-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Lx4Z9YDDThzHognxF8NCFKKZBl89+5+Pp85i4fjrE2Rz1w9d0L5Nvmpz1FdVGRCV iP8Y6gdZtk3QgUcHgEiUWA== 0001054522-99-000029.txt : 19990510 0001054522-99-000029.hdr.sgml : 19990510 ACCESSION NUMBER: 0001054522-99-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S WEST INC /DE/ CENTRAL INDEX KEY: 0001054522 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840953188 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14087 FILM NUMBER: 99613596 BUSINESS ADDRESS: STREET 1: 1801 CALIFORNIA STREET STREET 2: SUITE 390 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3036722700 MAIL ADDRESS: STREET 1: 1801 CALIFORNIA STREET STREET 2: SUITE 390 CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: USW-C INC DATE OF NAME CHANGE: 19980204 10-Q 1 FIRST QUARTER 10-Q FOR U S WEST, INC. =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 1-14087 U S WEST, Inc. (Exact name of registrant as specified in its charter)
A Delaware Corporation 84-0953188 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) of organization)
1801 California Street, Denver, Colorado 80202 Telephone Number (303) 672-2700 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 __ At April 22, 1999, 503,593,778 shares of common stock were outstanding. =============================================================================== U S WEST, Inc. Form 10-Q
TABLE OF CONTENTS Item Page PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 3 Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 4 Consolidated Statements of Cash Flows - Three months ended March 31, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
1. Legal Proceedings 26 6. Exhibits and Reports on Form 8-K 26
2 U S WEST, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited)
Quarter Ended March 31, 1999 1998 ---- ---- (dollars in millions, except per share amounts) Operating revenues: Local services $1,867 $1,730 Access services 681 665 Long-distance services 174 204 Directory services 326 306 Other services 134 104 --------------- --------------- Total operating revenues 3,182 3,009 Operating expenses: Employee-related expenses 1,125 1,006 Other operating expenses 662 656 Depreciation and amortization 602 532 --------------- --------------- Total operating expenses 2,389 2,194 --------------- --------------- Operating income 793 815 Other expense: Interest expense (153) (97) Other expense-net (1) (25) --------------- --------------- Total other expense-net (154) (122) --------------- --------------- Income before income taxes 639 693 Provision for income taxes 242 259 --------------- --------------- Net income $397 $434 =============== =============== Basic earnings per share $0.79 $0.89 =============== =============== Basic average shares outstanding (in 000's) 503,306 484,964 =============== =============== Diluted earnings per share $0.78 $0.89 =============== =============== Diluted average shares outstanding (in 000's) 508,121 489,113 =============== =============== Dividends per share $0.535 $0.535 =============== ===============
The accompanying notes are an integral part of the consolidated financial statements. 3 U S WEST, INC. CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1999 1998 ---- ---- (unaudited) (dollars in millions, except share amounts) ASSETS Current assets: Cash and cash equivalents $36 $49 Accounts receivable, less allowance for uncollectibles of $70 and $69, respectively 1,700 1,743 Inventories and supplies 236 197 Deferred directory costs 276 274 Deferred tax assets 161 151 Prepaid and other 127 78 --------------- ---------------- Total current assets 2,536 2,492 Property, plant and equipment-net 15,098 14,908 Other assets-net 1,075 1,007 --------------- ---------------- Total assets $18,709 $18,407 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $1,393 $1,277 Accounts payable 1,326 1,347 Accrued expenses 1,753 1,702 Advanced billings and customer deposits 377 370 --------------- ---------------- Total current liabilities 4,849 4,696 Long-term debt 8,642 8,642 Postretirement and other postemployment benefit obligations 2,632 2,643 Deferred income taxes 811 786 Unamortized investment tax credits 159 159 Deferred credits and other 696 726 Commitments and Contingencies Stockholders' equity: Preferred stock - $1.00 par value, 19,000,000 shares authorized, none issued and outstanding - - Series A junior preferred stock-$1.00 par value, 10,000,000 shares authorized, none issued and outstanding - - Common stock-$0.01 par value, 2,000,000,000 shares authorized, 503,797,638 and 503,207,058 issued, 503,493,635 and 502,903,055 outstanding. 553 532 Retained earnings 352 223 Accumulated other comprehensive income 15 - --------------- ---------------- Total stockholders' equity 920 755 --------------- ---------------- Total liabilities and stockholders' equity $18,709 $18,407 =============== ================
The accompanying notes are an integral part of the consolidated financial statements. 4 U S WEST, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Quarter Ended March 31, 1999 1998 ---- ---- (dollars in millions) OPERATING ACTIVITIES Net income $397 $434 Adjustments to net income: Depreciation and amortization 602 532 Deferred income taxes and amortization of investment tax credits 14 65 Changes in operating assets and liabilities: Accounts receivable 43 101 Inventories, supplies and other current assets (109) (41) Accounts payable, accrued expenses and advanced billings 51 124 Other (61) (6) -------------- -------------- Cash provided by operating activities 937 1,209 -------------- -------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (753) (563) Proceeds from (payments on) disposals of property, plant and equipment (8) 19 Other (11) (18) -------------- -------------- Cash used for investing activities (772) (562) -------------- -------------- FINANCING ACTIVITIES Net proceeds from short-term debt 256 119 Net repayments of Old U S WEST debt - (44) Repayments of long-term debt (181) (23) Proceeds from issuance of common stock 16 17 Dividends paid on common stock (269) (259) Dividends paid to Old U S WEST - (90) Purchases of treasury stock - (21) -------------- -------------- Cash used for financing activities (178) (301) -------------- -------------- CASH AND CASH EQUIVALENTS Increase (decrease) (13) 346 Beginning balance 49 27 -------------- -------------- Ending balance $36 $373 ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 5 U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three months ended March 31, 1999 (unaudited) (dollars in millions, except per share amounts) NOTE 1: U S WEST SEPARATION On June 12, 1998, our former parent company, herein referred to as "Old U S WEST," separated into two independent companies (the "Separation"). Old U S WEST had conducted its businesses through two groups: (i) the U S WEST Communications Group (the "Communications Group"), which included the communications businesses of Old U S WEST, and (ii) the U S WEST Media Group (the "Media Group"), which included the multimedia and directories businesses of Old U S WEST. As part of the Separation, Old U S WEST contributed to us the businesses of the Communications Group and the domestic directories business of the Media Group known as U S WEST Dex, Inc. ("Dex"). The alignment of Dex with our Company is referred to in this document as the "Dex Alignment." Old U S WEST has continued as an independent public company comprised of the businesses of Media Group other than Dex and has been renamed MediaOne Group, Inc. In connection with the Dex Alignment, (i) Old U S WEST distributed, as the Dex dividend to holders of Media Group common stock, approximately 16,341,000 shares of our common stock (net of the redemption of approximately 305,000 fractional shares) with an aggregate of $850 in value (the "Dex Dividend") and (ii) we refinanced $3,900 of Old U S WEST debt (the "Dex Indebtedness"), formerly allocated to Media Group. NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The consolidated financial statements include the consolidated results of operations, financial position and cash flows of the businesses that comprise the Communications Group and Dex, as if such businesses operated as a separate entity for all periods and as of all dates presented. However, certain financial effects of the Separation and the Dex Alignment, including interest expense associated with refinancing the Dex Indebtedness and the dilutive effect of the Dex Dividend, are not reflected in the accompanying consolidated statements of income prior to the Separation. For periods prior to the Separation, the consolidated financial statements include an allocation of certain costs, expenses, assets and liabilities from Old U S WEST. We believe the allocations were reasonable; however the amount of costs allocated to us were not necessarily indicative of the costs that would have been incurred if we had operated as a stand-alone company. The consolidated financial statements may not necessarily reflect the financial position, results of operations or cash flows in the future or what they would have been had we been a separate, stand-alone company during such periods. 6 The consolidated interim financial statements are unaudited. The financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not necessarily include all information and footnotes required by generally accepted accounting principles. In our opinion, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly our consolidated financial position, results of operations and cash flows as of March 31, 1999 and for all periods presented have been made. The statements are subject to year-end audit adjustment. A description of our accounting policies and other financial information are included in the audited consolidated financial statements filed with the Securities and Exchange Commission in our Form 10-K/A for the year ended December 31, 1998. The consolidated results of operations for the quarter ended March 31, 1999 are not necessarily indicative of the results expected for the full year. Certain reclassifications of prior period revenue amounts have been made to conform to the current year presentation. For a description of the reclassifications, see the Form 8-K filed April 21, 1999. On January 1, 1999, we adopted the accounting provisions required by the American Institute of Certified Public Accountants' Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1, among other things, requires that certain costs of internal use software, whether purchased or developed internally, be capitalized and amortized over the estimated useful life of the software. Adoption of the SOP resulted in an increase in net income for the quarter ended March 31, 1999 of $47 or $0.09 per diluted share. NOTE 3: EARNINGS PER SHARE The following presents a reconciliation of basic weighted average shares to diluted weighted average shares:
Quarter Ended March 31 ------------------------------------ 1999 1998 ---- ---- Basic weighted average shares outstanding 503,306 484,964 Dilutive effect of stock options 4,815 4,149 ---------------- ---------------- Diluted weighted average shares outstanding 508,121 489,113 ================ ================
Certain of the financial effects of the Separation and the Dex Alignment, including interest expense associated with the refinancing of the Dex Indebtedness and the dilutive effects of the Dex Dividend, are not reflected in the historical consolidated statements of income prior to the Separation. The following presents earnings per share for the quarter ended March 31, 1998 on a pro forma basis. The pro forma earnings per share amounts give effect to the Dex Indebtedness and issuance of approximately 16,341,000 shares (net of the redemption of 305,000 fractional shares) of common stock in connection with the Dex Alignment as if such transactions had been consummated as of January 1, 1998 (shares in thousands). 7
Basic Earnings Per Share Net income $434 Pro forma adjustment(1) (41) --------------- Pro forma net income $393 =============== Basic weighted average shares(2) 484,964 Pro forma adjustment(3) 16,341 --------------- Pro forma basic weighted average shares 501,305 --------------- Pro forma basic earnings per share $0.78 =============== Diluted Earnings Per Share Net income $434 Pro forma adjustment(1) (41) --------------- Pro forma net income $393 =============== Diluted weighted average shares(2) 489,113 Pro forma adjustment(3) 16,341 --------------- Pro forma diluted weighted average shares 505,454 --------------- Pro forma diluted earnings per share $0.78 =============== (1) Reflects incremental (after-tax) interest expense associated with the Dex Indebtedness. (2) Historical average shares assume a one-for-one conversion of historical Communications stock outstanding into shares of U S WEST as of the Separation. (3) Reflects the issuance of approximately 16,341,000 shares of common stock (net of the redemption of approximately 305,000 fractional shares) issued in connection with the Dex Alignment as if the shares had been issued at the beginning of the period.
