productivity and continue to narrow its cost of service disadvantage with current and potential competitors. Employee-related costs comprise approximately 45 percent of the total operating costs of U S WEST. The company will continue its efforts to control these costs, primarily through systems improvements and reductions in staffing. At USWC, the number of employees per 10,000 access lines decreased by 7.7 percent in 1994, to 33.1, and has dropped 24 percent since 1990. USWC Employees Per 10,000 Access Lines ======================== [GRAPH] U S WEST 18 21 1 9 9 4 -------------------- DEVELOPING BUSINESSES U S WEST continues to expand its customer base and strengthen its national out-of-region presence by acquiring or forming alliances with other communications, entertainment and information services companies. DOMESTIC CABLE On December 6, 1994, U S WEST purchased the Atlanta Cable Properties that serve approximately 486,000 subscribers, including 275,000 premium service subscribers. The Atlanta Cable Properties serve about 65 percent of the cable customers in the metropolitan Atlanta area. U S WEST plans to eventually offer local exchange telecommunications in addition to multimedia services in Atlanta. U S WEST and TWE have begun a five-year project to upgrade a substantial portion of TWE's cable systems to "Full Service Network" ("FSN") capacity. U S WEST and TWE are designating the systems to be upgraded and sharing management control over those systems. The partnership encountered initial delays on the market trial of the FSN in Orlando in order to make additional refinements to the underlying systems software and set-top terminals. In December 1994, TWE introduced the FSN trial in Orlando, Fla. TWE expects to link 4,000 homes by the end of 1995. U S WEST believes that each FSN, when completed, will provide consumers a wide variety of services, including video-on-demand, interactive games, distance learning, full-motion video, interactive shopping, alternative access and local telephone service. The FSN trial will allow TWE to refine the technology, and determine the level and nature of customer demand for services. This knowledge will assist in lowering the cost of the technology and the roll-out of interactive services across the country. DOMESTIC WIRELESS On July 25, 1994, AirTouch Communications ("AirTouch") and U S WEST announced an agreement to combine their domestic cellular operations. The joint venture will have a presence in nine of the top 20 cellular markets in the country. The initial equity ownership of the wireless joint venture will be approximately 70 percent AirTouch and 30 percent U S WEST. However, the companies will share governance responsibilities. This joint venture will provide U S WEST with an expanded wireless presence and economies of scale. The transaction is expected to close in second quarter 1995 after obtaining federal and state regulatory approvals. Each company's cellular operations initially will continue operating as separate entities owned by the individual partners, but will receive support services on a contract basis from a joint wireless management company. The merger of the two companies' domestic cellular operations will take place upon the earlier of four years from July 25, 1994, the lifting of certain MFJ restrictions, or at AirTouch's option. The agreement gives U S WEST strategic flexibility, including the right to exchange its interest in the joint venture for up to 19.9 percent of AirTouch common stock, with any excess amounts to be received in the form of AirTouch non-voting preferred stock. A partnership committee, led by the president and chief operating officer of AirTouch and three other AirTouch representatives, three U S WEST representatives and one mutually agreed upon independent representative will oversee the companies' combined domestic cellular operations. U S WEST 19 22 U S W E S T I N C. -------------------- On December 5, 1994, a partnership formed by the AirTouch/U S WEST joint venture and the Bell Atlantic/NYNEX partnership began bidding on PCS licenses being auctioned by the FCC. The combined companies own cellular licenses in 15 of the 20 largest U.S. cities and serve over five million customers. The partnership, known as PCS PrimeCo, is eligible to bid for PCS licenses in 26 markets, representing more than 100 million potential customers. This entity will be governed by a board made up of three members from the Bell Atlantic/NYNEX partnership and three members from the AirTouch/U S WEST joint venture. A second partnership will develop a national branding and marketing strategy and a common "look and feel" - for both cellular and PCS customers. This entity will be governed by a board made up of three members from the Bell Atlantic/NYNEX partnership, three from the AirTouch/U S WEST joint venture and one independent board member. The cellular properties of Bell Atlantic/NYNEX will not be merged with those of AirTouch/U S WEST. PCS will triple the spectrum available for wireless services, including new services such as two-way messaging from pocket pagers and wireless transfers of large computer files from laptop computers. The new spectrum also will help cellular operators create seamless networks. INTERNATIONAL In the international arena, U S WEST is focusing on certain strategic businesses, primarily in wireless communications, and combined cable television and telephone networks. The company's net investment in international ventures is approximately $988 (inclusive of consolidated entities), 68 percent of which is invested in the U.K. The U.K. market is attractive because of high population density, the opportunity to provide multiple services over one network and a low rate of cable television penetration. TeleWest, a venture with Tele-Communications Inc. in the U.K., is the largest provider of combined cable television and telephone service in the world. TeleWest owns all or part of 23 franchises, encompassing 3.6 million homes. The combined services are provided over a multimedia network that has been designed to provide a wide range of interactive and integrated communications, entertainment and information services as they become available. Through TeleWest, U S WEST has gained experience in packaging video and telephone services that it utilizes in other parts of the world. In November 1994, TeleWest sold a 24.4 percent interest to the public, which resulted in U S WEST's 37.8 percent ownership interest. Based on the offering price, U S WEST's share of TeleWest was valued at $1.1 billion, compared with U S WEST's net investment prior to the offering of approximately $300. In the U.K., Mercury One-2-One, a 50-50 joint venture between U S WEST and Cable & Wireless plc, launched the world's first PCS in 1993. Mercury One-2-One's PCS is a digital cellular communications service designed to offer consumers higher quality service, increased privacy and more features at lower prices than existing, analog cellular communications systems. To meet growing customer demand, Mercury One-2-One has expanded its coverage to reach 30 percent of the U.K. population. During 1994, the company expanded its international investments. The company purchased 100 percent of Thomson Directories for $94. Thomson Directories publishes 155 telephone directories that reach 80 percent of the households in Great Britain. The company acquired 49 percent of Listel, a Brazilian company that publishes telephone directories, and acquired a 20 percent interest in Binariang Sdn Bhd, a Malaysian telecommunications company that holds four licenses that enable it to become a second-network operator in Malaysia. The company also became a 25-percent partner in Mobiltel, a consortium awarded the 900 GSM license in Bulgaria. In early 1995, U S WEST, Time Warner Inc., TWE Japan, Itochu Corporation and Toshiba Corporation formed a venture to build cable systems in Japan. U S WEST will own 17 percent of the new venture. The company's 1995 commitment to existing international ventures is approximately $400. The company will continue to pursue opportunities in attractive local markets around the world that fit its strategic objectives. U S WEST is concentrating on opportunities where it can attain at least a number-one or -two market share in each market the company targets. U S WEST 20 23 1 9 9 4 -------------------- FEDERAL REGULATORY ISSUES U S WEST supports regulatory reform at all levels. While certain federal courts have recently ruled as unconstitutional some laws governing local exchange carrier activities, the legal and regulatory framework under which the company operates limits both competition and consumer choice. The limitations include restrictions on equipment manufacturing, the provisioning of cable television programming content, and restrictions on the transport of communications, entertainment and information across LATA boundaries. U S WEST believes that national telecommunications regulatory reform may be the only effective way to resolve the related issues and satisfy competing interests. Congress failed to pass telecommunications reform legislation in 1994. It is expected that new telecommunications legislation will be introduced in 1995. However, there is uncertainty concerning the scope and direction of that legislation. U S WEST believes it is in the public interest to lift all competitive restrictions, placing all competitors under the same rules. Such action would lead to wider consumer choices, and ensure the industry's technological development and long-term financial health. During 1994 and early 1995, a number of federal regulatory issues were ruled on in the courts: - - In January 1995, the 9th U.S. Circuit Court of Appeals in San Francisco upheld the June 15, 1994, Seattle Federal District Court ruling that affirmed U S WEST's challenge to the constitutionality of the telephone company video programming restriction in the 1984 Cable Act. The act prevents telephone companies from providing video programming within their regions. U S WEST argued, and the courts agreed, that the restriction violates its First Amendment right to free speech. The decision would allow the company to provide video programming directly to its regional telephone subscribers. The Federal Government can appeal to the U.S. Supreme Court. The company is evaluating its options in light of this ruling. In January 1995, the FCC instituted a proceeding to modify and promulgate rules on the provision of video programming. - - In January 1995, the U.S. Circuit Court of Appeals for the District of Columbia overruled the FCC's "range-of-rates" decision. This FCC decision permitted non-dominant carriers to file ranges for rates, rather than specific price points. The Court of Appeals held that the Communications Act requires all carriers to specify prices on their tariffs. The effect of this decision will be to require non-dominant carriers (like MCI, or Time Warner's Full Service Network) to file tariffs with considerably more price detail. - - In October 1994, the 9th U.S. Circuit Court of Appeals overruled the FCC's Computer III non-structural separation decision for the provision of enhanced services on an integrated basis. The effect of the decision is to return to the provision of such service through a separate subsidiary, which could make it more difficult for local exchange carriers to offer enhanced services. In January 1995, the FCC granted a waiver allowing for the continued provision of enhanced services, pending further proceedings by the FCC. - - In August 1994, the U.S. Circuit Court of Appeals for the District of Columbia upheld an FCC ruling that neither telephone companies nor customer programmers need to obtain a franchise from local governments to provide Video Dial Tone ("VDT") service. The decision means that local telephone companies will avoid additional franchise fees related to the provisioning of VDT services. - - In June 1994, the U.S. Circuit Court of Appeals for the District of Columbia overturned the FCC's requirement that local telephone companies allow physical collocation by third parties (competitive access providers), within their central offices, for the installation and operation of equipment that connects to the local telephone network. The decision essentially affirms the private-property rights of corporations. The court also ordered the FCC to reconsider its requirement that allows competitors to interconnect equipment to the local network from a point outside a central office. In light of the rulings the company is evaluating how it can provide future interconnection services. U S WEST 21 24 U S W E S T I N C. -------------------- In September 1994, the Department of Justice ("DOJ") granted U S WEST's request for two MFJ waivers relating to TWE and the Atlanta Cable Properties. The waivers will allow U S WEST to provide video and information services across LATA boundaries in the Atlanta Cable Properties and TWE service areas. The waivers also will allow U S WEST to participate in limited manufacturing and to provide equipment through its partnership in TWE. On June 20, 1994, the seven regional Bell operating companies ("RBOCs") asked the divestiture court for a waiver of the Court's restriction on the RBOCs' provision of wireless long-distance services. The consent decree restricts the RBOCs from providing long-distance services as well as manufacturing. The request for a waiver closely follows a recommendation by the DOJ that the RBOCs be allowed to provide wireless long-distance services. The FCC has adopted a regulatory structure known as "Open Network Architecture" ("ONA"), under which USWC is required to unbundle its telephone network services in a manner that will accommodate the service needs of the growing number of information service providers. Under ONA, the number of local exchange service competitors could increase significantly. U S WEST's interstate services have been subject to price cap regulation since January 1991. Price caps are a form of incentive regulation designed to limit prices rather than profits. The price cap plan is currently under review by the FCC. STATE REGULATORY ISSUES USWC has sought alternative forms of regulation ("AFOR") plans that provide for competitive parity, enhanced pricing flexibility and improved capability in bringing to market new products and services. In a number of states where AFOR plans have been adopted, such actions have been accompanied by agreements to refund revenues, reduce existing rates or upgrade service, any of which could have adverse short-term effects on earnings. Similar results may have occurred under traditional rate- of-return regulation. In addition to the FCC price cap plan, USWC has AFOR plans in the states of Minnesota, Colorado, Oregon, Idaho, Nebraska, North Dakota and South Dakota. At USWC, there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. In one such instance, the Utah Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the PSC for reconsideration, thereby establishing certain 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 an interexchange carrier and other parties that relates to the Tax Reform Act of 1986. This case is still in the discovery process. If a formal filing - made in accordance with the remand from the Supreme Court - alleges that the exceptions apply, the range of possible risk is $0 to $140. USWEST Communications' 14-State Region [MAP] U S WEST 22 25 1 9 9 4 -------------------- DISCONTINUED OPERATIONS In 1994, U S WEST continued to make progress in disposing of its Capital Assets segment in accordance with its plan of disposition announced in June 1993. (Further details on the discontinued operations are provided in "Results Of Operations - 1993 Compared with 1992" and in Note 17 to the Consolidated Financial Statements.) During 1994, U S WEST reduced its ownership interest in Financial Security Assurance ("FSA"), a member of the Capital Assets segment, to 60.9 percent, and its voting interest to 49.8 percent through a series of transactions. In May and June 1994, U S WEST sold 8.1 million shares of FSA, including 2.0 million shares sold to Fund American Enterprises ("FFC"), in an initial public offering of FSA common stock at $20 per share. U S WEST received $154 in net proceeds from the offering. On September 2, 1994, U S WEST issued to FFC 50,000 shares of cumulative redeemable preferred stock for a total of $50. FFC's voting interest in FSA is 21.0 percent, achieved through a combination of direct share ownership of common and preferred FSA shares, and a voting trust agreement with U S WEST. FFC has a right of first offer and a call right to purchase from U S WEST up to 9.0 million shares, or approximately 57 percent, of outstanding FSA stock held by U S WEST. U S WEST anticipates its ownership will be further reduced by 1996. During 1994, U S WEST Real Estate sold 12 buildings, six parcels of land and other assets for approximately $327. In January 1995, U S WEST Real Estate sold one property for approximately $37. The sales were in line with company estimates. U S WEST has completed all construction of existing buildings in the commercial real estate portfolio and expects to substantially complete the liquidation of its portfolio by 1998. The remaining balance of assets subject to sale is approximately $607, net of reserves. The company believes its reserves related to discontinued operations are adequate. