-----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, WhCNENw4fQVVC2IDCfBnRkIgdhMA7Dtr2xQmdQ0uIQfQsWWlTc68lZ5+nTrS3o9v MpX9ZStex90UjktH6tGfzQ== 0000068622-95-000008.txt : 19951119 0000068622-95-000008.hdr.sgml : 19951119 ACCESSION NUMBER: 0000068622-95-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NYSE SROS: PSE 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: 95590658 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 3RD QUARTER 26 _____________________________________________________________________________ __________________________________________________________________ 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 September 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 PART I - FINANCIAL INFORMATION
Item Page 1. Financial Statements Consolidated Statements of Operations - Three and nine months ended September 30, 1995 and 1994 3 Condensed Consolidated Balance Sheets - September 30, 1995 and December 31, 1994 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1995 and 1994 6 Consolidated Statements of Shareowner's Equity - Nine months ended September 30, 1995 and 1994 7 Notes to Consolidated Financial Statements 8 2. Management's Analysis - (Reduced disclosure format pursuant to General Instruction H(2)) 11
PART II - OTHER INFORMATION
6. Exhibits and Reports on Form 8-K 21
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Dollars in millions
Three Mos. Three Mos. Nine Mos. Nine Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, Dollars in millions 1995 1994 1995 1994 OPERATING REVENUES Local service $ 1,105 $ 1,034 $ 3,231 $ 3,035 Interstate access service 594 573 1,774 1,691 Intrastate access service 186 188 558 541 Long-distance network service 298 323 891 1,019 Other services 151 149 455 442 Total operating revenues 2,334 2,267 6,909 6,728 OPERATING EXPENSES Employee-related expenses 780 752 2,277 2,207 Other operating expenses 403 400 1,159 1,199 Taxes other than income taxes 92 99 299 294 Depreciation and amortization 507 471 1,499 1,406 Total operating expenses 1,782 1,722 5,234 5,106 Income from operations 552 545 1,675 1,622 Interest expense 98 82 284 243 Gains on sales of rural telephone exchanges 34 - 112 48 Other expense - net 10 6 43 23 Income before income taxes and extraordinary item 478 457 1,460 1,404 Provision for income taxes 173 172 543 527 Income before extraordinary item 305 285 917 877 Extraordinary item: Early extinguishment of debt, net of tax (5) - (5) - NET INCOME $ 300 $ 285 $ 912 $ 877 See Notes to Consolidated Financial Statements.
Form 10-Q - Part I U S WEST Communications, Inc. CONSOLIDATED BALANCE SHEETS (Unaudited) Dollars in millions
September 30, December 31, Dollars in millions 1995 1994 ASSETS Current assets Cash and cash equivalents $ 65 $ 114 Accounts receivable 1,638 1,450 Materials and supplies 160 120 Deferred tax asset 274 280 Other 38 48 Total current assets 2,175 2,012 Gross property, plant and equipment 30,498 29,406 Accumulated depreciation 17,289 16,444 Property, plant and equipment - net 13,209 12,962 Other assets 752 726 Total assets $ 16,136 $ 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
September 30, December 31, Dollars in millions 1995 1994 LIABILITIES AND SHAREOWNER'S EQUITY Current liabilities Short-term debt $ 2,011 $ 1,485 Accounts payable 784 883 Employee compensation 321 283 Current portion of restructuring charges 342 317 Other 934 883 Total current liabilities 4,392 3,851 Long-term debt 4,465 4,242 Postretirement and other postemployment benefit obligations 2,249 2,393 Deferred taxes, credits and other 1,346 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 $ 16,136 $ 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
Nine Months Ended September 30, 1995 1994 OPERATING ACTIVITIES Net income $ 912 $ 877 Adjustments Depreciation and amortization 1,499 1,406 Gains on sales of rural telephone exchanges (112) (48) Deferred income taxes and amortization of investment tax credits 120 135 Changes in operating assets and liabilities: Restructuring payments (253) (156) Postretirement medical and life costs, net of cash fundings (159) ( 213) Accounts receivable (188) (123) Materials, supplies and other (49) (31) Accounts payable and accrued liabilities (48) 15 Other - net 17 (23) Cash provided by operating activities 1,739 1,839 INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,696) (1,732) Proceeds from disposals of property, plant and equipment 160 48 Cash (used for) investing activities (1,536) (1,684) FINANCING ACTIVITIES Net proceeds from issuance of short-term debt 406 286 Proceeds from issuance of long-term debt 495 251 Repayments of long-term debt (248) (263) Dividends paid (905) (894) Equity infusions from parent - 451 Cash (used for) financing activities (252) (169) CASH AND CASH EQUIVALENTS Decrease (49) (14) Beginning balance 114 67 Ending balance $ 65 $ 53 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
Nine Months Ended September 30, 1995 1994 COMMON SHARES Balance at beginning of period $ 7,286 $ 6,742 Equity infusions from parent - 451 Other - - Balance at end of period 7,286 7,193 CUMULATIVE DEFICIT Balance at beginning of period (3,602) (3,602) Net income 912 877 Dividends declared (912) (877) Balance at end of period (3,602) (3,602) TOTAL SHAREOWNER'S EQUITY $ 3,684 $ 3,591 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"), a wholly owned subsidiary of U S WEST Inc., 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 Plan On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado corporation ("U S WEST Colorado") voted to approve a proposal (the "Recapitalization Plan") adopted by the Board of Directors to reincorporate from Colorado to Delaware and create two classes of common stock that are intended to reflect separately the performance of the communications and multimedia businesses. Under the Recapitalization Plan, shareholders approved an Agreement and Plan of Merger between U S WEST Colorado and U S WEST, Inc., a Delaware corporation ("U S WEST"), pursuant to which U S WEST continues as the