NOTE 4: SEGMENT INFORMATION We operate in four segments: retail services, wholesale services, network services and directory services. The retail services segment provides local telephone services, including wireless, data and long-distance services. The wholesale services segment provides access services that connect customers to the facilities of interexchange carriers and interconnection to our telecommunications network to competitive local exchange carriers. Our network services segment provides access to our telecommunications network, including our information technologies, primarily to our retail services and wholesale services segments. The directory services segment publishes White and Yellow Pages telephone directories and provides electronic directory and other information services. We provide our services to more than 25 million residential and business customers in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. 8 Following is a breakout of our segments. Because significant expenses of operating the retail services and wholesale services segments are not allocated to the segments for decision-making purposes, management does not believe the segment margins are representative of the actual operating results of the segments. The margin for the retail services and wholesale services segments excludes network and corporate expenses. The margin for the network services segment and directory services segment excludes corporate expense. The "other" category includes our corporate expenses. The communications and related services column represents a total of the retail services, wholesale services and network services segments.
Total Communications and Retail Wholesale Network Related Directory Reconciling Consolidated Services Services Services Services Services Other Items Total -------- -------- -------- -------- -------- ----- ----- ----- 1999 Operating revenues $2,169 $691 $50 $2,910 $329 $- $(57)(1) $3,182 Margin 1,505 530 (685) 1,350 170 (35) (846) 639(2) Assets -(3) -(3) -(3) -(3) 549 -(3) 18,160(3) 18,709 Capital expenditures 111(4) 31 638 780 7 - - 787 1998 Operating revenues 2,067 635 45 2,747 307 - (45)(1) 3,009 Margin 1,564 510 (676) 1,398 158 (108) (755) 693(2) Assets -(3) -(3) -(3) -(3) 496 -(3) 17,356(3) 17,852 Capital expenditures 118(4) - 391 509 6 7 - 522 (1) Represents primarily intersegment charges. (2) Represents income before income taxes. Adjustments that are made to the total of the segments' margin to arrive at income before income taxes include the following:
Quarter Ended March 31, ------------------------------------------ 1999 1998 ------------------- ------------------- Costs and adjustments excluded from segment data but included in the consolidated total: Taxes other than income taxes $90 $101 Depreciation and amortization 602 532 Interest expense 153 97 Other expense-net 1 25 =================== =================== $846 $755 =================== =================== 9 (3) A breakout of assets for all segments is not provided to our chief operating decision-maker. The reconciling items column represents the amount to reconcile to the consolidated total. (4) Capital expenditures reported for the retail services segment include only expenditures for wireless services and certain data services. Additional capital expenditures relating to those services are included in network services capital expenditures.
In addition to the operating revenues disclosed above, intersegment operating revenues of the retail services segment were $6 and $6 for the quarters ended March 31, 1999 and 1998, respectively. Intersegment operating revenues of the network services segment were $17 and $18 for the quarters ended March 31, 1999 and 1998, respectively. Intersegment operating revenues of the directory services segment were $3 and $1 for the quarters ended March 31, 1999 and 1998, respectively. NOTE 5: COMPREHENSIVE INCOME Other comprehensive income consists of $15 of unrealized gains on securities, which are net of deferred taxes of $10. Total comprehensive income for the quarter ended March 31, 1999 is as follows:
Net income $397 Other comprehensive income 15 =================== Comprehensive income $412 ===================
NOTE 6: COMMITMENTS AND CONTINGENCIES Commitments We have entered into an agreement with Olympic Properties of the United States to sponsor the 2002 Salt Lake City Winter Olympics and the U.S. Olympic Teams through 2004. As of March 31, 1999, we have a remaining commitment of $49 to be paid in a combination of cash and services through 2004. Contingencies U S WEST Communications, Inc. ("USWC"), our wholly owned subsidiary, has the following pending regulatory actions: Oregon. On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a stipulation terminating prematurely USWC's alternative form of regulation ("AFOR") plan and it then undertook a review of USWC's earnings. In May 1997, the OPUC ordered USWC to reduce its annual revenues by $97, effective May 1, 1997, and to issue a one-time refund, including interest, of approximately $102 to reflect the revenue reduction for the period May 1, 1996 through April 30, 1997. This one-time refund for interim rates became subject to refund when USWC's AFOR plan was terminated on May 1, 1996. 10 USWC filed an appeal of the order and asked for an immediate stay of the refund with the Oregon Circuit Court which granted USWC's request for a stay, pending a full review of the OPUC's order. On February 19, 1998, the Oregon Circuit Court entered a judgment in USWC's favor on most of the appealed issues. The OPUC appealed to the Oregon Court of Appeals on March 19, 1998, and the appeal remains pending. USWC continues to charge interim rates, subject to refund, during the pendency of that appeal. The potential exposure, including interest, at March 31, 1999, is not expected to exceed $350. Utah. The Utah Supreme Court has remanded a Utah Public Service Commission ("UPSC") order to the UPSC for hearing, thereby establishing two exceptions to the rule against retroactive ratemaking: i) unforeseen and extraordinary events, and ii) misconduct. The UPSC's initial order denied a refund request from interexchange carriers and other parties related to the Tax Reform Act of 1986. On April 19, 1999, the UPSC approved a settlement whereby USWC will refund $43 to its Utah basic exchange service customers. In addition, the UPSC approved a settlement between USWC and certain exchange carriers settling those carriers' claims for $3. State Regulatory Accruals. USWC has accrued $253 at March 31, 1999, which represents its estimated liabilities for all state regulatory proceedings. It is possible that the ultimate liabilities could exceed the amounts accrued by approximately $175. USWC will continue to monitor and evaluate the risks associated with its regulatory jurisdictions and will adjust estimates as new information becomes available. Other Contingencies. In December 1998, we were informed of the possibility of a claim by a purported class challenging the transfer of approximately $54 from the U S WEST pension trust to the U S WEST health care trust to pay retiree medical expenses pursuant to Section 420 of the Internal Revenue Code of 1986, as amended. We believe that this transfer complied with the applicable law and the associated plan documents. We plan to vigorously defend any such claim if and when it is asserted. We are subject to other legal proceedings and claims that arise in the ordinary course of business. Although there can be no assurance of the ultimate disposition of these matters, it is management's opinion, based upon the information available at this time, that the expected outcome, individually or in the aggregate, will not have a material adverse effect on our results of operations and financial position. 