0000068622-95-000004.txt : 19950810 0000068622-95-000004.hdr.sgml : 19950810 ACCESSION NUMBER: 0000068622-95-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950809 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: U S WEST COMMUNICATIONS INC CENTRAL INDEX KEY: 0000068622 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840273800 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03040 FILM NUMBER: 95560096 BUSINESS ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037936631 MAIL ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 FORMER COMPANY: FORMER CONFORMED NAME: MOUNTAIN STATES TELEPHONE & TELEGRAPH CO DATE OF NAME CHANGE: 19910109 10-Q 1 28 _____________________________________________________________________________ __________________________________________________________________ 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 June 30, 1995 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 1-3040 U S WEST Communications, Inc. A Colorado Corporation IRS Employer No. 84-0273800 1801 California Street, Denver, Colorado 80202 Telephone Number (303) 896-3099 THE REGISTRANT, A WHOLLY OWNED SUBSIDIARY OF U S WEST, INC., MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2). 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 __ ____________________________________________________________________________ ___________________________________________________________________ Form 10-Q - Part I U S WEST Communications, Inc. TABLE OF CONTENTS
Item Page ------------------------------------------------------------------- ---- PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Operations - Three and six months ended June 30, 1995 and 1994 3 Condensed Consolidated Balance Sheets - June 30, 1995 and December 31, 1994 4 Consolidated Statements of Cash Flows - Six months ended June 30, 1995 and 1994 6 Consolidated Statements of Shareowner's Equity - Six months ended June 30, 1995 and 1994 7 Notes to Consolidated Financial Statements 8 2. Management's Analysis - (Reduced disclosure format pursuant to General Instruction H(2)) 10 PART II - OTHER INFORMATION 6. Exhibits and Reports on Form 8-K 19
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Dollars in millions
Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 1995 1994 1995 1994 --------- --------- --------- --------- OPERATING REVENUES Local service $ 1,076 $ 1,016 $ 2,126 $ 2,001 Interstate access service 591 556 1,180 1,118 Intrastate access service 184 179 372 353 Long-distance network service 294 345 593 696 Other services 153 147 304 293 --------- --------- --------- --------- Total operating revenues 2,298 2,243 4,575 4,461 OPERATING EXPENSES Employee-related expenses 767 738 1,497 1,455 Other operating expenses 365 401 756 799 Taxes other than income taxes 104 98 207 195 Depreciation and amortization 498 470 992 935 --------- --------- --------- --------- Total operating expenses 1,734 1,707 3,452 3,384 Income from operations 564 536 1,123 1,077 Interest expense 95 81 186 161 Gains on sales of rural telephone exchanges 15 24 78 48 Other expense - net 20 7 33 17 --------- --------- --------- --------- Income before income taxes 464 472 982 947 Provision for income taxes 175 177 370 355 --------- --------- --------- --------- NET INCOME $ 289 $ 295 $ 612 $ 592 ========= ========= ========= ========= See Notes to Consolidated Financial Statements.
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) Dollars in millions
June 30, December 31, 1995 1994 --------- ------------- ASSETS Current assets Cash and cash equivalents $ 45 $ 114 Accounts receivable 1,552 1,450 Materials and supplies 135 120 Deferred tax asset 284 280 Other 62 48 --------- ------------- Total current assets 2,078 2,012 --------- ------------- Gross property, plant and equipment 29,972 29,406 Accumulated depreciation 16,983 16,444 --------- ------------- Property, plant and equipment - net 12,989 12,962 Other assets 761 726 --------- ------------- Total assets $ 15,828 $ 15,700 ========= ============= See Notes to Consolidated Financial Statements.