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Cash provided by operating activities of approximately $3.2 billion was essentially unchanged as compared with 1993. Improvement in operations in 1994 was largely offset by cash payments for restructuring activities of $289, compared with $120 in 1993. Growth in cash from operations will be limited in the near term as the company continues to implement its restructuring plan. Cash from operations is the primary source by which U S WEST funds its capital expenditures and shareholder dividends. Further details of cash provided by operating activities are provided in the Consolidated Statements of Cash Flows. The company expects that cash from operations will fund a significant share of expected future requirements for existing businesses. U S WEST will continue to employ strategic alliances and also will make direct investments in assets or businesses that are consistent with the company's business strategies. Financing for new investments will primarily come from a combination of new debt and equity. In the event of a new investment of substantial magnitude, the company also may reevaluate its use of internally generated cash, the feasibility of further acquisitions, the possibility of sales of assets and the capital structure. USWEST consists of many different parts having different financial characteristics. For this and other reasons, U S WEST believes that its stock price has been undervalued. Consequently, the company is evaluating a range of actions it might take with regard to its capital structure to make the value of its assets more apparent. U S WEST 23 26 U S W E S T I N C. -------------------- INVESTING ACTIVITIES Total capital expenditures were $2,820 in 1994 and $2,441 in 1993. Capital expenditures at USWC were $2,454 in 1994 and $2,182 in 1993. the 1994 capital expenditures of USWC were devoted substantially to the continued modernization of telephone plant, including investments in fiber optic cable, in order to improve customer service and network productivity. In 1995, capital expenditures are expected to approximate $2.6 billion, including $2.1 billion at USWC. Capital Expenditures Actual and Projected (Dollars in millions) ===================== [GRAPH] U S WEST's cash investment related to the December 1994 acquisition of the Atlanta Cable Properties was $745, obtained through short-term borrowing. U S WEST also invested approximately $444 in developing international businesses in 1994, including the acquisition of Thomson Directories. The company anticipates investments in international ventures to approximate $400 in 1995. In 1994, U S WEST received cash proceeds of $143 from the sale of its paging operations and $93 from the sale of certain rural telephone exchanges. U S WEST did not receive cash from the partial sale of its joint venture interest in TeleWest. All proceeds from the sale will be used by TeleWest for general business purposes, including financing construction and operations costs, and repaying debt. FINANCING ACTIVITIES Debt increased by $739 compared to the prior year, primarily due to the acquisition of the Atlanta Cable Properties. U S WEST's year-end 1994 debt-to-capital ratio was 51.8 compared with 55.1 at December 31, 1993. Including debt related to discontinued operations, the debt-to-capital ratio was 55.5 and 59.7 at December 31, 1994 and 1993, respectively. The decrease in the debt-to-capital ratio is primarily attributable to higher net income and the effects of an increase in common shares outstanding. In conjunction with the acquisition of the Atlanta Cable Properties, on December 6, 1994, 12,779,206 shares of U S WEST common stock valued at $459 were issued to, or in the name of, the holders of Wometco Cable Corp. Subsequent to the acquisition, the company announced its intention to purchase U S WEST common shares in the open market up to an amount equal to those issued in conjunction with the acquisition, subject to market conditions. In December 1994, the company purchased 550,400 shares of U S WEST common stock for approximately $20. In March 1994, the company issued approximately 5.5 million shares of U S WEST common stock for proceeds of $210 in conjunction with the settlement of shareowner litigation. The company also contributed 4.6 million shares of U S WEST common stock to the company's postretirement benefit fund in 1994. The company maintains short-term lines of credit aggregating approximately $1.9 billion, all of which were available at December 31, 1994. Under registration statements filed with the Securities and Exchange Commission, as of December 31, 1994, U S WEST companies are permitted to issue up to approximately $1.8 billion of new debt securities. U S WEST also 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 24 27 1 9 9 4 -------------------- DISCONTINUED OPERATIONS Cash to discontinued operations primarily reflects the payment of debt, net of $154 in proceeds from the sale of 8.1 million shares of FSA stock. Debt related to discontinued operations decreased by approximately $200 in 1994. (See Note 17 to the Consolidated Financial Statements.) For financial reporting purposes this debt is netted against the related assets of discontinued operations. RISK MANAGEMENT The company is exposed to market risks arising from changes in interest rates and foreign exchange rates. Derivative financial instruments are used by the company to manage these risks. INTEREST RATE RISK MANAGEMENT The objective of the company's interest rate risk management program is to minimize the total cost of debt. To meet this objective the company uses risk-reducing and risk-adjusting strategies. Interest rate forward contracts were used in 1993 to reduce the debt issuance risks associated with interest rate fluctuations. Interest rate swaps are used to adjust the risks of the debt portfolio on a consolidated basis by varying the ratio of fixed- to floating-rate debt. The market value of the debt portfolio and its risk-adjusting derivative instruments are monitored and compared to predetermined benchmarks to evaluate the effectiveness of the risk management program. In 1993, the company refinanced $2.7 billion of callable debt with new, lower-cost fixed-rate debt. The company achieved an annual interest expense reduction of approximately $35 as a result of this refinancing. In conjunction with the refinancing, the company executed forward contracts to sell U.S. Treasury securities to reduce debt issuance risks and to lock in the cost of $1.5 billion of the future debt issue. At December 31, 1994, deferred credits of $8 and deferred charges of $51 on closed interest rate forward contracts are included as part of the carrying value of the underlying debt. The deferred credits and charges are being recognized as a yield adjustment over the life of the debt, which matures at various dates through 2043. The net deferred charge is directly offset by the lower coupon rate achieved on the new debt. Notional amounts on interest rate swaps outstanding at December 31, 1994, were $1.6 billion with various maturities that extend to 2004. The estimated effect of the company's interest rate derivative transactions was to adjust the level of fixed-rate debt from 73.1 percent to 81.5 percent of the total debt portfolio (including continuing and discontinued operations). FOREIGN EXCHANGE RISK MANAGEMENT The company has entered into forward and combination option contracts to manage the market risks associated with fluctuations in foreign exchange rates after considering offsetting foreign exposures among international operations. The use of forward and option contracts allows the company to fix or cap the cost of firm foreign investment commitments in countries with freely convertible currencies. The market values of the foreign exchange positions, including the hedging instruments, are continuously monitored and compared to predetermined levels of acceptable risk. Notional amounts of forward and combination option contracts in British pounds outstanding at December 31, 1994, were $170, with maturities within one year. Cumulative deferred credits and charges associated with forward and option contracts of $7 and $25, respectively, are recorded in common shareowners' equity at December 31, 1994. At December 31, 1994, the company also had a British pound-denominated receivable from a wholly owned subsidiary in the translated principal amount of $48 that is subject to foreign exchange risk. This position is hedged in 1995. U S WEST 25 28 U S W E S T I N C. -------------------- RESULTS OF OPERATIONS - 1993 COMPARED WITH 1992
- ---------------------------------------------------------------------------------------------------- Increase 1993(1) 1992 (Decrease) -------------------------------------- Income from continuing operations $ 476 $ 1,076 $ (600) Income (loss) from discontinued operations (82) 103 (185) Extraordinary items: Discontinuance of SFAS No. 71, net of tax (3,123) - (3,123) Early extinguishment of debt, net of tax (77) - (77) Cumulative effect of change in accounting principles - (1,793) 1,793 -------------------------------------- Net loss $ (2,806) $ (614) $ (2,192) - ---------------------------------------------------------------------------------------------------- Earnings per common share from continuing operations $1.13 $ 2.61 $ (1.48) Earnings (loss) per common share from discontinued operations (.19) .25 (.44) Extraordinary items: Discontinuance of SFAS No. 71 (7.45) - (7.45) Early extinguishment of debt (.18) - (.18) Cumulative effect of change in accounting principles - (4.35) 4.35 -------------------------------------- Loss per common share $ (6.69) $ (1.49) $ (5.20) - ----------------------------------------------------------------------------------------------------
(1) 1993 income from continuing operations was reduced by $610, or $1.46 per share, for a restructuring charge, and $54, or $.13 per share, for the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. In 1993, income from continuing operations was $476, including the items in note (1) to the table above. Excluding these one-time effects, 1993 income from continuing operations and related earnings per share were $1,140 and $2.72, respectively. As normalized, 1993 income from continuing operations increased $64, or 6.0 percent, over 1992 and related earnings per share increased $.11, or 4.2 percent. The increase was primarily attributable to improvements in telephone, domestic cellular and publishing operations, and lower financing costs, partially offset by increased losses associated with developing businesses. During 1993, the U S WEST board of directors approved a plan to dispose of the Capital Assets segment, which includes activities related to financial services, financial guarantee insurance operations and real estate. The Capital Assets segment has been accounted for as discontinued operations in accordance with Accounting Principles Board Opinion No. 30, which provides for the reporting of the operating results of discontinued operations separately from continuing operations. The company recorded a provision of $100 (after tax), or $.24 per share, for the estimated loss on disposal of the discontinued operations and an additional provision of $20 to reflect the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. Income from discontinued operations to June 1, 1993, was $38, net of $15 in income taxes. Income from discontinued operations subsequent to June 1, 1993, is being deferred and was included within the provision for loss on disposal of the Capital Assets segment. U S WEST 26 29 1 9 9 4 -------------------- An extraordinary, non-cash charge of $3.1 billion (after tax) was incurred in conjunction with U S WEST's decision to discontinue accounting for the operations of USWC in accordance with SFAS No. 71. SFAS No. 71 generally applies to regulated companies that meet certain requirements, including a requirement that a company be able to recover its costs, competition notwithstanding, by charging its customers at prices established by its regulators. U S WEST's decision to discontinue the application of SFAS No. 71 was based on the belief that competition, market conditions and technological advances, more than prices established by regulators, will determine the future cost recovery by USWC. As a result of this change, the remaining asset lives of USWC's telephone plant were shortened to more closely reflect the useful (economic) lives of such plant. USWC's accounting and reporting for regulatory purposes were not affected by the change. During 1993, USWC refinanced long-term debt issues aggregating $2.7 billion in principal amount. These refinancings allowed the company to take advantage of favorable interest rates. Extraordinary costs associated with the redemptions reduced 1993 income by $77 (after tax). The accounting change in 1992 relates to two accounting standards issued by the Financial Accounting Standards Board. The first is SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," which mandates that employers reflect in their current expenses an accrual for the cost of providing retirement medical and life insurance benefits to current and future retirees. Prior to 1992, U S WEST, like most corporations, recognized these costs as they were paid. U S WEST also adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires that employers accrue for the estimated costs of benefits, such as workers' compensation and disability, provided to former or inactive employees who are not eligible for retirement. Adoption of SFAS Nos. 106 and 112 resulted in a one-time, non-cash charge against 1992 earnings of $1,793, net of tax, including $53 related to SFAS No. 112. Revenue growth and continued cost controls in 1993 resulted in a 6.7 percent increase in EBITDA, excluding the effects of the 1993 restructuring charge. U S WEST 27 30 U S W E S T I N C. -------------------- Income from Continuing Operations - Base and Developing Businesses
- -------------------------------------------------------------------------------------------------------------- Percent Increase Ownership 1993 (1) 1992 (2) (Decrease) ------------------------------------------------------ BASE BUSINESSES: U S WEST Communications Inc. 100 $ 435 $950 $ (515) Publishing and other 100 180 207 (27) --------------------------------------- Total base 615 1,157 (542) --------------------------------------- DEVELOPING BUSINESSES: Consolidated: Domestic wireless 100 (46) (17) (29) Unconsolidated equity investments: Time Warner Entertainment L.P. (2) 25.5 (19) - (19) TeleWest Communications plc 50.0 (21) (13) (8) Mercury One-2-One 50.0 (22) (9) (13) Other (3) (31) (42) 11 --------------------------------------- Total developing (139) (81) (58) --------------------------------------- Income from continuing operations $ 476 $1,076 $ (600) - --------------------------------------------------------------------------------------------------------------
(1) 1993 income from continuing operations was reduced by $610 for a restructuring charge, and $54 for the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. (2) Percent ownership represents pro-rata priority capital and residual equity interests. (3) Includes divisional expenses associated with developing businesses. During 1993, income from the company's base operations increased to $1,237, excluding the effects of the 1993 restructuring charge and the cumulative effect in 1993 of the increase in income tax rates. This represents an increase of $80, or 6.9 percent, over 1992. The increase is attributable to higher demand for telephone services, including the effects of growth in access lines, and continued cost controls, partially offset by lower prices. The loss from developing businesses increased as a result of the company's 1993 TWE investment and higher losses associated with international ventures. U S WEST 28 31 1 9 9 4 -------------------- SALES AND OTHER REVENUES
- --------------------------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------ 1993 1992 $ % --------------------------------------------------------------- BASE BUSINESSES: USWC operations: Local service $3,829 $3,674 $155 4.2 Access charges - interstate 2,147 2,047 100 4.9 Access charges - intrastate 682 673 9 1.3 Long-distance network service 1,442 1,420 22 1.5 Other services 556 510 46 9.0 --------------------------------------------------------------- Total USWC 8,656 8,324 332 4.0 Publishing and other 1,070 1,092 (22) (2.0) --------------------------------------------------------------- Total base 9,726 9,416 310 3.3 --------------------------------------------------------------- DEVELOPING BUSINESSES: (1) Domestic wireless 561 407 154 37.8 International directories 7 - 7 - --------------------------------------------------------------- Total developing 568 407 161 39.6 --------------------------------------------------------------- Total revenues $10,294 $9,823 $471 4.8 - ---------------------------------------------------------------------------------------------------------------------
(1) Includes consolidated subsidiaries. All other developing businesses are accounted for using the equity method. An analysis of the change in USWC's revenues follows: LOCAL SERVICE