11 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (dollars in millions) Special Note Regarding Forward-Looking Statements Some of the information presented in this Form 10-Q constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although U S WEST, Inc. (the "Company," which may also be referred to as "we," "us" or "our") believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its businesses and operations, there can be no assurance that actual results will not differ materially from our expectations. Factors that could cause actual results to differ from expectations include: o greater than anticipated competition from new entrants into the local exchange, intraLATA (local access transport area) toll, wireless, data and directories markets, causing loss of customers and increased price competition; o changes in demand for our products and services, including optional custom calling features; o higher than anticipated employee levels, capital expenditures and operating expenses (such as costs associated with interconnection and Year 2000 remediation); o the loss of significant customers; o pending and future state and federal regulatory changes affecting the telecommunications industry, including changes that could have an impact on the competitive environment in the local exchange market; o a change in economic conditions in the various markets served by our operations; o higher than anticipated start-up costs associated with new business opportunities; o delays in our ability to begin offering interLATA long-distance services; o consumer acceptance of broadband services, including telephony, data, video and wireless services; and o delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. These cautionary statements should not be construed as an exhaustive list or as any admission by us regarding the adequacy of the disclosures. We cannot always predict or determine after the fact what factors would cause actual results to differ materially from those indicated by our forward-looking statements or other statements. In addition, consider statements that include the terms "believes," "belief," "expects," "plans," "objectives," "anticipates," "intends," or the like to be uncertain and forward-looking. All cautionary statements should be read as being applicable to all forward-looking statements wherever they appear. 12 We do not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed herein might not occur. General On June 12, 1998, our former parent company, herein referred to as "Old U S WEST," separated into two independent companies (the "Separation"). Old U S WEST had conducted its businesses through two groups: (i) the U S WEST Communications Group (the "Communications Group"), which included the communications businesses of Old U S WEST, and (ii) the U S WEST Media Group (the "Media Group"), which included the multimedia and directories businesses of Old U S WEST. As part of the Separation, Old U S WEST contributed to us the businesses of the Communications Group and the domestic directories business of the Media Group known as U S WEST Dex, Inc. ("Dex"). The alignment of Dex with our Company is referred to in this document as the "Dex Alignment." Old U S WEST has continued as an independent public company comprised of the businesses of Media Group other than Dex and has been renamed MediaOne Group, Inc. In connection with the Dex Alignment, (i) Old U S WEST distributed, as the Dex dividend to holders of Media Group common stock, approximately 16,341,000 shares of our common stock (net of the redemption of approximately 305,000 fractional shares) with an aggregate of $850 in value (the "Dex Dividend") and (ii) we refinanced $3,900 of Old U S WEST debt (the "Dex Indebtedness"), formerly allocated to Media Group. The consolidated financial statements include the consolidated results of operations, financial position and cash flows of the businesses that comprise the Communications Group and Dex, as if such businesses operated as a separate entity for all periods and as of all dates presented. However, certain financial effects of the Separation and the Dex Alignment, including interest expense associated with the refinancing of the Dex Indebtedness and the dilutive effect of the Dex Dividend, are not reflected in the consolidated statements of income prior to the Separation. Results of Operations Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998 Net income for the quarter ended March 31, 1999, was $397 or $0.78 per diluted share, compared to pro forma net income, adjusted for the Dex Indebtedness and Dex Dividend, of $393 or $0.78 per diluted share, for the quarter ended March 31, 1998. While the Company experienced a 5.7% increase in revenues, the increase was substantially offset by increases in expenses to support our growth initiatives, enhanced customer service and greater network and interconnection costs. 13 The following sections provide a more detailed discussion of the changes in revenues and expenses. Operating Revenues
Quarter Ended March 31, 1999 1998 Increase ---- ---- -------- Local services revenues $1,867 $1,730 $137 7.9%
Local services revenues. Local services revenues include basic monthly service fees, fees for calling services, such as voice messaging and caller identification, wireless revenues, subscriber access line charges, MegaBit [Trademark] data services, public phone revenues, and installation and connection charges. State public service commissions regulate most local service rates. Local services revenues increased in 1999 due largely to access line growth, increased sales of calling services and increased wireless revenues. Second line additions by residential and small business customers contributed to access line growth due to continuing demand for Internet access and data transport capabilities. As of the end of the first quarter of 1999, we had added 569,000 additional access lines, an increase of 3.5% over the first quarter of 1998. Of this increase, second line installations accounted for 251,000 lines, an increase of 17.8% compared with the first quarter of 1998. Offsetting these increases were net regulatory rate adjustments and related accruals of $6. While the number of access lines, sales of calling services and associated revenues increased in 1999, the growth rate has declined from 1998. The decline in the growth rate was primarily attributable to increased competition as well as our customer retention strategy of offering bundles of services to customers at lower prices in return for entering into longer-term contracts. Additionally, some business customers have opted to migrate from multiple single lines to high capacity lines, which decreases local services revenues but increases access services revenues. We believe we will continue to experience declining growth rates as the level of customer demand slows and competition increases. Additionally, we are planning the sale of approximately 500,000 access lines that accounted for 3.8% of fiscal 1998 local services revenues. While the sale is expected to provide us with a one-time gain in 1999 or 2000, the sale will negatively impact future revenue growth.
Quarter Ended March 31, 1999 1998 Increase Access services revenues $681 $665 $16 2.4%
Access services revenues. Access services revenues are derived primarily from charging interexchange carriers, such as AT&T and MCI WorldCom, for use of our local network to connect customers to their long-distance networks. These revenues are generated from both interstate and intrastate services. 14 Access services revenues increased due to greater demand for both interstate and intrastate access services. The volume of interstate and intrastate access minutes billed increased 6.6% and 5.2%, respectively, in the first quarter of 1999 compared to the first quarter of 1998. Rate decreases of $14 and $17 for interstate and intrastate access services, respectively, offset increases in demand. The net impact of increased demand, offset by rate reductions, was to increase interstate access services revenues by $41 or 5.9% over the comparable quarter in 1998, while the intrastate access services revenues decreased by $9 or 4.4% over the comparable quarter in 1998. While we anticipate increased demand for access services will continue, the effect of rate reductions is anticipated to continue to cause a decline in intrastate access services revenues. Revenues from local number portability, which we began billing in February 1999, accounted for an additional $5 increase. Additionally, 1998 revenues were favorably impacted by a $20 regulatory rate adjustment.
Quarter Ended March 31, 1999 1998 Decrease Long-distance services revenues $174 $204 $(30) (14.7)%
Long-distance services revenues. Long-distance services revenues are derived from customer calls to locations outside of their local calling area but within the same LATA. The decrease in long-distance services revenues was primarily attributable to greater competition, resulting in a $20 revenue decline and rate reductions accounted for the remainder of the revenue loss. As of March 31, 1999, in ten of the 14 states in which we operate, customers are able to choose an alternative provider for intraLATA calls without dialing a special access code when placing the call. We believe we will continue to experience further declines in long-distance services revenues as regulatory actions provide for increased levels of competition. We are responding to competition through competitive pricing of intraLATA long-distance services and increased promotional efforts to retain customers. See "Special Note Regarding Forward-Looking Statements" on page 12.