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) Dollars in millions
June 30, December 31, 1995 1994 ---------- -------------- LIABILITIES AND SHAREOWNER'S EQUITY Current liabilities Short-term debt $ 2,262 $ 1,485 Accounts payable 700 883 Employee compensation 275 283 Current portion of restructuring charges 342 317 Other 1,029 883 ---------- -------------- Total current liabilities 4,608 3,851 ---------- -------------- Long-term debt 3,977 4,242 Postretirement and other postemployment benefit obligations 2,196 2,393 Deferred taxes, credits and other 1,363 1,530 Shareowner's equity Common shares - one share without par value 7,286 7,286 Cumulative deficit (3,602) (3,602) ---------- -------------- Total shareowner's equity 3,684 3,684 ---------- -------------- Total liabilities and shareowner's equity $ 15,828 $ 15,700 ========== ============== See Notes to Consolidated Financial Statements.
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Dollars in millions
Six Months Ended June 30, 1995 1994 ---------------------------------------------------- -------- -------- OPERATING ACTIVITIES Net income $ 612 $ 592 Adjustments Depreciation and amortization 991 935 Gains on sales of rural telephone exchanges (78) (48) Deferred income taxes and amortization of investment tax credits 56 50 Changes in operating assets and liabilities: Restructuring payments (172) (63) Postretirement medical and life costs, net of cash fundings (211) (235) Accounts receivable (102) (29) Materials, supplies and other (41) (37) Accounts payable and accrued liabilities 41 - Other - net 5 37 -------- -------- Cash provided by operating activities 1,101 1,202 -------- -------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,090) (1,165) Proceeds from disposals of property, plant and equipment 112 47 -------- -------- Cash (used) for investing activities (978) (1,118) -------- -------- FINANCING ACTIVITIES Net proceeds from repayment of short-term debt 569 149 Proceeds from Issuance of long-term debt - 251 Repayments of long-term debt (132) (243) Dividends paid (629) (612) Equity infusions from parent - 360 -------- -------- Cash (used for) financing activities (192) (95) -------- -------- CASH AND CASH EQUIVALENTS Decrease (69) (11) Beginning balance 114 67 -------- -------- Ending balance $ 45 $ 56 ======== ======== See Notes to Consolidated Financial Statements.
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED STATEMENTS OF SHAREOWNER'S EQUITY (Unaudited) Dollars in millions
Six Months Ended June 30, 1995 1994 ----------------------------------------------- -------- -------- COMMON SHARES Balance at beginning of period $ 7,286 $ 6,742 Equity infusions from parent - 360 Other - 2 -------- -------- Balance at end of period 7,286 7,104 CUMULATIVE DEFICIT Balance at beginning of period (3,602) (3,602) Net income 612 592 Dividends declared (612) (592) -------- -------- Balance at end of period (3,602) (3,602) TOTAL SHAREOWNER'S EQUITY $ 3,684 $ 3,502 ======== ======== See Notes to Consolidated Financial Statements.
Form 10-Q - Part I U S WEST Communications, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Consolidated Financial Statements The Consolidated Financial Statements have been prepared by U S WEST Communications, Inc. (the "Company"), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally accompanying financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of the Company's management, the Consolidated Financial Statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial information set forth therein. It is suggested that these Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1994. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. B. Recapitalization Proposal The Board of Directors of U S WEST, Inc. ("U S WEST"), a Colorado corporation, has adopted a proposal (the "Recapitalization Proposal") that would change the state of incorporation of U S WEST from Colorado to Delaware and create two classes of common stock that are intended to reflect separately the performance of U S WEST's communications and multimedia businesses. Under the Recapitalization Proposal, shareholders of U S WEST will be asked to approve an Agreement and Plan of Merger between U S WEST and U S WEST, Inc., a Delaware corporation and wholly owned subsidiary of U S WEST ("U S WEST Delaware"), pursuant to which U S WEST would be merged (the "Merger") with and into U S WEST Delaware with U S WEST Delaware continuing as the surviving corporation. In connection with the Merger, the Certificate of Incorporation of U S WEST Delaware would be amended and restated (as so amended and restated, the "Restated Certificate") to, among other things, designate two classes of common stock of U S WEST Delaware, one class of which would be authorized as U S WEST Communications Group Common Stock ("Communications Stock"), and the other class of which would be authorized as U S WEST Media Group Common Stock ("Media Stock"). Upon consummation of the Merger, each share