- ---------------------------------------------------------------------------------------------------------------------- Increase Price Refund -------------- Changes Activity Demand Other $ % - ---------------------------------------------------------------------------------------------------------------------- $(6) $(11) $176 $(4) $155 4.2 - ----------------------------------------------------------------------------------------------------------------------
The increase in local service revenues was primarily attributable to access line growth of 3.7 percent in 1993. INTERSTATE ACCESS CHARGES
- ---------------------------------------------------------------------------------------------------------------------- Increase Price Refund --------------- Changes Activity Demand Other $ % - ---------------------------------------------------------------------------------------------------------------------- $(71) $6 $175 $(10) $100 4.9 - ----------------------------------------------------------------------------------------------------------------------
Increased demand for interstate services, as evidenced by an increase of 8.5 percent in interstate billed access minutes of use, more than offset the effects of price decreases. USWC reduced its annual interstate access prices by approximately $60, effective July 1, 1993, in addition to $90, effective July 1, 1992, primarily due to FCC-mandated changes that resulted in a cost shift to intrastate jurisdictions. INTRASTATE ACCESS CHARGES
- ---------------------------------------------------------------------------------------------------------------------- Increase Price Refund ------------- Changes Activity Demand Other $ % - ---------------------------------------------------------------------------------------------------------------------- $(18) $8 $19 - $9 1.3 - ----------------------------------------------------------------------------------------------------------------------
Intrastate access charges increased primarily as a result of increased demand and lower refunds, largely offset by the effects of price decreases. U S WEST 29 32 U S W E S T I N C. -------------------- LONG-DISTANCE NETWORK SERVICE
- ---------------------------------------------------------------------------------------------------------------------- Increase Price Refund -------------- Changes Activity Demand Other $ % - ---------------------------------------------------------------------------------------------------------------------- $(7) $(1) $31 $(1) $22 1.5 - ----------------------------------------------------------------------------------------------------------------------
The increase in long-distance network service revenues reflects business growth, partially offset by the impacts of competition, particularly in Wide Area Telephone Service and "800" services, and price decreases. OTHER SERVICES Other services revenues increased 9.0 percent in 1993 due to increased revenue from billing and collection services and continued market penetration in voice messaging services. PUBLISHING AND OTHER
- ----------------------------------------------------------------------------------------------------------- Decrease -------------------- 1993 1992 $ % --------------------------------------------------- Publishing $949 $949 - - Other - net 121 143 $(22) (15.4) --------------------------------------------------- Total $1,070 $1,092 $(22) (2.0) - -----------------------------------------------------------------------------------------------------------
Revenue for the entire publishing and other group was reduced by approximately $86 in 1993 due to the sale of certain publishing and telephone equipment distribution operations. Revenues from ongoing operations increased $64, or 5.9 percent, primarily as a result of price increases related to publishing activities. Volume of Yellow Pages directory advertising was essentially flat in 1993. DEVELOPING BUSINESSES
- ------------------------------------------------------------------------------------------------------------- Increase --------------------- 1993 1992 $ % --------------------------------------------------- Domestic wireless $561 $407 $154 37.8 International directories 7 - 7 - - -------------------------------------------------------------------------------------------------------------
Domestic wireless revenues increased as a result of an expanded cellular customer base, which grew by 45 percent during 1993. This growth reflects increased penetration and a migration to the retail distribution channel. Average cellular revenue declined by 5.6 percent to approximately $76 per customer, per month. Revenue from international directories reflects the 1993 start up of U S WEST Polska, a publisher of directories in Poland. COSTS AND EXPENSES
- ---------------------------------------------------------------------------------------------------------------- Increase (Decrease) ------------------------- 1993 1992 $ % -------------------------------------------------------- Employee-related expenses $3,584 $3,487 $97 2.8 Other operating expenses 2,065 1,995 70 3.5 Taxes other than income taxes 417 378 39 10.3 Depreciation and amortization 1,955 1,881 74 3.9 Restructuring charge 1,000 - 1,000 - Interest expense 439 453 (14) (3.1) Equity losses in unconsolidated ventures 74 43 31 72.1 Other income (expense) - net (15) (17) (2) (11.8) - ----------------------------------------------------------------------------------------------------------------
Employee-related expenses at USWC increased by $41, or 1.4 percent, over 1992. This increase was attributable to basic wage increases, increased overtime costs (affected by flood damage in the midwestern states) and costs incurred for temporary employees in conjunction with customer service initiatives. These factors were partially offset by the effects of work-force reductions, primarily in conjunction with the company's 1991 restructuring plan. During 1993, USWC reduced its employee level by 2,755 employees. The work-force reductions and the company's emphasis on health-care cost containment through managed care and other programs, and earnings on the amounts funded for postretirement benefit costs, resulted in a decline in health-care costs of approximately $25 in 1993. Growth in the company's domestic wireless business also contributed to the increase in employee-related expenses. Other operating expenses increased by $56, or 3.5 percent, at USWC as a result of higher network software costs and increased advertising expenses. Higher marketing costs related to an expanding domestic cellular subscriber base also contributed to the increase in other operating expenses, partially offset by lower expenses due to the sale of certain publishing and telephone equipment distribution operations. U S WEST 30 33 1 9 9 4 -------------------- Taxes other than income taxes increased due in part to adjustments made in 1992 for resolution of certain longstanding appeals. Depreciation and amortization expense increased $71, or 4.1 percent, at USWC as a result of a higher depreciable asset base and increased rates of depreciation. These effects were partially offset by the completion of depreciation reserve deficiency amortization programs in several jurisdictions. Interest expense decreased principally due to the effects of lower interest rates, partially offset by increased debt of approximately $1.8 billion used to fund new initiatives, including the investment in TWE. U S WEST's average borrowing cost decreased to 6.7 percent in 1993, from 7.7 percent in 1992. Equity losses associated with developing businesses increased to $74, compared with $43 in 1992. The increase in these losses is primarily due to new investments in 1993, including the company's investment in Mercury One-2-One. PROVISION FOR INCOME TAXES
- ----------------------------------------------------------------------------------------------------------------- Decrease -------------------------- 1993 1992 $ % -------------------------------------------------------- Provision for income taxes $269 $493 $(224) (45.4) Effective tax rate 36.1% 31.4% - - - -----------------------------------------------------------------------------------------------------------------
The increase in the effective tax rate resulted primarily from the $54 cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates and the effects of discontinuing SFAS No. 71, partially offset by the tax effects of the restructuring charge. Please refer to "Results of Operations - 1994 Compared with 1993" for a discussion of the 1993 restructuring charge. DISCONTINUED OPERATIONS During 1993, U S WEST sold $2.0 billion of finance receivables and the business of US WEST Financial Services to NationsBank Corporation. The sales price was in line with the company's estimate. Proceeds from the sale of $2.1 billion were used to repay related debt. During 1993, U S WEST Real Estate Inc. sold five properties for proceeds of approximately $66. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities decreased by $35 over 1992, primarily due to a $200 increase in postretirement benefit funding, partially offset by an income tax refund in 1992 of approximately $125, and growth in base businesses. Debt increased by approximately $1.8 billion compared with 1992 (including $1.2 billion of short-term debt), principally as a result of the company's investment in TWE. During 1993, U S WEST refinanced debt issues aggregating $2.7 billion in principal amount. This refinancing has reduced interest expense by approximately $35 annually. During 1992, U S WEST called for early redemption of six debt issues aggregating $747 in principal amount. Debt related to discontinued operations decreased by approximately $1.9 billion in 1993. The decrease was related to the 1993 sale of the assets and the business of U S WEST Financial Services to NationsBank. Total capital expenditures associated with continuing operations were $2,441 in 1993 and $2,554 in 1992. Capital expenditures at USWC were $2,182 in 1993 and $2,357 in 1992. The 1993 capital expenditures of USWC were substantially devoted to the continued modernization of telephone plant. During fourth quarter 1993, proceeds of $1,020 resulting from the sale of 22 million shares of common stock were used to reduce short-term indebtedness, including indebtedness incurred in conjunction with the TWE investment, and for general corporate purposes. U S WEST 31 34 U S W E S T I N C. -------------------- REPORT OF MANAGEMENT The Consolidated Financial Statements of U S WEST have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. The integrity and objectivity of information in these financial statements, including estimates and judgments, are the responsibility of management, as is all other financial information included in this report. U S WEST maintains a system of internal accounting controls designed to provide a reasonable assurance as to the integrity and reliability of financial statements, the safeguarding of assets and the prevention and detection of material errors or fraudulent financial reporting. Monitoring of such systems includes an internal audit program designed to assess objectively the effectiveness of internal controls and recommend improvements therein. Limitations exist in any system of internal accounting controls based on the recognition that the cost of the system should not exceed the benefits derived. U S WEST believes that the company's system provides reasonable assurance that transactions are executed in accordance with management's general or specific authorizations and is adequate to accomplish the stated objectives. The independent certified public accountants, whose report is included herein, are engaged to express an opinion on our Consolidated Financial Statements. Their opinion is based on procedures performed in accordance with generally accepted auditing standards, including examining, on a test basis, evidence supporting the amounts and disclosures in the Consolidated Financial Statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. In an attempt to assure objectivity, the financial information contained in this report is subject to review by the Audit Committee of the board of directors. The Audit Committee is composed of outside directors who meet regularly with management, internal auditors and independent auditors to review financial reporting matters, the scope of audit activities and the resolution of audit findings. Richard D. McCormick Chairman and Chief Executive Officer James M. Osterhoff Executive Vice President and Chief Financial Officer January 18, 1995 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREOWNERS OF U S WEST INC.: We have audited the accompanying consolidated balance sheets of U S WEST Inc. as of December 31, 1994 and 1993 and the related consolidated statements of operations, cash flows and shareowners' equity for each of the three years in the period ended December 31, 1994. 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, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 5 to the Consolidated Financial Statements, the company discontinued accounting for the operations of U S WEST Communications Inc. in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," in 1993. As discussed in Note 14 to the Consolidated Financial Statements, the company changed its method of accounting for postretirement benefits other than pensions and other postemployment benefits in 1992. Coopers & Lybrand L.L.P. Denver, Colorado January 18, 1995 U S WEST 32 35 1 9 9 4 -------------------- U S WEST INC. 1994 CONSOLIDATED STATEMENTS OF OPERATIONS DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1994 1993 1992 --------------------------------------------- Sales and other revenues $ 10,953 $ 10,294 $ 9,823 Employee-related expenses 3,779 3,584 3,487 Other operating expenses 2,203 2,065 1,995 Taxes other than income taxes 412 417 378 Depreciation and amortization 2,052 1,955 1,881 Restructuring charge -- 1,000 -- Interest expense 442 439 453 Equity losses in unconsolidated ventures 121 74 43 Gains on sales of assets: Partial sale of joint venture interest 164 -- -- Rural telephone exchanges 82 -- -- Paging assets 68 -- -- Other income (expense) - net 25 (15) (17) --------------------------------------------- Income from continuing operations before income taxes 2,283 745 1,569 Provision for income taxes 857 269 493 --------------------------------------------- Income from continuing operations 1,426 476 1,076 Discontinued operations: Estimated loss from June 1, 1993 through disposal, net of tax -- (100) -- Income tax rate change -- (20) -- Income, net of tax (to June 1, 1993) -- 38 103 --------------------------------------------- Income before extraordinary items and cumulative effect of change in accounting principles 1,426 394 1,179 Extraordinary items: Discontinuance of SFAS No. 71, net of tax -- (3,123) -- Early extinguishment of debt, net of tax -- (77) -- Cumulative effect of change in accounting principles: Transition effect of change in accounting for postretirement benefits other than pensions and other postemployment benefits, net of tax -- -- (1,793) --------------------------------------------- Net income (loss) $ 1,426 $ (2,806) $ (614) --------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ Earnings (loss) per common share: Continuing operations $ 3.14 $ 1.13 $ 2.61 Discontinued operations: Estimated loss from June 1, 1993 through disposal -- (0.24) -- Income tax rate change -- (0.04) -- Income (to June 1, 1993) -- 0.09 0.25 Extraordinary items: Discontinuance of SFAS No. 71 -- (7.45) -- Early extinguishment of debt -- (0.18) -- Cumulative effect of change in accounting principles -- -- (4.35) --------------------------------------------- Earnings (loss) per common share $ 3.14 $ (6.69) $ (1.49) --------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ Average common shares outstanding (thousands) 453,316 419,365 412,518
The accompanying notes are an integral part of the Consolidated Financial Statements. U S WEST 33 36 U S W E S T I N C. -------------------- CONSOLIDATED BALANCE SHEETS Dollars in millions
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1994 1993 ---------------------------- ASSETS Current assets: Cash and cash equivalents $ 209 $ 128 Accounts and notes receivable, less allowance for credit losses of $62 and $54, respectively 1,693 1,570 Inventories and supplies 189 193 Deferred tax asset 352 336 Prepaid and other 323 273 ---------------------------- Total current assets 2,766 2,500 Property, plant and equipment - net 13,997 13,232 Investment in Time Warner Entertainment 2,522 2,552 Intangible assets - net 1,858 514 Investment in international ventures 881 477 Net assets of discontinued operations 302 554 Other assets 878 851 ---------------------------- Total assets $ 23,204 $20,680 ---------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 2,837 $ 1,776 Accounts payable 944 977 Employee compensation 367 386 Dividends payable 251 236 Current portion of restructuring charges 337 456 Other 1,278 1,150 ---------------------------- Total current liabilities 6,014 4,981 Long-term debt 5,101 5,423 Postretirement and postemployment benefit obligations 2,502 2,699 Deferred income taxes 890 201 Unamortized investment tax credits 231 280 Deferred credits and other 1,033 1,235 Preferred stock subject to mandatory redemption 51 -- Common shareowners' equity: Common shares - no par, 2,000,000,000 authorized; 476,880,420 and 448,126,801 issued; 469,343,048 and 441,139,829 outstanding, respectively 8,056 6,996 Cumulative deficit (458) (857) LESOP guarantee (187) (243) Foreign currency translation adjustments (29) (35) ---------------------------- Total common shareowners' equity 7,382 5,861 ---------------------------- Total liabilities and shareowners' equity $ 23,204 $20,680 ---------------------------- - ------------------------------------------------------------------------------------------------------------------------------------ Contingencies (see Note 16 to the Consolidated Financial Statements) - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. U S WEST 34 37 1 9 9 4 -------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Dollars in millions