Quarter Ended March 31, 1999 1998 Increase ---- ---- -------- Directory services $326 $306 $20 6.5%
Directory services. Directory services revenues are primarily derived from selling advertising in our published directories. The increase in directory services revenues was primarily attributable to price increases and increased sales of premium features. 15
Quarter Ended March 31, 1999 1998 Increase Other services revenues $134 $104 $30 28.8%
Other services revenues. Other services revenues include billings and collections for interexchange carriers, customer equipment sales and sales of other unregulated products, such as U S WEST.net [Registered Trademark], our Internet service. Other services revenues increased primarily as a result of increased sales of other unregulated products. Operating Expenses
Quarter Ended March 31, 1999 1998 Increase Employee-related expenses $1,125 $1,006 $119 11.8%
Employee-related expenses. Employee-related expenses include salaries and wages, benefits, payroll taxes and contract labor. Employee-related expenses increased because of growth in several sectors of the business, primarily wireless and data communications, resulting in increased employee levels. Additionally, increased commitments towards improving customer service, including meeting requests for installation and repair services, resulted in higher labor costs. Across-the-board wage increases also contributed to the increase in employee-related expenses. Additionally, included in employee-related expenses are the salary and benefit costs for employees who were transferred from Old U S WEST as part of the Separation. Prior to the Separation, these costs were allocated to us and included in other operating expenses. Partially offsetting these increases was a $25 pension credit in 1999 compared to a $12 pension credit in 1998. In addition, $13 of employee-related expenses associated with developing internal use software were capitalized in 1999 due to the adoption of AICPA Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use", effective January 1, 1999. 16
Quarter Ended March 31, 1999 1998 Increase Other operating expenses $662 $656 $6 0.9%
Other operating expenses. Other operating expenses include access charges paid to independent local exchange carriers for the routing of long-distance traffic through their facilities, paper, printing, delivery and distribution costs associated with publishing activities and other selling, general and administrative costs. The increase in other operating expenses was primarily attributable to the following: o increased costs of product sales associated with growth initiatives, including wireless handset costs and costs applicable to our data communications services, o higher marketing and advertising costs for wireless, data communications services and calling services, such as caller identification, o higher interconnection, local number portability and Year 2000 remediation costs, and o higher access charge expenses resulting from rulings that require us to pay reciprocal compensation to other local exchange carriers for calls that originate on our network and terminate on other local exchange carriers' networks. Partially offsetting the increase in other operating expenses was the effect of capitalizing $62 of expenses associated with developing internal use software in accordance with SOP 98-1. Additionally, the transfer of employees from Old U S WEST as part of the Separation has resulted in the reclassification of this cost to employee-related expenses. Lastly, we incurred lower property taxes due to favorable settlement of outstanding assessments.
Quarter Ended March 31, 1999 1998 Increase Depreciation and amortization expense $602 $532 $70 13.2%
Depreciation and amortization expense. Depreciation and amortization expense increased primarily due to higher overall property, plant and equipment balances resulting from continued investment in our network. Additionally, the asset lives of certain assets were reduced, reflecting changes in technology, causing greater depreciation expense. 17
Quarter Ended March 31, 1999 1998 Increase Other expense-net $154 $122 $32 26.2%
Other expense-net. Interest expense was $153 in 1999 compared to $97 in 1998. The increase in interest expense was attributable to $3,900 of debt assumed in the Separation as part of the Dex Alignment. Interest expense was $153 in 1999 compared to pro forma interest expense of $163 in 1998, assuming the Dex Indebtedness had occurred at the beginning of 1998. The decline in interest expense was primarily attributable to less interest incurred on capital lease obligations. Also included in other expense-net, were other expenses of $1 in 1999 compared to $25 in 1998. The reduction in 1999 was primarily attributable to a $16 reduction in interest expense attributable to an anticipated settlement of federal income tax liabilities for tax years still under audit.
Quarter Ended March 31, Increase 1999 1998 (Decrease) Segment margin results: Retail segment $1,505 $1,564 $(59) (3.8)% Wholesale segment 530 510 20 3.9% Network segment (685) (676) (9) (1.3)% Directory segment 170 158 12 7.6%
Segment results. For segment reporting purposes, segment margins exclude certain costs and expenses, including depreciation and amortization, corporate expenses and taxes other than income. See Note 4 to the consolidated financial statements. Margin from the retail services segment decreased due to operating expenses increasing at a greater rate than revenue growth. Revenue from the retail services segment increased 4.9% for the first quarter of 1999 over the comparable 1998 period, primarily due to growth in local services revenue. The revenue increase was more than offset by the higher operating expenses driven by growth initiatives and increased customer service costs. Margin from the wholesale services segment increased as a result of greater demand for access services, partially offset by price reductions as mandated by both federal and state regulatory authorities and higher operating costs, including greater interconnection costs and additional access charge expenses. Margin from the network services segment decreased as a result of expenditures to support growth in both the retail and wholesale services segments. Margin from the directory services segment increased due to growth in directory services revenue partially offset by increased printing, paper and sales support costs. 18
Quarter Ended March 31, 1999 1998 Decrease Provision for income taxes $242 $259 $(17) (6.6)%
Provision for income taxes. The effective tax rate was 37.9% for 1999 compared to 37.3% for 1998. The 1998 rate is computed on a pro forma basis assuming the Dex Indebtedness had occurred at the beginning of 1998. The increase in the effective tax rate is due to a higher effective state income tax rate. 19 Liquidity and Capital Resources Operating Activities. Cash provided by operations was $937 in 1999 compared to $1,209 in 1998. The decrease in operating cash flow in 1999 resulted from a reduction in working capital. Investing Activities. Total capital expenditures, on a cash basis, were $753 in 1999 and $563 in 1998. Capital expenditures have primarily been, and continue to be, focused on expanding access line growth, modernization of the telecommunications network and meeting the requirements of the Telecommunications Act of 1996 ("the Act"), including interconnection and local number portability. We are also continuing to expand our investment to compete in the wireless, data communications and video markets. For 1999, we anticipate total capital expenditures will approximate $3,500 to $3,800, including software capitalization, which includes the acceleration of the next generation of the network, launch of personal communication services in additional markets, expansion of the Internet data business and greater emphasis on our e-commerce efforts. Additionally, we will continue our expenditures on interconnection and local number portability to enable competition in compliance with federal regulations. See "Special Note Regarding Forward-Looking Statements" on page 12. Financing Activities. Cash used for financing activities was $178 in 1999 and $301 in 1998. We paid dividends on our common shares totaling $269 in 1999 and $259 in 1998. Additionally, prior to the Separation, Dex paid dividends to Old U S WEST equal to its net income, adjusted for the amortization of intangibles, totaling $90 in 1998. Net proceeds from short-term financing increased from $119 in 1998 to $256 in 1999, however, repayments of long-term debt also increased from $23 in 1998 to $181 in 1999. We maintain commercial paper programs to finance short-term cash flow requirements, as well as to maintain a presence in the short-term debt market. As of March 31, 1999, we had lines of credit with a total borrowing capacity of $2,360. In May of 1999, U S WEST Capital Funding, Inc., a wholly owned subsidiary of U S WEST, anticipates that it will amend and extend its current 364-day credit facility for approximately $750, which supports its commercial paper program. Also in May, USWC anticipates that it will enter into a replacement 364-day credit facility for approximately $800 to support its commercial paper program. Future cash needs could increase with the pursuit of new business opportunities and be impacted by continued implementation of the requirements of the Act. Interconnection, local number portability, universal service and access charge reform will negatively impact cash flows to the extent recovery mechanisms provided for by the Federal Communications Commission ("FCC") and state commissions are inadequate. From time to time, we may consider the acquisition or disposition of assets or businesses that may be material to our financial condition, and therefore, our cash needs. We expect that such cash needs will be funded through operations and, when necessary, the issuance of debt securities. 20 Risk Management Over time, we are exposed to market risks arising from changes in interest rates. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We may employ derivative financial instruments to manage our interest rate risk exposure. We have also employed financial derivatives to hedge interest rate and foreign currency exposures associated with particular debt issues to synthetically obtain below market interest rates. We do not use derivative financial instruments for trading purposes. As of March 31, 1999 and December 31, 1998, approximately $1,200 and $950, respectively, of floating-rate debt was exposed to changes in interest rates. This exposure is primarily linked to commercial paper rates. A hypothetical 10% change in commercial paper rates would not have had a material effect on our earnings. As of March 31, 1999 and December 31, 1998, we also had $74 and $228, respectively, of long-term fixed rate debt obligations maturing in the following 12 months. Any new debt obtained to refinance this debt would be exposed to changes in interest rates. A hypothetical 10% change in the interest rates on this debt would not have had a material effect on our earnings. As of December 31, 1998, we had interest rate swaps with notional amounts of $155. The swaps synthetically transformed certain of the Company's floating rate issues into fixed rate obligations. The swaps and associated debt issues were indexed to two- and 10-year constant maturity U.S. Treasury rates. Any gains (losses) on the swaps were offset by losses (gains) on the associated debt instruments. As of March 31, 1999, all outstanding interest rate swaps and the associated debt instruments have matured. As of March 31, 1999 and December 31, 1998, we had also entered into cross-currency swaps with notional amounts of $204. The cross-currency swaps synthetically transform $169 and $182 of Swiss Franc borrowings at March 31, 1999 and December 31, 1998, respectively, into U.S. dollar obligations. Any gains (losses) on the cross-currency swaps would be offset by losses (gains) on the Swiss Franc debt obligations. Other assets at March 31, 1999 included marketable equity securities that are recorded at a fair value of $26, including unrealized gains of $25. Those securities have exposure to price risk. The estimated potential loss in fair value resulting from a hypothetical 10% decrease in prices quoted by stock exchanges would not have had a material effect on our earnings. Recent Regulatory Developments Interconnection. The FCC issued an order (the "Order") in 1996 relating to the Act that established interconnection costing and pricing rules which, from our perspective, significantly impeded negotiations with new entrants to the local exchange market, state public utility commission interconnection rulemakings and interconnection arbitration proceedings. On January 25, 1999, the U.S. Supreme Court ("Supreme Court") issued a ruling on our appeal of the Order. Although the decision stated that the Act was ambiguous and self-contradictory, the Supreme Court ruled that: 21 o the FCC has authority to set pricing methodology; o unbundled network elements must be provided in cases where necessary or the lack of availability would impair competition; o Incumbent local exchange companies ("ILECs") must sell on a bundled basis, at the competitive local exchange carriers' ("CLECs") request, network elements the ILEC uses itself on a bundled basis; and o CLECs may pick and choose pricing or other terms and conditions from multiple contracts within certain bounds. The impact of the Supreme Court ruling is unclear since state regulatory commissions generally follow the FCC's pricing and unbundling requirements in setting unbundled network element prices. On April 16, 1999, the FCC issued a Further Notice of Proposal Rulemaking ("FNPRM") to address how it should interpret the "necessary and impair" standard and which specific network elements the FCC should require ILECs to unbundle. We expect further review of the legality of the FCC's pricing rules will occur at the Eighth Circuit Court of Appeals. InterLATA Long-Distance Entry. Several regional Bell operating companies have filed for entry into the interLATA long-distance business. Although many of these applications have been approved by state regulatory commissions, the FCC has rejected all applications to date. We view entry into this business as important to our strategy of providing an integrated bundle of services to our customers. In 1999, we withdrew our applications to enter the interLATA long-distance business in Wyoming and Montana but we filed an application in Arizona. In April 1999, the Nebraska Public Service Commission indicated it needed additional information before making a recommendation to the FCC. We expect our application to be forwarded to the FCC for its review later in 1999. Access Reform. In its access reform order, the FCC mandated a substantial restructuring of interstate access pricing. A significant portion of the services that were charged using minutes-of-use pricing are now being charged using a combination of minutes-of-use rates, flat-rate pre-subscribed interexchange carrier charges ("PICCs") and subscriber line charges ("SLCs"). Although an increase in the SLC to multi-line business users occurred on July 1, 1997, the bulk of the mandated pricing changes occurred on January 1, 1998. Additional mandated pricing changes occurred on January 1, 1999 and more will be implemented on July 1, 1999 and January 1 of 2000 and 2001. The net effect of these changes will be to decrease minutes-of-use charges and increase flat-rate charges (i.e., PICCs and SLCs). The access reform order also continued in place the current rules by which ILECs may not assess interstate access charges on information service providers and purchasers of unbundled network elements. 22 In February 1999, the FCC issued an order declaring that Internet traffic is interstate and opened a proceeding to determine the appropriate regulatory structure. The FCC allowed no change in the current agreements for reciprocal compensation with CLECs until it rules on this matter. A ruling is expected in the summer of 1999. Advanced Telecommunications Services. On March 31, 1999, the FCC issued an order establishing expanded collocation requirements for both conventional voice and advanced services. The FCC also issued a FNPRM on "line sharing." Line sharing allows a CLEC to provide advanced services over the same loop that the ILEC uses to provide analog voice service. We are currently reviewing the legal and regulatory ramifications of these orders. Contingencies We have pending regulatory actions in local regulatory jurisdictions. See Note 6 to the consolidated financial statements. Other Items From time to time, we engage in discussions regarding restructurings, dispositions, acquisitions and other similar transactions. Any such transaction could include, among other things, the transfer, sale or acquisition of significant assets, businesses or interests, including joint ventures, or the incurrence, assumption or refinancing of indebtedness, and could be material to our financial condition and results of operations. There is no assurance that any such discussions will result in the consummation of any such transaction. 23 Year 2000 Costs Background. We have conducted a comprehensive review of our computer-based systems and related software and are taking measures to ensure that such systems will properly recognize the year 2000 and continue to process beyond December 31, 1999. The systems we evaluated include systems within (i) the Public Switched Telephone Network (the "Network"), (ii) Information Technologies ("IT"), and (iii) individual Business Units (the "Business Units"). The Network, which processes voice and data information relating to our core communications business, relies on remote switches, central office equipment, interoffice equipment and loop transport equipment that is predominantly provided to us by telecommunications network vendors. IT is comprised of our internal business systems that employ hardware and software on an enterprise-wide basis, including operational, financial and administrative functions. The Business Units, which include internal organizations such as finance, procurement, directory services, operator services, wireless, data networks, real estate, etc., employ systems that support desktop and departmental applications, as well as embedded computer chip technologies, which relate specifically to each of our Business Unit's functions and generally are not part of the Network or IT. We have approached year 2000 remediation activities through five general phases: (i) inventory/assessment, (ii) planning, (iii) conversion, (iv) testing/certification and (v) implementation. Additionally, we are continuously monitoring and improving our year 2000 related activities and progress, communicating with our customers and vendors, participating in cooperative testing with others and taking steps to assure that we have contingency plans in place prior to the end of 1999. These activities will continue throughout 1999. Network update. With regard to the Network, we are working with our telecommunications network vendors to obtain and convert to compliant releases of hardware and software. We also are testing, at our own initiative, in cooperation with certain of our customers and vendors, and in cooperation with other major wireline telecommunications companies, network equipment over multiple configurations involving a broad spectrum of services. Toward this end, we participate in the Telco Year 2000 Forum (the "Forum"), an organization that addresses the year 2000 readiness of network elements and network interoperability. The Forum has contracted with Telcordia (formerly known as Bellcore), a former affiliate engaged in telecommunications industry research, development and maintenance activities, to engage in inter-region interoperability testing and no significant issues have been found to date. We also participate in the FCC's Network Reliability and Interoperability Council IV working group, which is tasked to evaluate the year 2000 readiness of the public telecommunications network, and in the Alliance for Telecommunications Industry Solutions ("ATIS"), which is testing inter-network interoperability, and which, in conjunction with the Cellular Telecommunications Industry Association ("CTIA"), is testing network interoperability with wireless networks. Our inventory/assessment, planning and conversion phases for the Network are complete. The network testing/certification phase was approximately 99% complete as of March 31, 1999 and we anticipate that this phase will be complete during the second quarter of 1999. Cooperative testing with certain customers, vendors and other telecommunications companies is expected to continue during 1999. As of March 31, 1999, approximately 93% of our Network remediation implementation was complete, with completion of the remainder anticipated by July 1999. We have initiated Network contingency planning activities and approximately 50% of the anticipated Network contingency planning activities were complete as of March 31, 1999. We anticipate that the remainder of our Network contingency planning activities will be complete by mid-1999. 