surviving corporation. In connection with the merger, the Certificate of Incorporation of U S WEST has been amended and restated to, among other things, designate two classes of common stock of U S WEST, one class of which is authorized as U S WEST Communications Group Common Stock ("Communications Stock"), and the other class is authorized as U S WEST Media Group Common Stock ("Media Stock"). Effective November 1, 1995, each share of common stock of U S WEST Colorado was converted into one share 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 Plan (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 the Company and certain other subsidiaries of U S WEST (the "Communications Group") and the 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 Communications Federal Services, Inc., U S WEST Advanced Technologies, Inc. and U S WEST Business Resources, Inc. U S WEST Communications comprised approximately 98 percent of the revenues and assets of the Communications Group in 1994. The Media Group is comprised of U S WEST Marketing Resources Group, Inc., a publisher of White and Yellow Pages telephone directories, and provider of multimedia content and services, U S WEST NewVector Group, Inc., which provides communications and information products and services over wireless networks, U S WEST Multimedia Communications, Inc., which owns domestic cable television operations and investments, and U S WEST International Holdings, Inc., which primarily owns investments in international cable and telecommunications, wireless communications and directory publishing operations. Dividends to be paid to the holders of Communications Stock will initially be $0.535 per share per quarter. Dividends on the Communications Stock will be paid at the discretion of the Board of Directors of U S WEST, based primarily upon the financial condition, results of operations and business requirements of the Communications Group and U S WEST as a whole. With regard to the Media Stock, the Board of Directors of U S WEST currently intends to retain future earnings, if any, for the development of the Media Group's businesses and does not anticipate paying dividends on the Media Stock in the foreseeable future. Form 10-Q - Part I U S WEST Communications, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) 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 two exceptions to the rule against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2) misconduct. The PSC's initial order denied a refund request from interexchange carriers and other parties related to the Tax Reform Act of 1986. This 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. D. Debt During third quarter 1995, the Company refinanced $410 of commercial paper to take advantage of favorable long-term interest rates. In addition to the commercial paper, the Company refinanced $90 of long term debt. Expenses associated with the refinancing of long-term debt resulted in an extraordinary charge to income of $5, net of an income tax benefit of $3. Subsequent to third quarter 1995, the Company refinanced $750 of commercial paper. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Results of Operations Comparative details of operations for the nine months ended September 30 follow:
Nine Months Ended September 30, 1995 1994 Operating revenues $6,909 $6,728 Operating expenses Employee-related expenses 2,277 2,207 Other operating expenses 1,159 1,199 Taxes other than income taxes 299 294 Depreciation and amortization 1,499 1,406 Interest expense 284 243 Gains on sales of rural telephone exchanges 112 48 Other expense - net 43 23 Income before income taxes and extraordinary item 1,460 1,404 Provision for income taxes 543 527 Income before extraordinary item 917 877 Extraordinary item (5) - Net income $ 912 $ 877
For the nine months ended September 30, 1995, the Company's net income was $912, a $35, or 4.0 percent, increase compared with the same period in 1994. Excluding gains on the sales of certain rural telephone exchanges of $70 and $31 year-to-date 1995 and 1994, respectively, and the extraordinary item in 1995 of $5, net income increased $1, or .1 percent, as compared with the same period in 1994. Increased income 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 offsetting these items were an increase in operating costs incurred to address current customer service issues, increased depreciation expense and higher interest expense. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Results of Operations (continued) Increased demand for the Company's services resulted in growth in earnings before interest, taxes, depreciation, amortization and other ("EBITDA") of 4.8 percent for the nine months ended September 30, 1995, as compared with the same period in 1994. The Company believes EBITDA is an important indicator of the operational strength 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. Sales & Other Revenues An analysis of changes in the Company's revenues follows:
Nine Nine Mos. Mos. Ended Ended Lower Increase Increase Sept. 30 Sept. 30 Price (Higher) (Decrease) (Decrease) 1995 1994 Changes Refunds Growth Other Dollars Percentage Local service $ 3,231 $ 3,035 $ 9 $ (7) $ 194 $ - $ 196 6.5 Interstate access 1,774 1,691 (27) (15) 126 (1) 83 4.9 Intrastate access 558 541 (24) 7 26 8 17 3.1 Long-distance network 891 1,019 (20) - (42) (66) (128) (12.6) Other services 455 442 - - - 13 13 2.9 Total revenues $ 6,909 $ 6,728 $ (62) $ (15) $ 304 $ (46) 181 2.7