of existing common stock of U S WEST would be automatically converted into one share of Communications Stock and one share of Media Stock. Form 10-Q - Part I U S WEST Communications, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) B. Recapitalization Proposal (continued) The Communications Stock and Media Stock are designed to provide shareholders with separate securities that are intended to reflect separately the communications businesses of U S WEST Communications and certain other subsidiaries of U S WEST (the "Communications Group") and U S WEST's multimedia businesses (the "Media Group" and, together with the Communications Group, the "Groups"). The Communications Group is comprised of U S WEST Communications, U S WEST Communications Services, Inc., U S WEST Federal Services, Inc., U S WEST Advanced Technologies, Inc. and U S WEST Business Resources, Inc. Under the Recapitalization Proposal, dividends to be paid to the holders of Communications Stock will initially be at a quarterly rate of $0.535 per share. Dividends on the Communications Stock will be paid at the discretion of the Board of Directors of U S WEST, Inc., based primarily upon the financial condition, results of operations and business requirements of the Communications Group and U S WEST as a whole. A preliminary proxy statement on the Recapitalization Proposal was filed with the Securities and Exchange Commission on May 12, 1995, and amendment one was filed on June 30, 1995. C. Contingencies 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 action 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. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Results of Operations Comparative details of operations for the six months ended June 30 follow:
Six Months Ended June 30, 1995 1994 ------------------------------------------- ------ ------ Operating revenues $4,575 $4,461 Operating expenses Employee-related expenses 1,497 1,455 Other operating expenses 756 799 Taxes other than income taxes 207 195 Depreciation and amortization 992 935 Interest expense 186 161 Gains on sales of rural telephone exchanges 78 48 Other expense - net 33 17 ------ ------ Income before income taxes 982 947 Provision for income taxes 370 355 ------ ------ Net income $ 612 $ 592 ====== ======
For the six months ended June 30, 1995, the Company's net income was $612, a $20, or 3.4 percent, increase compared with the same period in 1994. Excluding gains on the sales of certain rural telephone exchanges, of $49 and $31 year-to-date 1995 and year-to-date 1994, respectively, net income increased $2, or .4 percent, as compared to the same period of 1994. Increased income at U S WEST Communications is attributable to higher demand for services and access line growth, and lower employee benefit costs, including the effects of certain benefit cost true-ups, largely offset by an increase in operating costs incurred to address current customer service issues. Volume growth resulted in a 5.1 percent increase in earnings before interest, taxes, depreciation, amortization and other ("EBITDA") for the six months ended June 30, 1995, as compared with the same period of 1994. EBITDA also excludes the sales of certain rural telephone exchanges. The Company considers EBITDA an important indicator of the operational strength and performance of the business. EBITDA, however, should not be considered as an alternative to operating or net income as an indicator of the performance of the Company's business or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Sales & Other Revenues
Six Six Months Months Ended Ended Lower Increase Increase June 30, June 30, Price (Higher) (Decrease) (Decrease) 1995 1994 Changes Refunds Growth Other Dollars Percent --------- --------- --------- --------- -------- ------- ----------- ---------- Local service $ 2,126 $ 2,001 $ 4 $ - $ 121 $ - $ 125 6.2 Interstate access 1,180 1,118 (18) (10) 90 - 62 5.5 Intrastate access 372 353 (12) 5 19 7 19 5.4 Long-distance network 593 696 (15) - (28) (60) (103) (14.8) Other services 304 293 - - - 11 11 3.8 --------- --------- --------- --------- -------- ------- ----------- ---------- Total revenues $ 4,575 $ 4,461 $ (41) $ (5) $ 202 $ (42) $ 114 2.6 --------- --------- --------- --------- -------- ------- ----------- ----------
Total operating revenues were $4,575, a $114, or 2.6 percent, increase over the prior year. Local service revenues increased principally as a result of higher demand for services, as evidenced by an increase of 509,000 access lines, or 3.6 percent, during the last 12 months. Excluding the effects of the sales of certain rural telephone exchanges, access lines increased by 591,000 lines, or 4.2 percent, during the last 12 months. Higher revenue from interstate access services resulted from an increase of 9.1 percent in interstate billed access minutes of use in the first six months of 1995 as compared with the same period of 1994, which more than offset the effects of price reductions. Intrastate access charges increased as a result of higher demand and the effects of multiple toll carrier plans implemented in Oregon and Washington in May and June 1994, respectively, partially offset by the impacts of price changes. These regulatory arrangements decreased long-distance network revenues by $62, increased intrastate access revenues by $12 and decreased access fees (otherwise paid to independent companies) by $42. The increase in other services revenues is largely due to continued market penetration of new service offerings and higher revenues from customer premise equipment installations. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Costs and Expenses