24 IT update. Within IT, we have identified approximately 570 applications that support our critical business processes, such as billing and collections, network monitoring, repair and ordering. The inventory/assessment and planning phases for such IT applications are complete. As of March 31, 1999, approximately 97% of IT conversion activities, 92% of IT testing activities and 89% of IT implementation had been completed. We anticipate that each of these phases for IT will be complete by July 1999. IT contingency planning activities are approximately 50% complete and we anticipate that the remainder will be complete by mid-1999. Business Units update. Within our Business Units, it is estimated that as of March 31, 1999, approximately 100% of the inventory/assessment activity, 100% of the planning activity, 80% of the conversion activity and 70% of the testing and remediation implementation activities were complete. We anticipate that each of these phases will be complete in the Business Units for major conversions and upgrades by the end of the third quarter of 1999. We have recently initiated Business Unit contingency planning activities and we anticipate those will be complete by mid-1999. Costs relating to year 2000. We have spent approximately $172 from the beginning of 1997 through the end of the first quarter of 1999 on year 2000 projects and activities. We estimate that additional costs for year 2000 related projects and activities will be approximately $99. Virtually all year 2000 related expenditures are being funded through operations. Though year 2000 costs will directly impact the reported level of future net income, we intend to control our total cost structure, including deferral of non-critical projects to future years, in an effort to mitigate the impact of year 2000 costs on our historical rate of earnings growth. The estimates stated above are subject to change. The timing of our expenses may vary and is not necessarily indicative of readiness efforts or progress to date. Contingency plan. We cannot provide assurance that the results of our year 2000 compliance efforts or the costs of such efforts will not differ materially from estimates. Accordingly, we are developing year 2000 specific business continuity and contingency plans to address high risk areas as they are identified. Our year 2000 contingency planning activities will include training of crisis managers on year 2000 issues and potential business impacts to their particular process areas, reviewing and modifying existing business continuity plans to address year 2000 issues and establishing rapid response teams and communications procedures for each of the major critical operations and facilities to handle potential post-implementation year 2000 failures. These year 2000 specific contingency planning activities are to be in place by the third quarter of 1999. In addition, we have in place our standard overall business continuity, contingency and disaster recovery plans (such as diesel generator back-up power supply sources for our Network, Network rerouting capabilities, computer data and records safe-keeping and back-up and recovery procedures) which will be verified, and as appropriate, augmented for specific year 2000 contingencies. 25 Dependencies. Within Network, we are highly dependent upon our telecommunications network vendors to provide year 2000 compliant hardware and software in a timely manner, and on third parties that are assisting us in the focused testing and implementation phases regarding the Network. Because of these dependencies, we have developed and implemented a vendor compliance process whereby we have obtained written assurances of timely year 2000 compliance from most of our critical vendors (not only for Network, but also for IT and the Business Units). In addition, we monitor and actively participate in coordinated Network testing activities, as discussed above, with respect to the Forum, ATIS and Telcordia. Within IT, we depend on the development of software by experts, both internal and external, and the availability of critical resources with the requisite skill sets. Because of this dependency, we have developed detailed timetables, resource plans and standardized year 2000 testing requirements for identified critical applications (irrespective of whether these applications are used primarily by IT, the Network or the Business Units). Within the Business Units, we are dependent on vendor supplied goods and services and operability of the Network and critical IT and Business Unit specific applications. Because of these dependencies, we are implementing the same type of vendor compliance processes and application planning and testing processes at the Business Units, as discussed above with respect to the Network and IT. Overall, we have sought compliance assurances from approximately 6,750 vendors concerning approximately 28,900 products and have received assurances for approximately 91% of those products as of March 31, 1999. During 1999, we will continue to pursue assurances of timely year 2000 compliance for the remaining critical vendors. As with any large-scale computer-related project such as year 2000 remediation, the testing phase may require resources in excess of other project phases and the other project phases may be affected by and dependent upon the results of the testing phase. Summary. In management's view, the most reasonably likely worse case scenario for year 2000 failure prospects we face is that a limited number of important IT and/or Business Unit specific applications may unexpectedly fail. In addition, there may be problems with the Network relating to the year 2000. Our failure or the failure by certain of our vendors to remediate year 2000 compliance issues in advance of the year 2000 and to execute appropriate contingency plans in the event that a critical failure is experienced, could result in disruption of our operations, possibly impacting the Network and impairing our ability to bill or collect revenues. However, while no assurance can be given, management believes that our efforts at remediation and testing, year 2000 specific contingency planning, and overall business continuity, contingency and disaster recovery planning will likely be successful, and that the aforementioned "worse case scenario" is unlikely to develop or significantly disrupt our financial operations. The above discussion regarding year 2000 contains many statements that are "forward-looking" within the meaning of the Reform Act. Although we believe that our estimates are based on reasonable assumptions, we cannot assure that actual results will not differ materially from these expectations or estimates. See "Special Note Regarding Forward-Looking Statements" on page 12. 26 New Accounting Standards On June 15, 1998, the Financial Accounting Standards Board issued Financial Accounting Standards ("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments and for hedging activities. FAS No. 133 requires, among other things, that all derivative instruments be recognized at fair value as assets or liabilities on the balance sheet and that changes in fair value generally be recognized currently in earnings unless specific criteria are met. The standard is effective for fiscal years beginning after June 15, 1999, though earlier adoption is permitted. Financial statement impacts of adopting the new standard depend upon the amount and nature of the future use of derivative instruments and their relative changes in valuation over time. Had we adopted FAS No. 133 in 1999, its impact on the financial statements would not have been material. 27 PART II - OTHER INFORMATION Item 1. Legal Proceedings Our Company and its subsidiaries are subject to claims and proceedings arising in the ordinary course of business. At U S WEST Communications, there are pending certain regulatory actions in local regulatory jurisdictions. For a discussion of these actions, see "Note 6 - Commitments and Contingencies" - to the Consolidated Financial Statements. Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (3-A) Restated Certificate of Incorporation of U S WEST, Inc. (Exhibit 3(I) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). (3-B) Bylaws of U S WEST, Inc. (formerly "USW-C, Inc."), effective as of June 12, 1998 (Exhibit 3(ii) to Form 8-KA dated June 26, 1998, File No. 1-14087). (4-A) Form of Rights Agreement between U S WEST, Inc. (formerly "USW-C, Inc.") and State Street Bank and Trust Company, as Rights Agent (Exhibit 4-A to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). (4-B) Form of Indenture among U S WEST Capital Funding, Inc., USW-C (renamed "U S WEST, Inc.") and First National Bank of Chicago, as Trustee (Exhibit 4-A to Form S-3 Registration Statement No. 333-51907, filed May 6, 1998, as amended). (10-A) Separation Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated June 5, 1998 (Exhibit 99.1 to Form 8-K/A dated June 26, 1998, File No. 1-14087). (10-B) Employee Matters Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated June 5, 1998 (Exhibit 99.2 to Form 8-K/A dated June 26, 1998, File No. 1-14087). (10-C) Tax Sharing Agreement between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated June 5, 1998 (Exhibit 99.3 to Form 8-K/A dated June 26, 1998, File No. 1-14087). (10-D) 364-Day $3.5 Billion Credit Agreement, dated May 8, 1998, with Morgan Guaranty Trust Company of New York, as Administrative Agent (Exhibit 10A to Form 10-Q for the quarter ended March 31, 1998, File No. 1-14087). 29 (10-E) Five-Year $1.0 Billion Credit Agreement, dated May 8, 1998, with Morgan Guaranty Trust Company of New York, as Administrative Agent (Exhibit 10B to form 10-Q for the quarter ended March 31, 1998, File No. 1-14087). (10-E-1) Amendment No. 1 to Credit Agreements dated as of June 30, 1998 to the 364-Day $3.5 Billion Credit Agreement and the Five-Year $1.0 Billion Credit Agreement, each dated as of May 8, 1998, among U S WEST Capital Funding, Inc., U S WEST, Inc., the Banks listed on the signature pages thereto and Morgan Guaranty Trust Company of New York (Exhibit 10(e)(1) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). (10-F) Change of Control Agreement for the President and Chief Executive Officer (Exhibit 10(f) to Form 10-Q for the quarter ended June 30, 1998, file No. 1-14087). (10-G) Form of Change of Control Agreement for Tier II Executive (Exhibit 10(g) to Form 10-Q for the quarter ended June 30, 1998, File No. 1-14087). (10-H) Form of Executive Severance Agreement (Exhibit 10(h) to Form 10-Q for the quarter ended June 30, 1998, File No. 1-14087). (10-I) 1998 U S WEST Stock Plan (Exhibit 10-A to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). (10-J) U S WEST Long-Term Incentive Plan (Exhibit 10-D to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). (10-K) U S WEST Executive Short-Term Incentive Plan (Exhibit 10-E to the Form S-4 Registration Statement No. 333-45765, filed February 6, 1998, as amended). (10-L) U S WEST 1998 Broad Based Stock Option Plan dated June 12, 1998 (Exhibit 10(l) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). (10-M) U S WEST Deferred Compensation Plan, amended and restated effective as of June 12, 1998 (Exhibit 10(m) to Form 10-Q for the quarter ended September 30, 1998, File No. 1-14087). (10-N) U S WEST 1998 Stock Plan, as amended June 22, 1998 (Exhibit 10(n) to Form 10-Q for the quarter ended September 30, 1998, file No. 1-14087). (10-O) Shareowner Investment Plan dated June 12, 1998 (Form S-3 Registration Statement No. 333-52781, filed May 15, 1998).