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1994 1993 1992 --------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 1,426 $ (2,806) $ (614) Adjustments to net income (loss): Discontinuance of SFAS No. 71 -- 3,123 -- Cumulative effect of change in accounting principles -- -- 1,793 Restructuring charge -- 1,000 -- Depreciation and amortization 2,052 1,955 1,881 Gains on sales of assets: Partial sale of joint venture interest (164) -- -- Rural telephone exchanges (82) -- -- Paging assets (68) -- -- Equity losses in unconsolidated ventures 121 74 43 Discontinued operations -- 82 (103) Deferred income taxes and amortization of investment tax credits 373 (225) 4 Changes in operating assets and liabilities: Restructuring payments (289) (120) (98) Accounts and notes receivable (104) (90) 44 Inventories, supplies and other (81) (56) (24) Accounts payable and accrued liabilities (10) 238 133 Other - net 67 47 198 --------------------------------------------- Cash provided by operating activities 3,241 3,222 3,257 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Expenditures for property, plant and equipment (2,597) (2,449) (2,250) Investment in Time Warner Entertainment -- (1,557) -- Investment in Atlanta Cable Properties (745) -- -- Investment in international ventures (350) (230) (173) Proceeds from disposals of property, plant and equipment 96 45 75 Proceeds from sale of paging assets 143 -- -- Other - net (119) (10) 91 --------------------------------------------- Cash (used for) investing activities (3,572) (4,201) (2,257) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net proceeds from short-term debt 1,280 687 25 Proceeds from issuance of long-term debt 251 2,282 344 Repayments of long-term debt (526) (2,969) (770) Dividends paid on common stock (886) (812) (796) Proceeds from issuance of common stock 364 1,150 92 Proceeds from issuance of preferred stock 50 -- -- Purchase of treasury stock (20) -- -- --------------------------------------------- Cash provided by (used for) financing activities 513 338 (1,105) - ------------------------------------------------------------------------------------------------------------------------------------ Cash provided by (used for) continuing operations 182 (641) (105) Cash (to) from discontinued operations (101) 610 (237) - ------------------------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS Increase (decrease) 81 (31) (342) Beginning balance 128 159 501 --------------------------------------------- Ending balance $ 209 $ 128 $ 159 --------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. U S WEST 35 38 U S W E S T I N C. -------------------- CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY Dollars in millions
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1994 1993 1992 -------------------------------------------- COMMON SHARES Beginning balance $ 6,996 $ 5,770 $ 5,607 Issuance of common stock 694 1,224 144 Settlement of litigation 210 -- -- Benefit trust contribution (OPEB) 185 -- - (Purchase) issuance of treasury stock (20) 6 20 Other (9) (4) (1) -------------------------------------------- Ending balance 8,056 6,996 5,770 - ------------------------------------------------------------------------------------------------------------------------------------ (CUMULATIVE DEFICIT) RETAINED EARNINGS Beginning balance (857) 2,826 4,316 Net income (loss) 1,426 (2,806) (614) Dividends declared ($2.14, $2.14 and $2.12 per share, respectively) (980) (905) (876) Market value adjustment for securities (64) 35 -- Other 17 (7) -- -------------------------------------------- Ending balance (458) (857) 2,826 - ------------------------------------------------------------------------------------------------------------------------------------ LESOP GUARANTEE Beginning balance (243) (294) (342) Activity 56 51 48 Ending balance (187) (243) (294) - ------------------------------------------------------------------------------------------------------------------------------------ FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Beginning balance (35) (34) 7 Activity 6 (1) (41) -------------------------------------------- Ending balance (29) (35) (34) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL COMMON SHAREOWNERS' EQUITY $ 7,382 $ 5,861 $ 8,268 ============================================ COMMON SHARES AUTHORIZED AT DECEMBER 31 (THOUSANDS) 2,000,000 2,000,000 2,000,000 - ------------------------------------------------------------------------------------------------------------------------------------ COMMON SHARES OUTSTANDING (THOUSANDS) Beginning balance 441,140 414,462 409,936 Issuance of common stock 18,647 26,516 3,948 Settlement of litigation 5,506 -- -- Benefit trust contribution (OPEB) 4,600 -- -- (Purchase) issuance of treasury stock (550) 162 578 -------------------------------------------- Ending balance 469,343 441,140 414,462 -------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the Consolidated Financial Statements. U S WEST 36 39 1 9 9 4 -------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- BASIS OF PRESENTATION: The Consolidated Financial Statements include the accounts of U S WEST Inc. ("U S WEST" or "company") and its majority-owned subsidiaries, except for discontinued operations as discussed in Note 17 to the Consolidated Financial Statements. All significant intercompany amounts and transactions have been eliminated. Investments in less than majority-owned ventures are accounted for using the equity method. In the third quarter of 1993, U S WEST discontinued accounting for its regulated telephone operations, hereafter referred to as U S WEST Communications ("USWC"), under Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation." (See Note 5 to the Consolidated Financial Statements.) U S WEST operates in one industry segment (Communications and Related Services) as defined in SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." The company's Capital Assets segment has been discontinued. The largest volume of the company's services are provided to AT&T. During 1994, 1993 and 1992, revenues related to those services provided to AT&T were $1,130, $1,160 and $1,203, respectively. Related accounts receivable at December 31, 1994 and 1993 totaled $98 and $97, respectively. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. 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 USWC are carried at average cost, except for significant individual items that are valued based on specific costs. Non-reusable material is carried at its estimated salvage value. Inventories of U S WEST's non-telephone 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 charged to expense as incurred. USWC's provision for depreciation of property, plant and equipment is based on various straight-line group methods using remaining useful (economic) lives based on industrywide studies. Prior to discontinuing SFAS No. 71, depreciation was based on lives specified by regulators. (See Note 5 to the Consolidated Financial Statements.) When the depreciable property, plant and equipment of USWC is retired or sold, the original cost less the net salvage value is generally charged to accumulated depreciation. The non-telephone operations 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 recognized currently as an element of other income. Depreciation expense was $2,029, $1,941 and $1,857 in 1994, 1993 and 1992, respectively. Interest related to qualifying construction projects is capitalized and is reflected as a reduction of interest expense. At USWC, prior to discontinuing SFAS No. 71, capitalized interest was included as an element of other income. Amounts capitalized by U S WEST were $44, $20 and $29 in 1994, 1993 and 1992, respectively. INTANGIBLE ASSETS: The costs of identified intangible assets and goodwill are amortized by the straight-line method over periods ranging from five to 40 years. These assets are evaluated, with other related assets, for impairment using a discounted cash flow methodology. Amortization expense was $23, $14 and $24 in 1994, 1993 and 1992, respectively. FOREIGN CURRENCY TRANSLATION: For international investments, assets and liabilities 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 common shareowners' equity. U S WEST 37 40 U S W E S T I N C. -------------------- REVENUE RECOGNITION: Local telephone service, cellular access and cable television revenues are generally billed monthly, in advance, and revenues are recognized the following month when services are provided. Revenues derived from other telephone services, including exchange access, long-distance and cellular airtime usage, are billed and recorded monthly as services are provided. Directory advertising revenues and related directory costs are generally deferred and recognized over the period during which directories are utilized, normally 12 months. The balance of deferred directory costs included in prepaid and other is $217 and $197 at December 31, 1994 and 1993, respectively. FINANCIAL INSTRUMENTS: Net interest income or expense on interest rate swaps is recognized over the life of the swaps as an adjustment to interest expense. Gains and losses on forward contracts, designated as hedges of interest rate exposure on debt refinancings, are deferred and recognized as an adjustment to interest expense over the life of the underlying debt. Gains and losses on foreign exchange forward, option, and combination option contracts, designated as hedges, are included in common shareowners' equity and recognized in income on sale of the investment. COMPUTER SOFTWARE: The cost of computer software, whether purchased or developed internally, is charged to expense with two exceptions. Initial operating systems software is capitalized and amortized over the life of the related hardware, and initial network applications software is capitalized and amortized over three years. Subsequent upgrades to capitalized software are expensed. Capitalized computer software of $146 and $148 at December 31, 1994 and 1993, respectively, is recorded in property, plant and equipment. The company amortized capitalized computer software costs of $86, $51 and $24, in 1994, 1993 and 1992, respectively. INCOME TAXES: The provision for income taxes consists of an amount for taxes currently payable and an amount for tax consequences deferred to future periods in accordance with SFAS No. 109. U S WEST implemented SFAS No. 109, "Accounting for Income Taxes," in 1993. Adoption of the new standard did not have a material effect on the financial position or results of operations, primarily because of the company's earlier adoption of SFAS No. 96. For financial statement purposes, investment tax credits of USWC are being amortized over the economic lives of the related property, plant and equipment in accordance with the deferred method of accounting for such credits. EARNINGS (LOSS) PER COMMON SHARE: Earnings (loss) per common share are computed on the basis of the weighted average number of shares of common stock outstanding during each year. 2 NOTE 2: ACQUISITION OF ATLANTA CABLE PROPERTIES - -------------------------------------------------------------------------------- On December 6, 1994, U S WEST acquired the stock of Wometco Cable Corp. and subsidiaries, and the assets of Georgia Cable Holdings Limited Partnership and subsidiary partnerships (the "Atlanta Cable Properties"), 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 Cable Properties' results of operations have been included in the consolidated results of operations since the date of acquisition. 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. Following are summarized, consolidated, unaudited, pro forma results of operations for U S WEST for the years ended December 31, 1994 and 1993, assuming the acquisition occurred as of the beginning of the respective periods:
- -------------------------------------------------------------- Year Ended December 31, 1994 1993 ----------------------- Revenue $11,148 $10,494 Net income (loss) 1,415 (2,817) Earnings (loss) per common share 3.04 (6.52) - --------------------------------------------------------------
U S WEST 38 41 1 9 9 4 -------------------- 3 NOTE 3: 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") for an aggregate purchase price of $2.553 billion, consisting of $1.532 billion in cash and $1.021 billion in the form of a four-year promissory note bearing interest at a rate of 4.391 percent per annum. TWE owns and operates substantially all of the entertainment assets previously owned by Time Warner Inc., consisting primarily of its filmed entertainment, programming-HBO and cable businesses. As a result of U S WEST's admission to the partnership, certain wholly owned subsidiaries of Time Warner Inc. ("General Partners") and subsidiaries of Toshiba Corporation and ITOCHU Corporation hold equity interests of 63.27, 5.61 and 5.61 percent, respectively. In connection with the TWE investment, the company acquired 12.75 percent of the common stock of Time Warner Entertainment Japan Inc., a joint venture company established to expand and develop the market for entertainment services in Japan. The company has an option to increase its equity interests in TWE from 25.51 up to 31.84 percent depending on cable operating performance, as defined in the TWE Partnership Agreement. The option is exercisable, in whole or part, between January 1, 1999, and May 31, 2005, for an aggregate cash exercise price of $1.25 billion to $1.8 billion, depending on 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 and U S WEST Admission Agreement, there are six levels of capital. From the most to least senior, the capital accounts are: senior preferred (held by the General Partners); A preferred (held pro rata by all partners); B, C and D preferreds (all held by the General Partners); and common (residual equity interests held pro rata by all 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, which are based on the fair value of assets contributed to the partnership. 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 income"); (2) to the partners' preferred capital accounts in order of priority shown 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 will be 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 income. Also, the senior preferred is scheduled to be distributed in three annual installments beginning July 1, 1997. The value of the C and D preferreds will be determined at future dates and is dependent on achieving certain operating targets between 1992 and 2001. Beginning July 1, 1994, the TWE Partnership Agreement generally permits cash distributions to the partners to pay applicable taxes on their allocable taxable income from TWE. In addition, beginning July 1, 1995, and subject to restricted payment limitations and availability under the applicable financial ratios contained in the TWE Credit Agreement, distributions other than tax-related distributions also are permitted. For other than distributions 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 were made to U S WEST in 1994. The company 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 the company's investment is $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, U S WEST's recorded pretax share of TWE's 1994 and 1993 operating results was ($18) and ($20), respectively. As consideration for its expertise and participation in the cable operations of TWE, the company earns a management fee of $130 over five years, which is payable over a four-year period beginning in 1995. Management fees of $26 and $8 were recorded to other income in 1994 and 1993, respectively. U S WEST 39 42 U S W E S T I N C. -------------------- Summarized financial information for TWE is presented below:
- -------------------------------------------------------------- Year Ended December 31, Summarized Operating Results 1994 1993 ----------------------- Revenue $ 8,460 $ 7,946 Operating expenses (1) 7,612 7,063 Interest and other expense, net (2) 647 611 ----------------------- Income before income taxes and extraordinary item 201 272 Income before extraordinary item 161 208 ----------------------- Net income $ 161 $ 198 ----------------------- - --------------------------------------------------------------
(1) Includes depreciation and amortization of $943 and $902 in 1994 and 1993, respectively. (2) Includes corporate services of $60 in 1994 and 1993.