Six Six Months Months Ended Ended Increase Increase June 30, June 30, (Decrease) (Decrease) 1995 1994 Dollars Percent --------- --------- ----------- ---------- Employee-related expenses $ 1,497 $ 1,455 $ 42 2.9 eEmplo yee-related expenses Other operating expenses 756 799 (43) (5.4) Taxes other than income taxes 207 195 12 6.2 Depreciation and amortization 992 935 57 6.1 Interest expense 186 161 25 15.5 Other expense-net 33 17 16 94.1 Provision for income taxes 370 355 15 4.2 --------- --------- ----------- ----------
Higher employee-related expenses are a result of business growth and related customer service issues, which have been impacted by a temporary decline in productivity caused by a major rearrangement of resources due to restructuring. Growth in employee-related expenses is expected to continue throughout the remainder of the year. Overtime payments and contract labor increased employee-related expenses by approximately $95 from the first six months of 1994 to the first six months of 1995. Partially offsetting these increases were lower health-care benefit costs, including a reduction in the accrual for postretirement benefits, and certain benefit cost true-ups. Since December 1993, the Company has separated 3,560 employees under the Restructuring Plan. (See "Restructuring Charges.") These separations have been partially offset by the addition of approximately 2,100 employees (a significant portion of which are temporary) primarily dedicated to improving customer service and also developing new business opportunities. Benefits from the net work-force reductions have offset wage and salary increases. The Company estimates that it will achieve employee reductions of 9,000 in connection with the Restructuring Plan by the end of 1997. (See "Restructuring Charges.") These employee reductions will be partially offset by the planned addition of some employees by the end of 1997 to accommodate business growth, including wireless and data transmission services. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Costs and Expenses (continued) The decrease in other operating expenses was mainly attributable to a $42 reduction in access expense related to the effects of multiple toll carrier plans. The increase in depreciation and amortization expense was primarily a result of a higher depreciable asset base. Interest expense increased as a result of higher amounts of short-term debt combined with the effects of higher interest rates. Restructuring Charges The Company's 1993 results reflect an $880 restructuring charge (pretax). The related Restructuring Plan is designed to provide faster, more responsive customer services while reducing the costs of providing these services. As part of the Restructuring Plan, the Company is developing new systems and enhanced system functionality that will enable it to monitor networks to reduce the risk of service interruptions, activate telephone service on demand, rapidly design and engineer new services for customers and centralize its service centers. The Company is consolidating 560 customer service centers into 26 centers in 10 cities and reducing its work force by approximately 9,000 employees. The Restructuring Plan is scheduled to be completed by the end of 1997. Implementation to date has been driven by growth in the business and related service issues, revisions to system delivery schedules and productivity issues caused by the major rearrangement of resources due to restructuring. These issues may continue to affect the timing of the implementation of the Restructuring Plan. Following is a schedule of the costs included in the Restructuring Plan:
Actual Estimate Estimate Estimate 1994 1995 1996 1997 Total ------- --------- --------- --------- ------ Cash expenditures: Employee separation (1) $ 19 $ 67 $ 104 $ 65 $255 Systems development 118 145 97 - 360 Real estate 50 77 3 - 130 Relocation 21 52 2 - 75 Retraining and other 8 30 12 10 60 ------- --------- --------- --------- ------ Total cash expenditures 216 371 218 75 880 Remaining 1991 plan employee costs(1) 56 - - - 56 ------- --------- --------- --------- ------ Total $ 272 $ 371 $ 218 $ 75 $ 936 ======= ========= ========= ========= ====== (1) Employee separation costs, including the balance of the 1991 restructuring reserve at December 31, 1993, aggregate $311.
Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Restructuring Charges (continued) Employee separation costs include severance payments, health-care coverage and postemployment education benefits. Systems development costs include new systems and the application of enhanced system functionality to existing single purpose systems to provide integrated, end-to-end customer service. A substantial portion of the work-force reductions will be enabled by developing new systems and enhanced system functionality, which will simplify 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 Restructuring Plan will reduce employee-related expenses by approximately $400 per year. These savings are expected to be offset by the effects of inflation. Future operating costs also will be impacted by business growth. Employee Separation. Net employee reductions will total 9,000 under the Restructuring Plan. While the Company will separate 10,000 employees, approximately 1,000 employees that were originally expected to relocate have chosen separation or other job assignments and will be replaced. The estimated total cost for employee separations is $311, compared with $281 in the original estimate. The $30 cost associated with these additional employee separations has been reclassified from relocation to the reserve for employee separations. The following estimates of employee separations and related amounts reflect the extension of employee reductions into 1997:
Estimate Actual Estimate Estimate Estimate 1994 1994(1) 1995 1996 1997 Total --------- ------------- --------- --------- --------- ------- Employee separations Managerial 1,061 497 862 840 521 2,720 Occupational 1,887 1,683 1,288 2,660 1,649 7,280 --------- ------------- --------- --------- --------- ------- Total 2,948 2,180 2,150 3,500 2,170 10,000 ========= ============= ========= ========= ========= ======= Estimate Actual Estimate Estimate Estimate 1994 1994 (1) 1995 1996 1997 Total --------- ------------- --------- --------- --------- ------- Employee separation amounts Managerial $ 22 $ 5 $ 31 $ 30 $ 19 $ 85 Occupational 15 14 36 74 46 170 --------- ------------- --------- --------- --------- ------- Total 37 19 67 104 65 255 Remaining 1991 reserve 56 56 - - - 56 --------- ------------- --------- --------- --------- ------- Total $ 93 $ 75 $ 67 $ 104 $ 65 $ 311 ========= ============= ========= ========= ========= ======= (1) Includes the remaining employees and the separation amounts associated with the balance of the 1991 restructuring reserve at December 31, 1993.
Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Restructuring Charges (continued) Employee Separation (continued) Compared with the original estimates, employee reduction and separation amounts shown above have been reduced by 1,319 employees and $35, respectively, in 1995, and increased by 900 employees and $18 in 1996 and 2,170 employees and $65 in 1997, respectively. Systems Development. The Company's existing information management systems were largely developed to support a monopoly environment. These systems have become 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 Company believes that improved customer service, delivered at lower cost, can be achieved by a combination of new systems and introducing new functionality to existing systems. This is a change from the Company's initial strategy which placed more emphasis on the development of new systems. The Restructuring Plan is now less dependent on development of entirely new, untested systems and related technology. The systems development program involves new systems and enhanced system functionality for systems that support the following core processes: Service Delivery - to support service on demand for all products and services. These new systems and enhanced system functionality 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. Capacity Provisioning - for integrated planning of future network capacity, including the installation of software controllable service components. The direct, incremental and nonrecurring costs of providing new and enhanced system functionality follow:
Estimate Actual Estimate Estimate 1994 1994 1995 1996 Total --------- ------- --------- ----- --------- Service delivery $35 $21 $21 $31 $73 Service assurance 45 12 24 28 64 Capacity provisioning 17 57 92 30 179 All other 8 28 8 8 44 --------- ------- --------- ----- --------- Total $105 $118 $145 $97 $360 ========= ======= ========= ===== =========
Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Restructuring Charges (continued) Systems Development (continued) The Company continues to review its estimates of systems expenditures under the Restructuring Plan. Management does not anticipate any material revisions in total estimated expenditures. However, should expenditures exceed the remaining reserve, additional amounts would be expensed as incurred. Systems expenses charged to current operations consist of costs associated with the information management function, including planning, developing, testing and maintaining data bases 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 in 1994, 1993 and 1992. The Company expects systems costs charged to current operations as a percent of total operating expenses to approximate the current level throughout the life of the Restructuring Plan. However, systems costs could increase relative to other operating costs as the business becomes more technology dependent. Progress Under the Restructuring Plan. Following is a reconciliation of restructuring activity since December 1993:
Change in Relocation/ Reserve Reserve First Half Employee Reserve Balance 1994 Balance 1995 Separation Balance 12/31/93 Activity 12/31/94 Activity Estimates 6/30/95 --------- --------- --------- ----------- ------------- -------- Employee Separations Managerial $ 75 $ 5 $ 70 $ 11 $ 7 $ 66 Occupational 150 14 136 28 23 131 --------- --------- --------- ----------- ------------- -------- Total 225 19 206 39 30 197 System Development Service delivery 73 21 52 7 45 Service assurance 64 12 52 11 41 Capacity provisioning 179 57 122 47 75 All other 44 28 16 0 16 --------- --------- --------- ----------- -------- Total 360 118 242 65 177 Real Estate 130 50 80 50 30 Relocation 105 21 84 10 (30) 44 Retraining & other 60 8 52 9 43 --------- --------- --------- ----------- -------- Total 880 216 664 173 - 491 Remaining 1991 plan costs 56 56 - - - - --------- --------- --------- ----------- ------------- -------- Total $ 936 $ 272 $ 664 $ 173 - $ 491 ========= ========= ========= =========== ============= ========
Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) Restructuring Charges (continued) Progress Under the Restructuring Plan: (continued)
Cumulative First Half Separations 1994 Separations 1995 Separations At June 30, 1995 ---------------- ---------------- ---------------- Employee separations Managerial 497 324 821 Occupational 1,683 1,056 2,739 ---------------- ---------------- ---------------- Total 2,180 1,380 3,560 ================ ================ ================