29
(10-P) Amendment to the Separation Agreement, dated June 5, 1998 between U S WEST, Inc. (renamed "MediaOne Group, Inc.") and USW-C, Inc. (renamed "U S WEST, Inc."), dated June 12, 1998 (Exhibit 10(p) to Form 10-K/A for the year ended December 31, 1998, File No. 1-14087). 10-Q Form of Non-Qualified Stock Option Agreement. (13) U S WEST 1998 Summary Annual Report to Shareholders (Exhibit 13 to Form 8-K dated February 24, 1999, File No. 1-14087). 27 Financial Data Schedule.
- ------------------- ( ) Previously filed.
(b) Reports on Form 8-K filed during the First Quarter of 1999 (i) Form 8-K dated January 12, 1999 providing notification of a press release entitled "Jerry O. Williams Retires from U S WEST Board of Directors." (ii) Form 8-K dated January 15, 1999 providing notification of a press release entitled "U S WEST To Sell 500,000 Access Lines." (iii) Form 8-K dated January 22, 1999 providing notification of the release of 1998 fourth quarter earnings of U S WEST. (iv) Form 8-K dated February 23, 1999 providing notification of a press release entitled "U S WEST Commits $300 Million in Added Spending." (v) Form 8-K dated February 24, 1999 attaching U S WEST Summary Annual Report to Shareholders. (vi) Form 8-K dated February 25, 1999 providing notification of a press release entitled "U S WEST Holds Third Annual Investor Conference." (vii) Form 8-K dated April 6, 1999 providing notification of a press release entitled "Chairman of Gartner Group Elected to U S WEST Board of Directors." (viii) Form 8-K dated April 21, 1999 providing notification of the release of 1999 first quarter earnings of U S WEST.
30 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. U S WEST, Inc. /s/ ALLAN R. SPIES By:___________________________________ Allan R. Spies Executive Vice President and Chief Financial Officer May 6, 1999 31 EX-10 2 FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT U S WEST, INC. FORM OF NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT is made between U S WEST, Inc. (the "Company" or "U S WEST") and the Optionee ("Optionee") named in the schedule attached to and made part of this Agreement (the "Schedule"), as of the date set forth in the Schedule. Pursuant to the 1998 U S WEST Stock Plan, as amended, (the "Plan"), the Human Resources Committee of the Company's Board of Directors (the "Committee") has approved the granting to Optionee of an option to purchase shares of Common Stock (the "Option"), without par value on the terms and conditions set forth in this Agreement, as a matter of separate inducement in connection with Optionee's engagement with the Company or a Related Entity, and not in lieu of salary or other compensation for Optionee's services. The Option shall not be treated as an incentive stock option. In consideration of the foregoing and of the mutual covenants set forth herein, and other good and valuable consideration, the Company and Optionee agree as follows: 1. Incorporation of Plan and Defined Terms. 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 fully set forth herein. Terms used in this Agreement and not otherwise defined shall have the meanings set forth in the Plan. 2. Shares Optioned; Option Price. Optionee may purchase all or any part (in whole shares) of an aggregate of the number of shares of Common Stock, at a purchase price per share (which is not less than the Fair Market Value on the date of this Agreement) as specified in the Schedule, on the terms and conditions set forth herein. 3. Option Term; Vesting; Times of Exercise. The Option shall become Vested in one-third increments upon each of the first three (3) anniversaries following the date hereof. The vesting on any such increment shall be subject to the continuous employment of Optionee until the anniversary date on which such increment is scheduled to vest, and provided further that the Option shall expire and shall no longer be exercisable following ten (10) years from the date of this Agreement (the "Expiration Date"). Except as otherwise specifically set forth below and elsewhere in this Agreement, the Option shall become Vested only to the extent that the foregoing continuous employment requirement is satisfied, regardless of the circumstances under which Optionee's employment is terminated. The exercise of any option or the sale of any stock is subject to the Company's standard blackout practices as more fully described in the Company's policies and procedures. 32 (i) Death. In the event of the death of Optionee, the Option shall become Vested and the estate of the Optionee shall have the right, at any time and from time to time consistent with rules established by the Committee for the administration of the Plan, 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. Except as otherwise set forth in this Agreement, if the employment of Optionee is terminated because of Disability, the Option shall be retained by Optionee, and the Option, if not then Vested, shall become Vested as set forth in the vesting schedule in Paragraph 3 of this Agreement. Upon vesting, Optionee shall have the right to exercise the Option, at any time and from time to time, but not after the Expiration Date. (iii) Retirement. Except as otherwise set forth in this Agreement, upon Optionee's Retirement, the Option shall be retained by Optionee, and the Option, if not then Vested, shall become Vested as set forth in the vesting schedule in Paragraph 3 of this Agreement, unless the Committee, in its sole discretion, determines otherwise; provided, however, that the continuation of vesting shall be contingent upon Optionee's execution and delivery to the Company, on or prior to the effective date of Optionee's Retirement, of the Company's standard form of "Waiver & Release" of claims, available from the Human Resources Department of the Company. Upon vesting, Optionee shall have the right to exercise the Option, at any time and from time to time, until the Expiration Date, unless otherwise provided in this Agreement. (iv) Other Termination. If Optionee's employment with the Company or a Related Entity is terminated for any reason other than for death, Disability or Retirement and other than "for cause," as such term is defined in the Plan, Optionee shall have the right to exercise all or any portion of the Option, if the Option is then Vested, at any time and from time to time within ninety (90) days of termination or such other period, if any, as the Committee in its sole discretion shall determine (but not after the Expiration Date). (v) Executive Severance Agreement. If Optionee has executed an Executive Severance Agreement with the Company, the Option will be Vested in accordance with the terms of the Executive Severance Agreement if Optionee becomes entitled to the receipt of "Severance Benefits," as set forth in that Executive Severance Agreement and sixteen (16) days have passed following the execution of a standard form of "Waiver & Release" of claims and compliance with the "Conditions" by Optionee as set forth in the Company's standard Executive Severance Agreement. 33 (vi) Change of Control. Upon the occurrence of a Change of Control, the Option shall be Vested immediately. For purposes of this paragraph, "Change of Control" shall have the identical meaning as set forth in the Change of Control Agreement, if any, that Optionee has executed with the Company. To ensure parallel application, for purposes of this paragraph only, defined terms contained in the definition of "Change of Control" set forth in Optionee's Change of Control Agreement shall have the same meaning here as set forth in that Change of Control Agreement. If Optionee has not executed any such Change of Control Agreement, "Change of Control" shall have the identical meaning as set forth in the Stock Plan. (vii) Termination for Cause. Notwithstanding any other provision in this Agreement, if Optionee's employment is terminated by the Company or any Related Entity "for cause," as such term is defined in the Plan, Optionee shall forfeit immediately all rights under the Option except as to the shares of Common Stock already purchased prior to such termination. 4. Exercise: Payment for and Delivery of Stock. The Option may be exercised only by Optionee or his or her transferee(s) by last will and testament or the laws of descent and distribution. The Option may be exercised by giving 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. The purchase price shall be payable (i) in cash or by an equivalent means, (ii) by delivery, constructive or otherwise, to the Company of shares of Common Stock owned by Optionee, or (iii) any combination of the foregoing. Any shares of Common Stock so tendered shall be valued as of the Option exercise date. 5. Non-Transferability of Option. The Option is not transferable otherwise than by last will and testament 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. The Option shall not be assignable or transferable pursuant to a domestic relations order. During the lifetime of Optionee, the Option shall be exercisable only by Optionee, or Optionee's guardian or legal representative. Upon any attempt to transfer the Option otherwise than by last will and testament 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. 34 6. Performance for Competitors. If at any time following the date of this Agreement and before the Option is Vested, regardless of whether Optionee has Retired, Optionee directly or indirectly receives payment for services rendered to, or is otherwise employed by, any person, firm or corporation that is in competition with the Company or engaged in providing any goods or services that are substantially the same as any goods or services provided or under development by the Company, Optionee immediately shall forfeit all rights under the Option, unless the Committee in its sole discretion determines otherwise, or unless Optionee is in full compliance with the Company's Policy on Service on Outside Boards of Directors, as interpreted solely by the Company's Senior Management Compliance Committee. If at any time Optionee renders services to or becomes otherwise employed by any person, firm or corporation that is in competition with the Company or engaged in providing any goods or services that are substantially the same as goods or services provided or under development by the Company, Optionee shall have ninety (90) days after the date of such employment to exercise any Vested and non-expired Option. Any determination under this Paragraph 6, including whether a person, firm or corporation is "in competition with" the Company or providing "substantially the same" goods or services as the Company provides or is developing, will be subject to the sole discretion of the Committee. The parties intend that the protection afforded to the Company under this section shall also benefit a Related Entity of the Company. 