- -------------------------------------------------------------- December 31, Summarized Financial Position 1994 1993 ----------------------- Current assets $ 3,573 $ 3,745 Non-current assets 15,089 14,218 Current liabilities 2,857 2,265 Non-current liabilities 7,909 8,162 Senior preferred capital 1,663 1,536 Partners' capital 6,233 6,000 - --------------------------------------------------------------
In early 1995, Time Warner Inc. announced its intention to simplify its corporate structure by establishing a separate, self- financing enterprise to house its cable and telecommunications properties. Any change in the structure of TWE would require the approval of U S WEST and its TWE partners. 4 NOTE 4: RESTRUCTURING CHARGES - -------------------------------------------------------------------------------- The company's 1993 results reflect a $1 billion restructuring charge (pretax). The restructuring charge includes only the specific, incremental and direct costs that can be estimated with reasonable accuracy and are clearly identifiable with the related plan. The related restructuring plan (the "Plan") is designed to provide faster, more responsive customer services, while reducing the costs of providing these services. As part of the Plan, the company is developing new systems that will enable it to monitor networks to reduce the risk of service interruptions, activate telephone service on demand, provide automated inventory systems and centralize its service centers so customers can have their telecommunications needs met with one phone call. The company is consolidating its existing 560 customer service centers centers into 26 centers in 10 cities and reducing its total work force by approximately 9,000 employees (including the remaining employee reductions associated with the restructuring plan announced in 1991). The Plan provides for the reduction of 2,450 management and 6,550 occupational employees. Following is a schedule of the costs included in the 1993 restructuring charge: - -------------------------------------------------------------- Employee separation $ 230 Systems development 400 Real estate 130 Relocation 110 Retraining and other 65 Asset write-down 65 --------- Total $ 1,000 - --------------------------------------------------------------
Employee separation costs include severance payments, health-care coverage and postemployment education benefits. Systems development costs include the replacement of existing, single-purpose systems with new systems designed to provide integrated, end-to-end customer service. The work-force reductions would not be possible without the development and installation of the new systems, which will eliminate the current, labor-intensive interfaces between existing processes. Real estate costs include preparation costs for the new service centers. The relocation and retraining costs are related to moving employees to the new service centers and retraining employees on the methods and systems required in the new, restructured mode of operation. During 1994, 497 management and 1,683 occupational employees left the company under the Plan. The following table shows amounts charged to the restructuring reserve:
- -------------------------------------------------------------- Amount --------- Employee separation (1) $ 75 Systems development 127 Real estate 50 Relocation 21 Retraining and other 16 --------- 1994 restructuring reserve activity $ 289 --------- - --------------------------------------------------------------
(1) Includes $56 associated with work-force reductions under the 1991 restructuring plan. The company's 1991 restructuring plan included a pretax charge of $364 due to planned work-force reductions and the write-off of certain intangible and other assets. The portion of the 1991 restructuring charge related to work-force reductions was $240, and covered approximately 6,000 employees. The balance of the unused reserve associated with work-force reductions at December 31, 1993, was $56. All expenditures and work-force reductions under the 1991 plan were completed by the end of 1994. U S WEST 40 43 1 9 9 4 -------------------- 5 NOTE 5: PROPERTY, PLANT AND EQUIPMENT - -------------------------------------------------------------------------------- The composition of property, plant and equipment follows:
- -------------------------------------------------------------- December 31, 1994 1993 ------------------------ Land and buildings $ 2,604 $ 2,521 Telephone network equipment and outside plant 23,519 22,479 General purpose computer and other 4,157 3,569 Construction in progress 734 592 ------------------------ 31,014 29,161 ------------------------ Less accumulated depreciation: Buildings 698 656 Telephone network equipment and outside plant 14,175 13,389 General purpose computer and other 2,144 1,884 ------------------------ 17,017 15,929 ------------------------ Property, plant and equipment - net $ 13,997 $ 13,232 ------------------------ - --------------------------------------------------------------
In 1994, USWC sold certain rural telephone exchanges with a cost basis of $122. The company received consideration for the sales of $93 in cash and $81 in replacement property. The company will receive an additional $30 of replacement property in 1995. DISCONTINUANCE OF SFAS NO. 71 U S WEST incurred a non-cash, extraordinary charge of $3.1 billion, net of an income tax benefit of $2.3 billion, in conjunction with its decision to discontinue accounting for the operations of USWC in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," as of September 30, 1993. SFAS No. 71 generally applies to regulated companies that meet certain requirements, including a requirement that a company be able to recover its costs, notwithstanding competition, by charging its customers at prices established by its regulators. U S WEST's decision to discontinue application of SFAS No. 71 was based on the belief that competition, market conditions and the development of multimedia technology, more than prices established by regulators, will determine the future cost recovery by USWC. As a result of this change, the remaining asset lives of USWC's plant were shortened to more closely reflect the useful (economic) lives of such plant. Following is a list of the major categories of telephone property, plant and equipment and the manner in which depreciable lives were affected by the discontinuance of SFAS No. 71:
- -------------------------------------------------------------- Average Life (years) --------------------------------- Before After Category Discontinuance Discontinuance --------------------------------- Digital switch 17-18 10 Digital circuit 11-13 10 Aerial copper cable 18-28 15 Underground copper cable 25-30 15 Buried copper cable 25-28 20 Fiber cable 30 20 Buildings 27-49 27-49 General purpose computers 6 6 - --------------------------------------------------------------
The company employed two methods to determine the amount of the extraordinary charge. The "economic life" method assumed that a portion of the plant-related effect is a regulatory asset that was created by the under-depreciation of plant under regulation. This method yielded the plant-related adjustment that was confirmed by the second method, a discounted cash flows analysis. Following is a schedule of the nature and amounts of the after-tax charge recognized as a result of the company's discontinuance of SFAS No. 71: - -------------------------------------------------------------- Plant related $ 3,124 Tax-related regulatory assets and liabilities (208) Other regulatory assets and liabilities 207 ----------- Total $ 3,123 ----------- - --------------------------------------------------------------
U S WEST 41 44 U S W E S T I N C. -------------------- 6 NOTE 6: DEBT - -------------------------------------------------------------------------------- Short-term Debt The components of short-term debt follow:
- ---------------------------------------------------------------------------------------------------------------- December 31, 1994 1993 ------------------------ Notes payable: Commercial paper $ 2,305 $ 1,029 Current portion of long-term debt, including $500 and $450 payable to TWE, in 1994 and 1993, respectively 732 795 Allocated to discontinued operations - net (200) (48) ------------------------ Total $ 2,837 $ 1,776 ------------------------ - ----------------------------------------------------------------------------------------------------------------
The weighted average interest rate on commercial paper was 5.97 percent and 2.77 percent at December 31, 1994 and 1993, respectively. U S WEST is permitted to borrow up to approximately $1.9 billion under short-term formal lines of credit, all of which was available at December 31, 1994. Long-term Debt Interest rates and maturities of long-term debt at December 31 follow:
- ------------------------------------------------------------------------------------------------------------------------------- Maturities ---------------------------------------------------------------- Total Total Interest rates 1996 1997 1998 1999 Thereafter 1994 1993 -------------------------------------------------------------------------------------------- Up to 5% $ 271 $ -- $ 35 $ -- $ 240 $ 546 $ 844 Above 5% to 6% 13 25 300 -- 261 599 561 Above 6% to 7% -- -- -- 226 1,290 1,516 1,383 Above 7% to 8% 670 16 -- -- 2,507 3,193 2,061 Above 8% to 9% 28 -- -- 126 290 444 504 Above 9% to 10% -- 29 -- 15 355 399 399 -------------------------------------------------------------------------------------------- $ 982 $ 70 $ 335 $ 367 $ 4,943 6,697 5,752 ================================================================ Capital lease obligations and other 153 139 Unamortized discount - net (1,239) (101) Allocated to discontinued operations - net (510) (367) ---------------------------- Total $ 5,101 $ 5,423 ---------------------------- - -------------------------------------------------------------------------------------------------------------------------------
Long-term debt consists principally of debentures and medium-term notes, debt associated with the company's Leveraged Employee Stock Ownership Plans (LESOP), and zero coupon, subordinated notes convertible at any time into U S WEST common shares. The zero coupon notes have a yield to maturity of approximately 7.3 percent and are recorded at a discounted value of $498. Long-term debt also includes a note payable to TWE of $271 in 1994 and $555 in 1993. During 1993, U S WEST refinanced debt issues aggregating $2.7 billion in principal amount. Expenses associated with the refinancing resulted in an extraordinary charge to income of $77, net of a tax benefit of $48. The refinancing allowed the company to take advantage of favorable interest rates. Interest payments, net of amounts capitalized, were $534, $680 and $704 for 1994, 1993 and 1992, respectively, of which $103, $212 and $220, respectively, relate to discontinued operations. U S WEST 42 45 1 9 9 4 -------------------- 7 NOTE 7: LEASING ARRANGEMENTS - -------------------------------------------------------------------------------- U S WEST has entered into operating leases for office facilities, equipment and real estate. Rent expense under operating leases was $288, $275 and $274 in 1994, 1993 and 1992, respectively. Minimum future lease payments as of December 31, 1994, under non-cancellable operating leases, follow:
- ------------------------------------------------------------- Year - ------------------------------------------------------------- 1995 $ 153 1996 140 1997 128 1998 123 1999 109 Thereafter 853 -------- Total $ 1,506 -------- - -------------------------------------------------------------
8 NOTE 8: DERIVATIVE FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The company is exposed to market risks arising from changes in interest rates and foreign exchange rates. Derivative financial instruments are used by the company to manage these risks. INTEREST RATE RISK MANAGEMENT The company enters into interest rate swap agreements to manage its market exposure to fluctuations in interest rates. Swap agreements are primarily used to effectively convert existing commercial paper to fixed-rate debt. This allows the company to achieve interest savings over issuing fixed-rate debt directly. Additionally, the company has entered into interest rate swaps to effectively terminate existing swaps. Under an interest rate swap, the company agrees with another party to exchange interest payments at specified intervals over a defined term. Interest payments are calculated by reference to the notional amount based on the fixed- and variable-rate terms of the swap agreements. The net interest received or paid as part of the interest rate swap is accounted for as an adjustment to interest expense. The company also entered into a currency swap to convert Swiss franc-denominated debt to dollar-denominated debt. This allowed the company to achieve interest savings over issuing fixed-rate, dollar-denominated debt. Under the currency swap, the company agreed with another party to exchange dollars for francs within the terms of the loan, which include periodic interest payments and principal upon origination and maturity. The currency swap and foreign currency debt are combined and accounted for as if fixed-rate, dollar-denominated debt were issued directly. The following table summarizes terms of swaps pertaining to continuing operations as of December 31, 1994. Variable rates are primarily indexed to the 30-day commercial paper rate.
- ----------------------------------------------------------------------------------- Weighted Average Rate -------------------------- Continuing operations Notional Amount Maturities Receive Pay - ----------------------------------------------------------------------------------- Variable to fixed $ 785 1995 - 2004 6.14 6.47 Fixed to variable 5 1995 6.61 5.87 Currency 71 1999 -- 6.53 - -----------------------------------------------------------------------------------
U S WEST 43 46 U S W E S T I N C. -------------------- The following table summarizes terms of swaps pertaining to discontinued operations as of December 31, 1994. Variable rates are indexed to three- and six-month LIBOR.
- ----------------------------------------------------------------------------------- Weighted Average Rate -------------------------- Discontinued operations Notional Amount Maturities Receive Pay - ----------------------------------------------------------------------------------- Variable to fixed (1) $ 380 1996 - 1997 5.69 9.03 Fixed to variable (1) 380 1996 - 1997 7.29 5.80 Variable rate basis adjustment (2) 10 1997 5.89 7.04 - -----------------------------------------------------------------------------------
(1) The fixed to variable swap has the same terms as the variable to fixed swap and was entered into to terminate the variable to fixed swap. The net interest cost on the swaps is a cost of discontinued operations and is included in the discontinued operations loss provision. (2) Variable rate debt based on U. S. Treasury securities is swapped to a LIBOR-based interest rate. In 1993, the company executed forward contracts to sell U. S. Treasury securities to reduce debt issuance risks by allowing the company to lock in the Treasury rate component of the future debt issue. At December 31, 1994, deferred credits of $8 and deferred charges of $51 on closed interest rate forward contracts are included as part of the carrying value of the underlying debt. The deferred credits and charges are being recognized as a yield adjustment over the life of the debt, which matures at various dates through 2043. The net deferred charge is directly offset by the lower coupon rate achieved on the debt issuance. At December 31, 1994, there were no open forward contracts on interest rates. The counterparties to these derivative contracts are major financial institutions. The company is exposed to credit loss in the event of non-performance by these counterparties. The company manages this exposure by monitoring the credit standing of the counterparty and establishing dollar and term limitations that correspond to the respective credit rating of each counterparty. The company does not have significant exposure to an individual counterparty and does not anticipate non-performance by any counterparty. FOREIGN EXCHANGE RISK MANAGEMENT The company enters into forward and option contracts to manage the market risks associated with fluctuations in foreign exchange rates after considering offsetting foreign exposures among international operations. The company enters into forward contracts to exchange foreign currencies at agreed rates on specified future dates. This allows the company to fix the cost of firm foreign commitments. The commitments and the forward contracts are for periods up to one year. The gain or loss on forward contracts designated as hedges of firm foreign investment commitments are included in common shareowners' equity and are recognized in income on sale of the investment. The company also enters into foreign exchange combination option contracts to protect against adverse changes in foreign exchange rates. These option contracts combine purchased options to cap the foreign exchange rate and written options to finance the premium of the purchased options. The commitments and combination option contracts are for periods up to one year. Gains or losses on the contracts, designated as hedges of firm investment commitments, are included in common shareowners' equity and are recognized in income on sale of the investment. The counterparties to these contracts are major financial institutions. The company is exposed to credit loss in the event of non-performance by these counterparties. The company does not have significant exposure to an individual counterparty and does not anticipate non-performance by any counterparty. At December 31, 1994, the company has outstanding forward and combination option contracts to purchase British pounds in the notional amounts of $135 and $35, respectively. All contracts mature within one year. Cumulative deferred credits on foreign exchange contracts of $7 and deferred charges of $25, and deferred taxes (benefits) of $3 and ($10), respectively, are included in common shareowners' equity at December 31, 1994. U S WEST 44 47 1 9 9 4 -------------------- 9 NOTE 9: FAIR VALUES OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- Fair values of cash equivalents, other current amounts receivable and payable, and short-term debt, including discontinued operations, approximate carrying values due to their short-term nature. The fair values of mandatorily redeemable preferred stock, foreign exchange forward and combination option contracts approximate the carrying values. The fair values of interest rate swaps are based on estimated amounts the company would receive or pay to terminate such agreements, taking into account current interest rates and creditworthiness of the counterparties. The fair value of long-term debt, including discontinued operations, is based on quoted market prices where available or, if not available, is based on discounting future cash flows using current interest rates.