Recapitalization Proposal The Board has adopted a proposal that would change the state of incorporation of U S WEST from Colorado to Delaware and create two classes of common stock, the Communications Stock and the Media Stock, which are intended to reflect separately the performance of the communications and multimedia businesses. For a more complete discussion on the Recapitalization Proposal see Footnote B in the Notes to the Consolidated Financial Statements. A preliminary proxy statement on the Recapitalization Proposal was filed with the Securities and Exchange Commission on May 12, 1995, and amendment one was filed on June 30, 1995. Other Items U S WEST from time to time engages in discussions regarding acquisitions. U S WEST may fund such acquisitions with internally generated funds, debt or equity. The incurrence of indebtedness to fund such acquisitions and/or the assumption of indebtedness in connection with acquisitions, if significant, could result in a downgrading of the credit rating of U S WEST and/or the Company. Broadband In early 1994, U S WEST Communications filed applications with the FCC to install Broadband Network architecture in Denver; Minneapolis-St. Paul; Salt Lake City; Boise; and Portland, Oregon (collectively, the "Broadband Applications"). In May 1995, however, in order to fully assess the results of the Omaha trials and examine alternative technologies, including wireless cable and direct broadcast satellite services, U S WEST Communications withdrew the Broadband Applications. The Communications Group plans to incorporate the results of the Omaha trials , as well as applicable new technologies, into its Broadband Network architecture in order to develop an advanced Broadband Network that is responsive to the needs of customers. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Analysis (Dollars in millions) OTHER ITEMS (continued) Regulatory Though Congress failed to pass telecommunications reform legislation in 1994, new telecommunications legislation has been introduced in both houses in 1995. The Senate passed a bill on June 16, 1995, and the House of Representatives passed a bill on August 4, 1995. The thrust of this legislation is to open up the network of local exchange carriers to further competition and to eliminate certain prohibitions upon local exchange carriers entering into other lines of business. The proposed legislation would (i) open local exchange service to competition and preempt states from imposing barriers preventing such competition, (ii) impose new unbundling and interconnection requirements on local exchange carrier networks, (iii) remove the MFJ prohibitions on interLATA services and manufacturing if certain competitive conditions are met, (iv) transfer any remaining MFJ requirements (including the MFJ's nondiscrimination provisions) to the FCC's jurisdiction, (v) impose requirements to conduct certain competitive activities only through structurally separate affiliates, and (vi) eliminate many of the remaining cable and telephone company cross-ownership restrictions. There is, however, uncertainty concerning the outcome of such legislation and whether key differences between the House and Senate bills could be resolved in Conference Committee. The passing of such legislation would significantly change the competitive landscape of the telecommunications industry as a whole. Contingencies 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 Commission's initial order denied a refund request from an interexchange carrier and other parties that relates to the Tax Reform Act of 1986. This action 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. Form 10-Q - Part II U S WEST Communications, Inc. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number 12 Statement regarding computation of earnings to fixed charges ratio of U S WEST Communications, Inc. (b) Reports on Form 8-K filed during the second quarter (i) report dated June 20, 1995, concerning U S WEST, Inc.'s announcement with respect to key executive changes. Form 10-Q - Part II U S WEST Communications, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ John W. Putnam U S WEST Communications, Inc. John W. Putnam Vice President and Controller August 9, 1995 EX-12 2 U S WEST Communications, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions) ,CAPTION. Quarter Ended 6/30/95 6/30/94 --------------------------------------------------- --------- --------- Income before income taxes $465 $472 Interest expense (net of amounts capitalized) 95 81 Interest factor on rentals (1/3) 16 18 --------- --------- Earnings $576 $571 Interest expense 105 88 Interest factor on rentals (1/3) 16 18 --------- --------- Fixed charges $121 $106 Ratio of earnings to fixed charges 4.76 FALSE --------------------------------------------------- --------- ---------
Year-to-Date 6/30/95 6/30/94 --------------------------------------------------- --------- --------- Income before income taxes $983 $947 Interest expense (net of amounts capitalized) 186 161 Interest factor on rentals (1/3) 31 36 --------- --------- Earnings $1,200 $1,144 Interest expense 205 174 Interest factor on rentals (1/3) 31 36 --------- --------- Fixed charges $236 $210 Ratio of earnings to fixed charges 5.08 5.45 --------------------------------------------------- --------- ---------
EX-27 3
5 0000068622 U S WEST COMMUNICATIONS, INC. 1,000,000 3-MOS 6-MOS DEC-31-1995 DEC-31-1995 JUN-30-1995 JUN-30-1995 45 45 0 0 1,552 1,552 0 0 135 135 2,078 2,078 29,972 29,972 16,983 16,983 15,828 15,828 4,608 4,608 3,977 3,977 7,286 7,286 0 0 0 0 (3,602) (3,602) 15,828 15,828 2,298 4,575 2,298 4,575 0 0 0 0 1,734 3,452 0 0 95 186 464 982 175 370 289 612 0 0 0 0 0 0 289 612 0 0 0 0