7. Non-solicitation of Employees. Optionee agrees that he or she will not for a period of one (1) year immediately following the termination of his or her employment with the Company for any reason, either on Optionee's own account or in conjunction with or on behalf of any other person or entity whatsoever, directly or indirectly induce, solicit, or entice away any person who, at any time during the three (3) months immediately preceding Optionee's termination of employment, is a managerial level employee of the Company (including, but not limited to, any Officer, Executive Director or director-level employee, or any equivalent or successor term for any such employees). If Optionee engages in any conduct contrary to the provisions of this Paragraph 7, Optionee shall forfeit the Option to the extent the Option has not Vested, unless the Committee determines otherwise. Such forfeiture is in addition to any other remedies available under law. The parties intend that the protection afforded to the Company under this section shall also benefit a Related Entity of the Company. 8. Intellectual Property Ownership and Protection. Optionee agrees that any inventions, discoveries, creations (including without limitation software, writings, drawings and other works), improvements, confidential information or other intellectual property that he or she may develop or create, or assist in developing or creating, during his or her employment with the Company, whether or not patentable or eligible for copyright, that relate to the actual, planned, or foreseeable business or other activities of the Company, or that result from his or her work for the Company, are the exclusive property of the Company. Optionee agrees to disclose promptly such property to the Company and will, both during and after his or her employment, and without additional compensation, execute all assignments and other documents and do all things reasonably necessary to secure and enforce U.S. and foreign intellectual property rights for the Company, including patents and copyrights. 35 Optionee is not obligated to assign any intellectual property to Company that Optionee created prior to Optionee's employment with the Company. To avoid any confusion, Optionee must identify in writing on Attachment A [make sure appropriate attachment is referenced] any such intellectual property that has not been patented or published and forward it along with this letter. Optionee agrees that Optionee will hold in confidence and will not, during or after his or her employment, disclose or use for the benefit of any person or entity other than Company, any Company confidential information that was developed or received during his or her employment. "Company confidential information" shall include all trade secrets, research and development information, product and marketing plans, business or legal strategies, personnel or financial data, product and service specifications, prototypes, software, customer lists and other confidential information or materials of Company or of others with whom Company has a confidential relationship. Optionee will promptly return all such information and materials to Company when his or her employment ends. [Use as needed, could remove depending on the circumstance i.e., no stock in the offer]. If Optionee fails to comply with the provisions of this paragraph 8, Optionee shall forfeit the Option to the extent the Option has not vested, unless the Committee determines otherwise. Such forfeiture is in addition to any other remedies available to the Company. The parties intend that the protection afforded to the Company under this section shall also benefit a Related Entity of the Company. 9. 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 Optionee and any respective heir, executor, administrator, successor or assign. 36 10. Arbitration. Optionee agrees that any claim, controversy or dispute that may arise directly or indirectly in connection with Optionee's employment or termination of employment with U S WEST, and/or any associated or related disputes arising therefrom involving U S WEST and/or any employee(s), Director(s), officer(s), or agent(s) of U S WEST, whether arising in contract, statute, tort, fraud, misrepresentation, discrimination, common law or any other legal theory, including, but not limited to, disputes relating to the making, performance or interpretation of this Agreement; and claims or other disputes arising under Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1991; the Age Discrimination in Employment Act of 1967, as amended; 42 U.S.C. ss. 1981, ss. 1981a, ss. 1983, ss. 1985, or ss. 1988; the Family and Medical Leave Act of 1993; the Americans with Disabilities Act of 1990, as amended; the Rehabilitation Act of 1973, as amended; the Fair Labor Standards Act of 1938, as amended; the Employee Retirement Income Security Act of 1974, as amended ("ERISA"); the Colorado Anti-Discrimination Act; or any other similar federal, state or local law or regulation, whenever brought, shall be resolved by arbitration. If, however, Optionee would otherwise be legally required to exhaust administrative remedies to obtain legal relief, Optionee can and must exhaust such administrative remedies prior to pursuing arbitration. The only legal claims between Optionee and U S WEST that are not included for arbitration within this Agreement are claims for workers' compensation or unemployment compensation benefits. By signing this Agreement, Optionee voluntarily, knowingly and intelligently waives any right Optionee may otherwise have to seek remedies in court or other forums, including the right to a jury trial. U S WEST also hereby voluntarily, knowingly, and intelligently waives any right it might otherwise have to seek remedies against Optionee in court or other forums, including the right to a jury trial. The Federal Arbitration Act, 9 U.S.C. ss.ss. 1-16 ("FAA") shall govern the arbitrability of all claims, provided that they are enforceable under the FAA, as it may be amended from time to time. In the event the FAA does not govern, the Colorado Uniform Arbitration Act shall apply. Additionally, the substantive law of Colorado, to the extent it is consistent with the terms stated in this Agreement for arbitration, shall apply to any common law claims. This Agreement for arbitration supersedes any prior arbitration agreement between Optionee and U S WEST to the extent they are inconsistent. 37 A single arbitrator engaged in the practice of law shall conduct the arbitration under the applicable rules and procedures of the American Arbitration Association ("AAA"), unless otherwise agreed to by the parties. Any dispute, that relates directly or indirectly to Optionee's employment with U S WEST or to the termination of Optionee's employment will be conducted under the AAA National Rules for the Resolution of Employment Disputes, effective June 1, 1997. The arbitrator shall be chosen from a state other than Optionee's state of residence and other than Colorado. Other than as set forth herein, the arbitrator shall have no authority to add to, detract from, change, amend, or modify existing law. The arbitrator shall have the authority to order such discovery as is necessary for a fair resolution of the dispute. The arbitrator may award punitive damages, as allowed by Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1991; the Age Discrimination in Employment Act of 1967, as amended; and the Americans with Disabilities Act of 1990, as amended, regardless of any limitations imposed by federal, state, or local laws regarding amounts that may be awarded in arbitration proceedings. All arbitration proceedings, including without limitation, settlements under this Agreement, will be confidential. Optionee shall not be required to pay more than One Hundred Fifty Dollars ($150.00) of the arbitrator's hourly fees and expenses. The prevailing party in any arbitration shall be entitled to receive reasonable attorneys' fees as provided by law. The arbitrator's decision and award shall be final and binding, as to all claims that were, or could have been, raised in the arbitration, and judgment upon the award rendered by the arbitrator may be entered to any court having jurisdiction thereof. If any party hereto files a judicial or administrative action asserting claims subject to this arbitration provision, and another party successfully stays such action and/or compels arbitration of such claims, the party filing said action shall pay the other party's costs and expenses incurred in seeking such stay and/or compelling arbitration, including reasonable attorneys' fees not to exceed Two Thousand Five Hundred Dollars ($2,500.00). 38 11. Miscellaneous. (i) Notices. Any notice to be given to the Company shall be personally delivered to or addressed to its Senior Vice President - Law and Human Resources and Assistant Secretary, and any notice to be given to Optionee shall be addressed to him or her at the address given beneath his or her signature below or such other address as the Company reasonably believes to be his or her most current address. Any notice to the Company is deemed given when received on behalf of the Company by the Senior Vice President - Law and Human Resources and Assistant Secretary, of the Company at 1801 California Street, Suite 5200, Denver, CO 80202. Any notice to 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 Postal Service. (ii) Employment. The Company may terminate Optionee's employment at any time, with or without cause, unless the term of employment is covered by separate conditions contained in another authorized written agreement signed by the Company and the Optionee. 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. (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 Optionee. U S WEST, Inc. OPTIONEE By: /S/ CEO & PRESIDENT CEO & President __________________________ Full Name -------------------------- Street Address -------------------------- City, State and Zip Code -------------------------- Social Security Number 39 INTELLECTUAL PROPERTY THAT HAS NOT BEEN PATENTED OR PUBLISHED 1. 2. 3. 40 EX-27 3 FDS --
5 0001054522 U S WEST, INC. 1,000,000 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 MAR-31-1999 MAR-31-1998 36 373 0 0 1,700 1,616 0 0 236 179 2,536 2,751 36,031 33,930 20,933 19,679 18,709 17,851 4,849 4,350 8,642 4,931 0 0 0 0 0 0 920 4,450 18,709 17,851 3,182 3,009 3,182 3,009 0 0 0 0 2,389 2,194 0 0 153 163 639 627 242 234 397 393 0 0 0 0 0 0 397 393 .79 .78 .78 .78
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