- ------------------------------------------------------------------------- December 31, 1994 1993 --------------------------------------- Continuing and Carrying Fair Carrying Fair discontinued operations Value Value Value Value --------------------------------------- Debt (includes short-term portion) $ 9,221 $ 8,700 $ 8,695 $ 8,940 Interest rate swap agreements - assets -- (15) -- (29) Interest rate swap agreements - liabilities -- 20 -- 89 --------------------------------------- Debt-net $ 9,221 $ 8,705 $ 8,695 $ 9,000 --------------------------------------- - -------------------------------------------------------------------------
10 NOTE 10: PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION - -------------------------------------------------------------------------------- U S WEST has 50,000,000 authorized shares of preferred stock. On September 2, 1994, U S WEST issued to Fund American Enterprises Holdings Inc. ("FFC") 50,000 shares of a class of newly created 7 percent Series B Cumulative Redeemable Preferred Stock for a total of $50. (See Note 17 to the Consolidated Financial Statements.) The preferred stock was recorded at fair market value of $51. U S WEST has the right, commencing five years from September 2, 1994, to redeem the shares for one thousand dollars per share plus unpaid dividends and a redemption premium. The shares are mandatorily redeemable in year 10 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, a member of the Capital Assets segment. U S WEST 45 48 U S W E S T I N C. -------------------- 11 NOTE 11: SHAREOWNERS' EQUITY - -------------------------------------------------------------------------------- COMMON STOCK At December 31, 1994, the company held 7,537,372 treasury shares with a cost basis of $163, or $21.63 per share. 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 2 to the Consolidated Financial Statements.) In connection with the settlement of shareowner litigation ("Rosenbaum v. U S WEST Inc. et al."), the company issued approximately 5.5 million shares of U S WEST common stock in March 1994 to class members connected with this litigation. U S WEST issued, to certified class members, non-transferable rights to purchase shares of common stock directly from U S WEST, on a commission-free basis, at a 3 percent discount from the average of the high and low trading prices of such stock on the New York Stock Exchange on February 23, 1994, the pricing date designated in accordance with the settlement. U S WEST received net proceeds of $210 from the offering. During fourth quarter 1993, the company issued 22 million additional shares of U S WEST common stock for net cash proceeds of $1,020. The company used the net proceeds to reduce short-term indebtedness, including indebtedness incurred from the TWE investment, and for general corporate purposes. LEVERAGED EMPLOYEE STOCK OWNERSHIP PLANS (LESOP) U S WEST maintains employee savings plans for management and occupational employees under which the company matches a certain percentage of eligible contributions made by the employees with shares of company stock. The company established two LESOPs in 1989 to provide the company stock used for matching contributions to the savings plans. The long-term debt of the LESOP trusts, which is unconditionally guaranteed by the company, is included in the accompanying consolidated balance sheets and corresponding amounts have been recorded as reductions to common shareowners' equity. The trusts will repay the debt with company contributions and certain dividends received on shares of the company's common stock held by the LESOP. Total company contributions to the trusts (excluding dividends) were $80, $75 and $78 in 1994, 1993 and 1992, respectively, of which $19, $24 and $28, respectively, have been classified as interest expense. The company recognizes expense based on the cash payments method. Dividends on unallocated shares held by the LESOP were $11, $14 and $17 in 1994, 1993 and 1992, respectively. SHAREHOLDER RIGHTS PLAN The board of directors of the company has adopted a shareholder rights plan which, in the event of a takeover attempt, would entitle existing shareowners to certain preferential rights. The rights expire on April 6, 1999, and are redeemable by the company at any time prior to the date they would become effective. SHARE REPURCHASE Subsequent to the acquisition of the Atlanta Cable Properties (See Note 2 to the Consolidated Financial Statements), the company announced its intention to purchase U S WEST common shares in the open market up to an amount equal to those issued in conjunction with the acquisition, subject to market conditions. In December 1994, the company purchased 550,400 shares of U S WEST common stock at an average price per share of $36.30. U S WEST 46 49 1 9 9 4 -------------------- 12 NOTE 12: PARTIAL SALE OF JOINT VENTURE INTEREST - -------------------------------------------------------------------------------- TeleWest Communications plc ("TeleWest"), the cable television/ telephone joint venture in the United Kingdom owned by U S WEST and Tele-Communications Inc., made an initial public offering of its ordinary shares in November 1994. Following the offering, in which U S WEST sold 24.4 percent of its joint venture interest, U S WEST owns approximately 37.8 percent of TeleWest. Net proceeds of approximately $650 will be used by TeleWest to finance construction and operations costs, invest in affiliated companies and repay debt. It is the company's policy to recognize as income any gains or losses related to the sale of investee stock. U S WEST recognized a gain of $105 in 1994, net of $59 in deferred taxes, for the partial sale of its joint venture interest in TeleWest. 13 NOTE 13: STOCK INCENTIVE PLANS - -------------------------------------------------------------------------------- U S WEST maintains stock incentive plans for executives and key employees, and non-employees. The 1994 Stock Plan was approved by shareowners on May 6, 1994. The 1994 Stock Plan is a successor plan to the USWEST Inc. Stock Incentive Plan and the USWEST1991 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. The maximum aggregate number of shares of common stock of the company that may be granted in any calendar year for all purposes under the plan will be three-quarters of 1 percent of the shares of common stock outstanding (excluding shares of such common stock held in the company's treasury) on the first day of such calendar year. In the event that fewer than the full aggregate number of shares of common stock available for issuance in any calendar year are issued, the shares not issued will be added to the shares available for issuance in any subsequent year or years. Options may be exercised no later than 10 years after the date on which the option was granted. A total of 8,300,853 shares of U S WEST common stock were reserved for issuance under the 1994 Stock Plan and the Predecessor Plans at December 31, 1994. Data for outstanding options under the plan is summarized as follows:
- ---------------------------------------------------------------- Number of Average Shares* Option Price --------------------------- Outstanding January 1, 1992 3,420,406 $ 33.97 - ---------------------------------------------------------------- Granted 1,410,311 38.13 Exercised (327,221) 26.15 Canceled or expired (53,346) 36.17 --------------------------- Outstanding December 31, 1992 4,450,150 35.81 - ---------------------------------------------------------------- Granted 1,486,106 48.83 Exercised (412,444) 31.73 Canceled or expired (222,273) 36.87 --------------------------- Outstanding December 31, 1993 5,301,539 39.76 - ---------------------------------------------------------------- Granted 2,438,409 36.15 Exercised (139,762) 33.72 Canceled or expired (214,149) 40.71 --------------------------- Outstanding December 31, 1994 7,386,037 $ 38.66 --------------------------- - ----------------------------------------------------------------
* Includes options granted in tandem with SARs. Options to purchase 2,374,394 and 1,412,791 shares were exercisable at December 31, 1994 and 1993, respectively. A total of 914,816 and 8,649,750 shares of U S WEST common stock were available for grant under the plans in effect at December 31, 1994 and 1993, respectively. U S WEST 47 50 U S W E S T I N C. -------------------- 14 NOTE 14: EMPLOYEE BENEFITS - -------------------------------------------------------------------------------- PENSION PLAN Effective January 1, 1993, U S WEST merged its two defined benefit pension plans, covering substantially all management and occupational employees, in a single 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. No funding was required in 1994, 1993 or 1992. The composition of the net pension credit and the actuarial assumptions of the plan follow:
- ---------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 --------------------------------- Details of pension credit: Service cost -- benefits earned during the period $ 197 $ 148 $ 141 Interest cost on projected benefit obligation 561 514 480 Actual return on plan assets 188 (1,320) (411) Net amortization and deferral (946) 578 (318) --------------------------------- Net pension credit $ 0 $ (80) $ (108) --------------------------------- - ----------------------------------------------------------------
The expected long-term rate of return on plan assets used in determining net pension cost was 8.50 percent for 1994, 9.00 percent for 1993 and 9.25 percent for 1992. The funded status of the plan follows:
- ---------------------------------------------------------------- December 31, 1994 1993 ------------------------- Accumulated benefit obligation, including vested benefits of $5,044 and $5,286, respectively $ 5,616 $ 5,860 ------------------------- - ---------------------------------------------------------------- Plan assets at fair value, primarily stocks and bonds $ 8,388 $ 8,987 Less: Projected benefit obligation 7,149 7,432 ------------------------- Plan assets in excess of projected benefit obligation 1,239 1,555 Unrecognized net (gain) loss 161 (70) Prior service cost not yet recognized in net periodic pension cost (67) (72) Balance of unrecognized net asset at January 1, 1987 (785) (865) ------------------------- Prepaid pension asset $ 548 $ 548 ------------------------- - ----------------------------------------------------------------
The actuarial assumptions used to calculate the projected benefit obligation follow:
- ---------------------------------------------------------------- December 31, 1994 1993 ------------------------- Discount rate 8.00 7.25 Average rate of increase in future compensation levels 5.50 5.50 - ----------------------------------------------------------------
Anticipated future benefit changes have been reflected in the above calculations. U S WEST 48 51 1 9 9 4 -------------------- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS U S WEST and most of its subsidiaries provide certain health care and life insurance benefits to retired employees. Effective January 1, 1992, U S WEST adopted SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions," which mandates that employers reflect in their current expenses the cost of providing retirement medical and life insurance benefits to current and future retirees. Prior to 1992, U S WEST recognized these costs as they were paid. Adoption of SFAS No. 106 resulted in a one-time, non-cash charge against 1992 earnings of $1,741 net of a deferred income tax benefit of $1,038, for the prior service of active and retired employees. The effect on 1992 income from continuing operations of adopting SFAS No. 106 was approximately $47, or $.11 per share. In conjunction with the adoption of SFAS No. 106, for financial reporting purposes, the company elected to immediately recognize the accumulated postretirement benefit obligation for current and future retirees, net of the fair value of plan assets. 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. U S WEST uses the projected unit credit method for the determination of postretirement medical costs for financial reporting purposes. The composition of net postretirement benefit costs and actuarial assumptions underlying plan benefits follow:
- ------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1994 1993 1992 --------------------------------------------------------------------------------------- Medical Life Total Medical Life Total Medical Life Total --------------------------------------------------------------------------------------- Service cost -- benefits earned during the period $ 62 $ 13 $ 75 $ 60 $ 11 $ 71 $ 57 $ 10 $ 67 Interest on accumulated benefit obligation 221 39 260 235 36 271 223 33 256 Actual return on plan assets 3 1 4 (73) (52) (125) (19) (29) (48) Net amortization and deferral (68) (31) (99) 27 22 49 -- -- -- --------------------------------------------------------------------------------------- Net postretirement benefit costs $ 218 $ 22 $ 240 $ 249 $ 17 $ 266 $261 $ 14 $ 275 --------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------
The expected long-term rate of return on plan assets used in determining net postretirement benefit costs was 8.50 percent for 1994 and 9.00 percent in 1993 and 1992. The funded status of the plan follows:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1994 1993 -------------------------------------------------------------- Medical Life Total Medical Life Total -------------------------------------------------------------- Accumulated postretirement benefit obligation attributable to: Retirees $ 1,733 $248 $ 1,981 $1,795 $ 311 $ 2,106 Fully eligible plan participants 264 38 302 274 48 322 Other active plan participants 940 135 1,075 983 170 1,153 -------------------------------------------------------------- Total accumulated postretirement benefit obligation 2,937 421 3,358 3,052 529 3,581 Unrecognized net gain (loss) 243 90 333 65 (25) 40 Fair value of plan assets, primarily stocks, bonds and life insurance (1) (894) (374) (1,268) (613) (388) (1,001) -------------------------------------------------------------- Accrued postretirement benefit obligation $ 2,286 $137 $ 2,423 $2,504 $ 116 $ 2,620 -------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------------
(1) Medical plan assets include U S WEST common stock of $164 in 1994. The actuarial assumptions used to calculate the accumulated postretirement benefit obligation follow:
- -------------------------------------------------------------- December 31, 1994 1993 -------------------- Discount rate 8.00 7.25 Medical trend* 9.70 10.30 - --------------------------------------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 6 percent in 2006. A 1-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 1994 net postretirement benefit cost by approximately $50 and increased the 1994 accumulated postretirement benefit obligation by approximately $450. For USWC, the annual amount funded will generally follow the amount of expense allowed in regulatory jurisdictions. Anticipated future benefit changes have been reflected in these postretirement benefit calculations. OTHER POSTEMPLOYMENT BENEFITS U S WEST adopted, effective January 1, 1992, SFAS No. 112, "Employers' Accounting for Postemployment Benefits." SFAS No. 112 requires that employers accrue for the estimated costs of benefits, such as workers' compensation and disability, provided to former or inactive employees who are not eligible for retirement. Adoption of SFAS No. 112 resulted in a one-time, non-cash charge against 1992 earnings of $53, net of a deferred income tax benefit of $32. U S WEST 49 52 U S W E S T I N C. -------------------- 15 NOTE 15: INCOME TAXES - -------------------------------------------------------------------------------- The components of the provision for income taxes follow:
- -------------------------------------------------------------- Year Ended December 31, 1994 1993 1992 ------------------------------ Federal: Current $ 418 $ 422 $ 427 Deferred 351 (145) 46 Investment tax credits - net (47) (56) (63) ------------------------------ 722 221 410 ------------------------------ State and local: Current 52 71 62 Deferred 83 (23) 21 ------------------------------ 135 48 83 ------------------------------ Provision for income taxes $ 857 $ 269 $ 493 ------------------------------ - --------------------------------------------------------------
Amounts paid for income taxes were $313, $391 and $459 in 1994, 1993 and 1992, respectively, inclusive of discontinued operations. The effective tax rate differs from the statutory tax rate as follows:
- -------------------------------------------------------------- Year Ended December 31, In percent 1994 1993 1992 ------------------------------ Federal statutory tax rate 35.0 35.0 34.0 Investment tax credit amortization (1.3) (3.0) (4.2) State income taxes - net of federal effect 3.9 4.0 3.5 Rate differential on reversing temporary differences -- (2.2) (3.1) Depreciation on capitalized overheads - net -- 1.4 2.1 Tax law change - catch-up adjustment -- 3.1 -- Restructuring charge -- (1.5) -- Other (0.1) (0.7) (0.9) ------------------------------ Effective tax rate 37.5 36.1 31.4 ------------------------------ - --------------------------------------------------------------
The components of the net deferred tax liability follow:
- -------------------------------------------------------------- December 31, 1994 1993 ----------------------- Property, plant and equipment $ 1,504 $ 1,340 Leases 690 663 State deferred taxes - net of federal effect 395 277 Intangible assets 164 -- Investment in partnerships 142 46 Other 84 94 ----------------------- Deferred tax liabilities 2,979 2,420 ----------------------- Postemployment benefits, including pension 718 736 Restructuring, discontinued operations and other 417 620 Unamortized investment tax credit 79 94 State deferred taxes - net of federal effect 232 220 Other 317 260 ----------------------- Deferred tax assets 1,763 1,930 ----------------------- Net deferred tax liability $ 1,216 $ 490 ----------------------- - --------------------------------------------------------------
The current portion of the deferred tax asset was $352 and $336 at December 31, 1994 and 1993, respectively, resulting primarily from restructuring charges and compensation-related items. On August 10, 1993, federal legislation was enacted that increased the corporate tax rate from 34 percent to 35 percent retroactive to January 1, 1993. The cumulative effect on deferred taxes of the 1993 increase in income tax rates was $74, including $20 for discontinued operations. The net deferred tax liability includes $678 in 1994 and $607 in 1993 related to discontinued operations. U S WEST 50 53 1 9 9 4 -------------------- 16 NOTE 16: COMMITMENTS AND CONTINGENCIES - -------------------------------------------------------------------------------- At USWC, there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. In one such instance, the Utah Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the PSC for reconsideration, thereby establishing two exceptions to the rule against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2) misconduct. The PSC's initial order denied a refund request from interexchange carriers and other parties related to the Tax Reform Act of 1986. This case is still in the discovery process. If a formal filing - made in accordance with the remand from the Supreme Court - alleges that the exceptions apply, the range of possible risk to USWC is $0 to $140. U S WEST has issued letters of credit, which expire in July 1995, in conjunction with its investment in Binariang Sdn Bhd, a Malaysian telecommunications company, totaling $110. 17 NOTE 17: DISCONTINUED OPERATIONS - -------------------------------------------------------------------------------- During second quarter 1993, the U S WEST board of directors approved a plan to dispose of the Capital Assets segment through the sale of segment assets and businesses. Accordingly, the company recorded an after-tax charge of $100, or $.24 per share, for the estimated loss on disposition. An additional provision of $20, or $.04 per share, is related to the effect of the 1993 increase in federal income tax rates. The Capital Assets segment includes activities related to financial services and financial guarantee insurance operations. Also included in the segment is U S WEST Real Estate Inc., for which disposition was announced in 1991 and a $500 valuation allowance was established to cover both carrying costs and losses on disposal of related properties. The entire Capital Assets segment has been accounted for as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. During 1994, U S WEST reduced its ownership interest in Financial Security Assurance ("FSA"), a member of the Capital Assets segment, to 60.9 percent, and its voting interest to 49.8 percent through a series of transactions. In May and June 1994, U S WEST sold 8.1 million shares of FSA, including 2.0 million shares to Fund American Enterprises Holdings Inc. ("FFC"), in an initial public offering of FSA common stock at $20 per share. U S WEST received $154 in net proceeds from the offering. On September 2, 1994, U S WEST issued to FFC 50,000 shares of cumulative redeemable preferred stock for a total of $50. (See Note 10 to the Consolidated Financial Statements.) FFC's voting interest in FSA is 21.0 percent, achieved through a combination of direct share ownership of common and preferred FSA shares, and a voting trust agreement with U S WEST. The company retained certain risks in asset-backed obligations related to the commercial real estate portfolio. FFC has a right of first offer and a call right to purchase from U S WEST up to 9.0 million shares, or approximately 57 percent, of outstanding FSA stock held by U S WEST. U S WEST anticipates its ownership will be further reduced by 1996. During 1994, U S WEST Real Estate sold 12 buildings, six parcels of land and other assets for approximately $327. An additional property was sold in January 1995 for approximately $37. During 1993, five properties were sold for approximately $66. The sales were in line with company estimates. Proceeds from building sales were primarily used to pay related debt. U S WEST has completed all construction of existing buildings in the commercial real estate portfolio and expects to substantially complete the liquidation of its portfolio by 1998. The remaining balance of assets subject to sale is approximately $607, net of reserves. In December 1993, the company sold $2.0 billion of finance receivables and the business of U S WEST Financial Services to NationsBank Corporation. Sales proceeds of $ 2.1 billion were used primarily to repay related debt. The pretax gain on the sale of approximately $100, net of selling expenses, was in line with management's estimate and was included in the company's estimate of provision for loss on disposal. The management team that previously operated the entire Capital Assets segment transferred to NationsBank. U S WEST 51 54 U S W E S T I N C. -------------------- Building sales and operating revenues of discontinued operations were $553 in 1994, $710 in 1993 and $672 in 1992. Income from discontinued operations for 1993 (to June 1) and 1992 totaled $38 and $103, respectively. Income (loss) from discontinued operations subsequent to June 1, 1993 is being deferred and was included within the provision for loss on disposal.
NET ASSETS OF DISCONTINUED OPERATIONS - -------------------------------------------------------------- December 31, 1994 1993 ----------------------- Assets Cash and cash equivalents $ 7 $ 24 Finance receivables - net 1,073 1,131 Investment in real estate - net of valuation allowance 465 711 Investments in securities at market value 155 895 Investment in FSA 329 -- Other assets 362 600 ----------------------- Total assets $ 2,391 $ 3,361 ----------------------- Liabilities Debt $ 1,283 $ 1,496 Deferred income taxes 693 681 Accounts payable, accrued liabilities and other 103 244 Unearned premiums -- 346 Minority interests 10 40 ----------------------- Total liabilities 2,089 2,807 ----------------------- Net assets of discontinued operations $ 302 $ 554 ----------------------- - --------------------------------------------------------------
The assets and liabilities of the Capital Assets segment have been separately classified on the consolidated balance sheets as net assets of discontinued operations. Finance receivables primarily consist of contractual obligations under long-term leases that the company intends to run off. These long-term leases primarily consist of investments in leveraged leases related to aircraft and power plants. For leveraged leases, the cost of the assets leased is financed primarily through non-recourse debt that is netted against the related lease receivable. The components of finance receivables follow:
- -------------------------------------------------------------- December 31, 1994 1993 ------------------------ Receivables $ 1,095 $ 1,208 Unguaranteed estimated residual values 467 477 ------------------------ 1,562 1,685 Less: Unearned income 459 490 Credit loss and other allowances 30 64 ------------------------ Finance receivables - net $ 1,073 $ 1,131 ------------------------ - --------------------------------------------------------------
Investments in securities, which are designated as available for sale, are carried at market value. Any resulting unrealized gains or losses, net of applicable deferred income taxes, are reflected as a component of common shareowners' equity. The 1994 net unrealized loss of $64 (net of a deferred tax benefit of $34) and the 1993 net unrealized gain of $35 (net of deferred taxes of $19), are included in common shareowners' equity. The amortized cost and estimated market value of investments in securities follow:
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1994 December 31, 1993 ------------------------------------------------------------------------------------------------ Gross Gross Gross Gross Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair Marketable Securities Amount Gains Losses (1) Value Amount Gains Losses Value ------------------------------------------------------------------------------------------------ Municipal $113 -- $ 13 $ 100 $ 742 $ 51 $ 1 $ 792 Other 65 -- 10 55 99 4 -- 103 ------------------------------------------------------------------------------------------------ Total $178 -- $ 23 $ 155 $ 841 $ 55 $ 1 $ 895 - ------------------------------------------------------------------------------------------------------------------------------------
(1) Common shareowners' equity at December 31, 1994, also includes a net unrealized loss on marketable securities of $49 (net of a deferred tax benefit of $26), associated with the company's equity investment in FSA. U S WEST 52 55 1 9 9 4 -------------------- Debt Interest rates and maturities of debt associated with discontinued operations at December 31 follow:
- ------------------------------------------------------------------------------------------------------------------------------------ Maturities -------------------------------------------------------- Total Total Interest rates 1995 1996 1997 1998 1999 Thereafter 1994 1993 -------------------------------------------------------------------------------- Up to 5% $ 50 $ -- $ -- $ -- $ -- $ 5 $ 55 $ 496 Above 5% to 6% 5 -- 10 -- -- -- 15 5 Above 6% to 7% 100 -- 54 -- -- -- 154 54 Above 7% to 8% 7 5 5 -- -- -- 17 26 Above 8% to 9% -- 35 -- -- 150 4 189 264 Above 9% to 10% 61 -- 48 5 -- -- 114 177 Above 10% -- -- -- 29 -- -- 29 29 Commercial paper rates -- -- -- -- -- -- -- 30 ======================================================== $ 223 $ 40 $ 117 $ 34 $ 150 $ 9 573 1,081 Allocated from continuing operations - net 710 415 ------------------------ Total $ 1,283 $1,496 - ------------------------------------------------------------------------------------------------------------------------------------
Debt of $119 and $124 at December 31, 1994 and 1993, respectively, was collateralized by first deeds of trust on associated real estate, assignment of rents from leases, and operating and management agreements. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET CREDIT RISK - FINANCIAL GUARANTEES The company retained certain risks in asset-backed obligations related to the commercial real estate portfolio. The principal amounts insured on the asset-backed and municipal obligations follow. The 1994 amounts do not include the financial guarantees for FSA, which is now accounted for under the equity method.
- ------------------------------------------------------------- Asset-Backed (1) Municipal (2) December 31, December 31, --------------------------------------- Term to Maturity 1994 1993 1994 1993 --------------------------------------- 0 to 5 Years $ 540 $ 5,955 -- $ 1,888 5 to 10 Years 537 2,050 -- 2,771 10 to 15 Years 391 1,286 -- 2,176 15 to 20 Years -- 593 -- 2,346 20 and Above -- 2,501 -- 4,606 --------------------------------------- Total $ 1,468 $ 12,385 -- $ 13,787 --------------------------------------- - -------------------------------------------------------------
(1) Excludes amounts ceded to other insurers of $6,210 in 1993 and includes $25 of assumed obligations in 1993. (2) Excludes amounts ceded to other insurers of $5,576 in 1993 and includes $1,218 of assumed obligations in 1993. The principal amount of insured obligations in the municipal portfolio, net of amounts ceded, include the following types of issues:
- ------------------------------------------------------------- December 31, Type of Issue 1994 1993 ----------------------- General obligation $ -- $ 3,487 Tax-backed revenue -- 2,919 Housing revenue -- 1,879 Municipal utility revenue -- 1,783 Health care revenue -- 1,399 Transportation revenue -- 710 Other -- 1,610 ----------------------- Total $ -- $ 13,787 - -------------------------------------------------------------
Concentrations of collateral associated with insured asset-backed obligations, net of amounts ceded, follow:
- ------------------------------------------------------------- December 31, Type of Collateral 1994 1993 ----------------------- Residential mortgages $ -- $ 3,874 Consumer receivable -- 1,443 Securities: Government debt -- 2,039 Non-government securities -- 1,709 Commercial mortgages: Commercial real estate 530 809 Corporate secured 888 1,018 Investor-owned utility first mortgage bonds -- 772 Other asset-backed 50 721 ----------------------- Total $ 1,468 $ 12,385 ----------------------- - -------------------------------------------------------------
U S WEST 53 56 U S W E S T I N C. -------------------- ADDITIONAL FINANCIAL INFORMATION Information for U S WEST Financial Services Inc., a member of the discontinued segment, follows:
- ------------------------------------------------------------- Year Ended December 31, Summarized Operating Results 1994 1993 1992 ----------------------------- Revenues $ 54 $ 410 $ 302 Income before parent support and income taxes * * 83 Income before parent support * * 55 Net income * * 55 - -------------------------------------------------------------
* Results of Financial Services are included in discontinued operations
- ------------------------------------------------------------- December 31, Summarized Financial Position 1994 1993 ---------------------- Net finance receivables $ 981 $ 1,020 Total assets 1,331 1,797 Total debt 533 957 Total liabilities 1,282 1,748 Shareowners' equity 49 49 - -------------------------------------------------------------
18 NOTE 18: QUARTERLY FINANCIAL DATA (UNAUDITED) - -------------------------------------------------------------------------------- Quarterly financial data, and per share market and dividend data, follows:
- ------------------------------------------------------------------------------------------------------------------------------------ First Second Third Fourth Quarterly Financial Data Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------------------------ 1994 Sales and other revenues $2,641 $2,708 $ 2,765 $2,839 Income from continuing operations before income taxes 522 609 514 638 Income from continuing operations and net income 324 375 318 409 Earnings per common share 0.73 0.83 0.70 0.89 - ------------------------------------------------------------------------------------------------------------------------------------ 1993 Sales and other revenues $2,510 $2,541 $ 2,577 $2,666 Income (loss) from continuing operations before income taxes 449 436 (534) 394 Income (loss) from continuing operations 296 291 (375) 264 Net income (loss) 316 159 (3,545) 264 Earnings (loss) per common share from continuing operations 0.71 0.70 (0.90) 0.62 Earnings(loss) per common share 0.76 0.38 (8.50) 0.62 - ------------------------------------------------------------------------------------------------------------------------------------
1994 first-quarter income from continuing operations includes $15 ($.03 per share) for a gain on the sale of certain rural telephone exchanges. 1994 second-quarter net income includes gains of $16 ($.04 per share) and $41 ($.09 per share) for the sales of certain rural telephone exchanges and paging operations, respectively. 1994 fourth-quarter net income includes gains of $105 ($.23 per share) for the partial sale of a joint venture interest and $20 ($.04 per share) for the sale of certain rural telephone exchanges. 1993 second-quarter net income was reduced by $100 ($.24 per share) for a charge related to discontinued operations and $50 ($.12 per share) for the early extinguishment of debt. 1993 third-quarter net loss includes a restructuring charge of $610 ($1.46 per share) and $74 ($.18 per share), including $20 ($.05 per share) related to discontinued operations, for the cumulative effect on deferred taxes of the 1993 federally mandated increase in income tax rates. 1993 third-quarter net loss also includes extraordinary charges of $3,123 ($7.49 per share) for the discontinuance of SFAS No. 71, and $27 ($.06 per share) for the early extinguishment of debt. 1993 net income (loss) related to discontinued operations was $20 ($.05 per share) and ($82) ($.20 per share) for the first and second quarters, respectively. Income (loss) subsequent to June 1, 1993, is being deferred and was included within the provision for loss on disposal of the Capital Assets segment.
- ------------------------------------------------------------- Per share Market and Market Price Dividend Data -------------------------- (Whole dollars) High Low Close Dividends - ------------------------------------------------------------- 1994 First $46.250 $ 38.500 $40.750 $ 0.535 Second 43.750 38.250 41.875 0.535 Third 43.125 38.250 38.750 0.535 Fourth 38.875 34.625 35.625 0.535 - ------------------------------------------------------------- 1993 First $43.875 $ 37.750 $43.625 $ 0.535 Second 46.000 40.625 45.875 0.535 Third 49.375 44.500 49.250 0.535 Fourth 50.750 45.750 45.875 0.535 - -------------------------------------------------------------
U S WEST 54 57 1 9 9 4 -------------------- U S WEST Board of Directors [PICTURE] Dick Cheney (54) A former secretary of Defense in the Bush administration, he is a senior fellow with the American Enterprise Institute in Washington, D.C. The former five-term congressman from Wyoming also served as chief of staff for President Ford. Mr. Cheney joined the U S WEST board in 1993. [PICTURE] Remedios Diaz-Oliver (56) The chief executive officer and president of All American Container Inc., which sells and distributes glass, plastic and metal containers for a variety of products worldwide. Ms. Diaz-Oliver joined the U S WEST board in 1988. [PICTURE] Grant A. Dove (66) The managing partner of Technology Strategies and Alliances, a strategic planning and investment banking firm. Mr. Dove spent nearly 30 years in a number of executive positions with Texas Instruments. He joined the U S WEST board in 1988 and chairs the Human Resources Committee. [PICTURE] Allan D. Gilmour (60) The former vice chairman of the Ford Motor Company, Mr. Gilmour held several executive assignments since joining Ford in 1960. He served as the company's chief financial officer before taking over leadership of its international automotive operations and, later, the Ford Automotive Group. He joined the U S WEST board in 1992. [PICTURE] Pierson M. Grieve (67) The chairman and chief executive officer of Ecolab Inc., a leading worldwide developer and marketer of premium cleaning, sanitizing and maintenance products and services for the hospitality, institutional and res-idential markets. He joined the U S WEST board in 1990, and chairs the Board Affairs Committee. [PICTURE] Shirley M. Hufstedler (69) A partner in the law firm of Hufstedler, Kaus & Ettinger. She served as secretary of Education during the Carter administration and, for 11 years, as a judge for the 9th U.S. Circuit Court of Appeals. Ms. Hufstedler joined the U S WEST board in 1983, and chairs the Public Policy Committee. [PICTURE] Allen F. Jacobson (68) The former chairman and chief executive officer of 3M. Mr. Jacobson has been a member of the U S WEST board since 1983, and chairs the Corporate Development and Finance Committee. [PICTURE] Richard D. McCormick (54) Named president and chief executive officer of U S WEST January 1, 1991, and chairman of the board May 1, 1992. Mr. McCormick was president of Northwestern Bell Telephone Company before joining U S WEST as executive vice president in 1985. He became a member of the company's board in 1986. [PICTURE] Marilyn Carlson Nelson (55) The vice chair of Carlson Holdings Inc., a group of com-panies involved in marketing services, travel and hospitality services. Ms. Nelson is also chair of Citizens State Bank of Waterville, Minn., and Montgomery, Minn. She joined the U S WEST board in 1993. [PICTURE] Frank Popoff (59) The chairman and chief executive officer of The Dow Chemical Company. Since joining Dow Chemical in 1959, he also served as the company's president and chief operating officer and executive vice president for international operations. Mr. Popoff joined the U S WEST board in 1993. [PICTURE] Glen L. Ryland (70) The president of RYCO Inc. He is former chairman, president and chief executive officer of Frontier Holdings Inc., and its principal subsidiary, Frontier Airlines. He joined the U S WEST board in 1983, and chairs the Audit Committee. [PICTURE] Jerry O. Williams (56) The president and chief executive officer of Grand Eagle Enterprises Inc., a private investment group. Mr. Williams is former president and chief operating officer of AM International Inc., a manufacturer and seller of design, display, reproduction and finishing products and supplies in the graphics industry. He joined the U S WEST board in 1988. [PICTURE] Daniel Yankelovich (70) The founder and chairman of DYG Inc., a leading market research firm. He also founded Yankelovich, Skelly and White, one of the nation's largest opinion research organiza-tions. Mr. Yankelovich joined the U S WEST board in 1983, and chairs the Trust Investment Committee. In Memoriam U S WEST lost two valued members of its family - Mary M. Gates and Jack D. Sparks - since the 1994 annual meeting. Ms. Gates, a member of the U S WEST board since 1992, passed away June 9, 1994. She also served as a director of the U S WEST NewVector Group from 1990 to 1991, and of Pacific Northwest Bell from 1979 to 1988. Mr. Sparks, who retired from the U S WEST board in 1993, passed away Dec. 22, 1994. The former chairman, chief executive officer and president of the Whirlpool Corporation, he was elected to the U S WEST board in 1985. Their experience and insights were invaluable, and they will be missed. U S WEST -------------------- 55 58 U S W E S T I N C. -------------------- Executive and Subsidiary Officers Richard D. McCormick* James H. Stever* Chairman, President and Executive Vice President and Chief Executive Officer Acting Chief Human Resources Officer A. Gary Ames* James T. Anderson* President and Chief Executive Officer Vice President and Treasurer U S WEST Communications Group Lorne G. Rubis* Richard J. Callahan* Vice President Executive Vice President, U S WEST; Quality President, U S WEST International and Business Development Group Judith A. Servoss* Vice President Charles M. Lillis* Public Relations Executive Vice President, U S WEST; President and Chief Executive Officer, H. Laird Walker U S WEST Diversified Group Vice President Federal Relations James M. Osterhoff* Executive Vice President and Thomas E. Pardun Chief Financial Officer President and Chief Executive Officer U S WEST Multimedia Group Charles P. Russ III* Executive Vice President, Jan Peters General Counsel and Secretary Chief Operating Officer U S WEST NewVector Group C. Scott McClellan* Acting Executive Vice President Solomon D. Trujillo Public Policy President and Chief Executive Officer U S WEST Marketing Resources Group Pearre Williams President Corporate Development Division * Executive officer
The U S WEST Foundation During 1994 the U S WEST Foundation invested more than $25 million in education, economic development, arts and community-betterment projects in the 14 states served by U S WEST Communications. The Foundation also moved in a new direction: encouraging innovative programs to meet community needs through information technologies. For more information on the foundation, please call (800) 843-3383 U S WEST -------------------- 56 59 SHAREOWNER INFORMATION U S WEST Shareowner Services Expected Dividend If you have questions about your Record Dates U S WEST account or need to April 19, 1995 make changes, please write: July 20, 1995 October 20, 1995 For general information, transfers, January 19, 1996 the U S WEST Investor's Handbook or the company's Expected Dividend current Form 10-K Report: Payment Dates U S WEST May 1, 1995 P.O. Box 8935 August 1, 1995 Boston, MA 02266-8935 November 1, 1995 February 1, 1996 For dividend reinvestment: U S WEST Annual Meeting P.O. Box 8936 Boston, MA 02266-8936 The annual meeting of share- owners will be held at 10 a.m. Shareowner Toll-Free Numbers: Friday, May 5, 1995, at the For information or inquiries, Boise Centre, 850 West Front Street, call 1-800-537-0222. For recorded Boise, Idaho 83702. messages about the company's A signer will be at the meeting to activities, call 1-800-449-0000. assist the hearing impaired. Shareowners calling from Alaska, Stock Exchange Listings Hawaii or outside the United U S WESTcommon stock is listed States, please call collect: on the New York, Pacific, London, 0-505-989-2004. Zurich, Basel, Geneva, Amsterdam and Tokyo stock exchanges. Shareowner Investment Plan USWEST's ticker symbol is Shareowners can reinvest their "USW," and the company is listed dividends and/or make optional in newspaper stock tables under payments for a fee of $1.00 per USWEST. account, per quarter. Contact U S WEST Shareowner Services Corporate Headquarters for enrollment information. U S WEST Inc. 7800 East Orchard Road P.O. Box 6508 Englewood, CO 80155-6508 303-793-6500 (C) Printed on recycled paper. (C) 1995 U S WEST Inc.
60 USWEST 7800 EAST ORCHARD ROAD P.O. BOX 6508 ENGLEWOOD, CO 80155-6508 61 APPENDIX TO EXHIBIT 13 Furnished in Accordance With Rule 304 of Regulation S-T NARRATIVE DESCRIPTION OF GRAPHIC AND IMAGE INFORMATION IN U S WEST'S 1994 ANNUAL REPORT TO STOCKHOLDERS
Page of Annual Report Description - --------- -------------- Front Cover Centered on the page, in portrait style, within a border containing a background of numbers 1 through 9 and the words "results, growth, value, cash, yield and performance," is the following text: "U S WEST -------- Making the RIGHT Connections -------- Annual Report 1994" 1 A bar graph illustrating U S WEST revenues for the years 1990 through 1994, as follows: 1990, $9,369 million; 1991, $9,528 million; 1992, $9,823 million; 1993, $10,294 million; and 1994, $10,953 million. 1 A bar graph illustrating normalized income from continuing operations for the years 1990 through 1994 (excluding one-time items described in Note 1), as follows: 1990, $1,145 million; 1991, $1,070 million; 1992, $1,076 million; 1993, $1,140 million; and 1994, $1,229 million. 2 Picture of Richard D. McCormick beneath a caption which reads: "Chairman and Chief Executive Officer Richard D. McCormick looks back on the highlights and challenges of 1994, and ahead to a larger, more exciting role for the company in "connecting people with their world."
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Page of Annual Report Description - --------- -------------- 3 A bar graph illustrating annual percentage growth and year-end access lines (in millions), respectively, of U S WEST Communications, Inc. for the years 1990 through 1994 (excluding the effects of 1994 rural exchange sales), as follows: 1990, 2.8%/12.6; 1991, 3.0%/12.9; 1992, 3.2%/13.3; 1993, 3.7%/13.8; and 1994, 4.0%/14.3. 3 A bar graph illustrating annual percentage growth and year-end cellular subscribers (in thousands), respectively, of U S WEST for 1990 through 1994, as follows: 1990, 55%/219; 1991, 37%/300; 1992, 38%/415; 1993, 45%/601; and 1994, 61%/968. 4 A bar graph illustrating annual percentage growth of earnings before interest, taxes, depreciation and amortization ("EBITDA") and full year EBITDA (in millions), respectively, for the years 1990 through 1994 (excluding equity losses, other income and one-time items), as follows: 1990, 8.2%/$3,889; 1991, .8%/$3,920; 1992, 1.1%/$3,963, 1993, 6.7%/$4,228; and 1994, 7.8%/$4,559. 9 A bar graph illustrating 1994 percentage population growth for the states of Nevada, 5.4%; Arizona, 3.3%; Idaho, 3.0%; Utah, 2.6%; Colorado, 2.6%; New Mexico, 2.3%; Georgia, 2.2%; Texas, 2.0%; Montana, 1.8%; and Oregon, 1.7%; and indicating Arizona, Idaho, Utah, Colorado, New Mexico, Montana and Oregon are in the U S WEST Communications, Inc. 14-state region. Source: U.S. Census Bureau (12/31/94). 9 A pie chart illustrating a summary of U S WEST Communications, Inc. 1994 revenues by percentage and amount of total U S WEST Communications, Inc. revenues (in millions), respectively, as follows: local service, 45%/$4,067; interstate access charges, 25%/$2,269; intrastate access charges, 8%/$729; long-distance network services, 15%/$1,329; and other services, 7%/$604.
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Page of Annual Report Description - --------- -------------- 10 A bar graph illustrating U S WEST international customers for 1990 through 1994, including wireless customers, directory contracts sold and customer equivalents for gateway switches and cable TV/telephone services, as follows: 1990, 400,000; 1991, 600,000; 1992, 900,000; 1993, 1,100,000; and 1994, 1,800,000. 18 A graphic illustration of U S WEST's three key objectives, or "value drivers" for achieving cash flow improvement: 1) growth through the development of multimedia networks and a broadened wireless presence (new revenue); 2) customer loyalty through continuous improvement in customer service (customer retention); and 3) improved productivity through systems re- engineering and other cost controls (cost reduction), as described under "U S WEST Competitive Strategy." 18 A bar graph illustrating the number of U S WEST Communications, Inc. employees per access lines from 1990 through 1994, as follows: 1990, 43.7; 1991, 42.5; 1992, 39.3; 1993, 35.9; 1994, 33.1. 22 A map of the United States highlighting U S WEST Communications, Inc. 14-state region. 24 A bar graph illustrating U S WEST, Inc.'s and U S WEST Communications, Inc.'s actual and projected capital expenditures (in millions), respectively, for 1991 through 1995, as follows: 1991, $2,425/$2,168; 1992, $2,554/$2,357; 1993, $2,441/$2,182; 1994, $2,820/$2,454; 1995, $2,600/$2,100. 55 Photographs of U S WEST, Inc. Board of Directors.
EX-21 14 SUBSIDIARIES OF U S WEST 1 Page 1 EXHIBIT 21 SUBSIDIARIES OF U S WEST, INC. 1. U S WEST Communications Group, Inc., a Colorado corporation - U S WEST Communications, Inc., a Colorado corporation - U S WEST Communications Federal Services, Inc., a Colorado corporation - U S WEST Communications Services, Inc., a Colorado corporation - U S WEST Enhanced Services, Inc., a Washington corporation 2. U S WEST Business Resources, Inc., a Colorado corporation 3. U S WEST Capital Corporation, a Colorado corporation - Financial Security Assurance Holdings, Ltd., a New York corporation (Subsidiaries performing various reinsurance services omitted: 4 U.S., 1 foreign) - U S WEST Financial Services, Inc., a Colorado corporation (Subsidiaries performing various financial services omitted: 11 U.S., 7 foreign) 4. U S WEST Capital Funding, Inc., a Colorado corporation 5. U S WEST International Holdings, Inc., a Delaware corporation - U S WEST International, Inc., a Colorado corporation (Subsidiaries providing cable, cellular, and wireless telecommunications services in foreign countries omitted: 15 U.S., 10 foreign) 6. U S WEST Investments, Inc., a Colorado corporation - U S WEST Real Estate, Inc., a Colorado corporation (Subsidiaries holding various real estate investments omitted: 8 U.S.) 2 Page 2 7. U S WEST Marketing Resources Group, inc., a Colorado corporation - Interactive Video Enterprises, Inc., a Colorado corporation - U S WEST Interactive Services, Inc., a Colorado corporation - LOCALTouch Holdings, Inc., a Colorado corporation (Subsidiaries providing specialized directory services omitted: 2 U.S.) - Please Hold Promotions, Inc., an Arizona corporation 8. U S WEST MFT Co., a Delaware corporation 9. U S WEST Multimedia Communications, Inc., a Colorado corporation - Southern Multimedia Communications, Inc., a Delaware corporation (Subsidiaries providing cable services omitted: 12 U.S.) 10. U S WEST NewVector Group, Inc., a Colorado corporation (Subsidiaries providing cellular and paging services omitted: 16 U.S.) 11. U S WEST PCS Holdings, Inc., a Delaware corporation 12. U S WEST Personal Communications Development, Inc., a Colorado corporation 13. U S WEST SPF Co., a Colorado corporation 14. U S WEST SPF Co. II, a Delaware corporation 15. U S WEST Technologies, Inc., a Colorado corporation 16. Western Range Insurance Co., a Vermont Corporation EX-23 15 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement of U S WEST, Inc. on Forms S-3 (File Nos. 33-50047, 33-50047-01, 33-50049, 33-50049-01, 33-51427, 33-55289, and 33-56709 and on Forms S-8 (File Nos. 33-43362, 33-56895, 33-55289, and 33-56709 of our report, which includes an explanatory paragraph regarding the discontinuance of accounting for operations of U S WEST Communications, Inc. in accordance with Statement of Financial Accounting Stardard No. 71, "Accounting for the Effects of Certain Types of Regulation," in 1993, and a change in the method of accounting for postretirement benefits other than pensions and other postemployment benefits in 1992, dated January 18, 1995, on our audits of the consolidated financial statements of U S WEST, Inc. (the "Company"), as of December 31, 1994 and 1993, and for the three years ended December 31, 1994, 1993 and 1992, which report is incorporated by reference from U S WEST Inc.'s 1994 Annual Report to Shareowners. We also consent to the incorporation by reference of our report dated January 18, 1995 on the related consolidated financial statement schedules, which report is included in this Annual Report on Form 10-K. /s/ COOPERS & LYBRAND LLP COOPERS & LYBRAND LLP Denver, Colorado March 7, 1995 EX-24 16 POWERS OF ATTORNEY 1 Page 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, U S WEST, Inc., a Colorado corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the fiscal year ended December 31, 1994; and WHEREAS, each of the undersigned is a Director of the Company; NOW THEREFORE, each of the undersigned constitutes and appoints JAMES M. OSTERHOFF, BARBARA M. JAPHA, and STEPHEN E. BRILZ, and each of them, as attorneys for me and in my name, place, and stead, and in my capacity as a Director of the Company, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto on Form 10-K/A, hereby giving and granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as I might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney this 3rd day of February, 1995. /s/ Richard Cheney /s/ Allen F. Jacobson Richard Cheney Allen F. Jacobson /s/ Remedios Diaz-Oliver /s/ Marilyn C. Nelson Remedios Diaz-Oliver Marilyn C. Nelson 2 Page 2 /s/ Grant A. Dove /s/ Frank Popoff Grant A. Dove Frank Popoff /s/ Allan D. Gilmour /s/Glen L. Ryland Allan D. Gilmour Glen L. Ryland /s/ Pierson M. Grieve /s/ Jerry O. Williams Pierson M. Grieve Jerry O. Williams /s/ Shirley M. Hufstedler /s/ Daniel Yankelovich Shirley M. Hufstedler Daniel Yankelovich 3 Page 3 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: WHEREAS, U S WEST, Inc., a Colorado corporation (hereinafter referred to as the "Company"), proposes to file with the Securities and Exchange Commission, under the provisions of the Securities Exchange Act of 1934, as amended, an annual report on Form 10-K for the fiscal year ended December 31, 1994; and WHEREAS, the undersigned is an officer or Director, or both, of the Company and holds the office, or offices, in the Company as indicated below his name; NOW THEREFORE, each of the undersigned hereby constitutes and appoints JAMES M. OSTERHOFF, BARBARA M. JAPHA, and STEPHEN E. BRILZ, and each of them, as attorneys for him and in his name, place, and stead, and in each of his offices and capacities in the Company, to execute and file such annual report, and thereafter to execute and file any amendment or amendments thereto on Form 10-K/A, hereby giving and granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite and necessary to be done in and about the premises as fully, to all intents and purposes, as he might or could do if personally present at the doing thereof, hereby ratifying and confirming all that said attorneys may or shall lawfully do, or cause to be done, by virtue hereof. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 3rd day of February, 1995. /s/ Richard D. McCormick /s/ James M. Osterhoff Richard D. McCormick James M. Osterhoff Chairman of the Board, Executive Vice President Chief Executive Officer and Chief Financial and President Officer EX-27 17 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1994 DEC-31-1994 209 0 1,755 62 189 2,766 31,014 17,017 23,204 6,014 0 8,056 51 0 (674) 23,204 10,953 10,953 0 0 8,345 101 442 2,283 857 1,426 0 0 0 1,426 3.14 0
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