Total operating revenues were $6,909, a $181 or 2.7 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 495,000 access lines, or 3.5 percent, during the last 12 months. Access line growth was 4.2 percent as adjusted for sales of approximately 103,000 rural telephone access lines during the last 12 months. Higher revenues from interstate access services resulted from an increase of 9.4 percent in interstate billed access minutes of use in the first nine months of 1995 as compared with the same period of 1994. The increased volume of business more than offset the effects of price reductions and refunds. Intrastate access revenues increased primarily due to the impacts of multiple toll carrier plans. Multiple toll carrier plans ("MTCP") implemented in Oregon and Washington in May and July 1994, respectively, allow independent telephone companies to act as toll carriers. The impact on the Company for the nine months ended September 30, 1995 was long-distance revenue losses of $62, partially offset by increases in intrastate access revenue of $12, and decreases in other operating expenses (i.e. access expense) of $42. These regulatory arrangements did not impact third quarter results. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Sales & Other Revenues (continued) Adjusted for the effects of MTCP, long-distance network revenues decreased by 6.5 percent for the nine months ended September 30, 1995, compared with the same period last year. The decrease was primarily due to the effects of competition and rate reductions. Revenues from other services increased primarily as a result of continued market penetration in voice messaging services and increases in inside wire services, partially offset by decreases in billing and collection revenues. Costs and Expenses
Nine Mos. Nine Mos. Ended Ended Increase Increase September 30, September 30, (Decrease) (Decrease) 1995 1994 Dollars Percentage Employee-related expenses $ 2,277 $ 2,207 $ 70 3.2 Other operating expenses 1,159 1,199 (40) (3.3) Taxes other than income taxes 299 294 5 1.7 Depreciation and amortization 1,499 1,406 93 6.6 Interest expense 284 243 41 16.9 Other expense-net 43 23 20 87.0 Provision for income taxes 543 527 16 3.0
Higher employee-related expenses are primarily the result of initiatives to improve customer service and address business growth. Customer service has been impacted by temporary declines in productivity partly caused by restructuring efforts. Higher levels of employee-related expenses are expected to continue throughout the remainder of the year. Overtime payments and contract labor increased employee-related expenses by approximately $149 for the first nine months of 1995 as compared to the first nine months of 1994. Partially offsetting these increases was a reduction in the accrual for postretirement benefits, certain benefit cost true-ups and lower travel and conference expenses. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Costs and Expenses (continued) Since December 1993, the Company has separated 4,299 employees under the Restructuring Plan. (See "Restructuring Charges.") These separations have been partially offset by the addition of approximately 2,600 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 cable and data transmission services. Other operating expenses decreased primarily due to the effect of the multiple toll carrier plans. Increased depreciation and amortization expense was attributable to the effects of a higher depreciable asset base. Interest expense increased primarily as a result of an increased use of debt financing. Restructuring The Company's 1993 results reflected an $880 restructuring charge (pretax). The related restructuring plan (the "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 new systems and enhanced system functionality are being developed 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 its 560 customer service centers into 26 centers in 10 cities and reducing its total 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. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued 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 $ 75 $ 96 $ 65 $ 255 Systems development 118 145 97 - 360 Real estate 50 71 9 - 130 Relocation 21 23 31 - 75 Retraining and other 8 27 15 10 60 Total cash expenditures 216 341 248 75 880 Remaining 1991 plan employee 56 - - - 56 costs (1) Total $ 272 $ 341 $ 248 $ 75 $ 936 (1) Employee separation costs, including the balance of the 1991 restructuring reserve at December 31, 1993, aggregate $311.
Employee separation costs include severance payments, health-care coverage and postemployment education benefits. System 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. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued 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 1,061 497 612 1,090 521 2,720 Occupational 1,887 1,683 1,638 2,310 1,649 7,280 Total 2,948 2,180 2,250 3,400 2,170 10,000 Estiimate Actual Estimate Estimate Estimate 1994 1994 (1) 1995 1996 1997 Total Employee separation amounts Managerial $ 22 $ 5 $ 21 $ 40 $ 19 $ 85 Occupational 15 14 54 56 46 170 Total 37 19 75 96 65 255 Remaining 1991 reserve 56 56 - - - 56 Total $ 93 $ 75 $ 75 $ 96 $ 65 $ 311 (1) Includes the remaining employees and the separation amounts associated with the balance of the 1991 restructuring reserve at December 31, 1993
Compared with the original estimates, employee reductions and separation amounts shown above have been reduced by 1,219 and $27 in 1995, and increased by 800 and $10 in 1996, and 2,170 and $65 in 1997. Systems Development. The 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 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. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued 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 systems 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
The Company continues to review its estimates of systems expenditures under the Restructuring Plan. Material revisions in total estimated expenditures are not anticipated. 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. Other systems expenses are for administrative (i.e. general purpose) systems which 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. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Progress Under the Restructuring Plan: Following is a reconciliation of restructuring reserve activity since December 1993.
First Change in Nine Relocation/ Reserve Reserve Months Employee Reserve Balance Balance 1994 Balance 1995 Separation 9/30/95 12/31/93 Activity 12/31/94 Activity Estimates Employee separations Managerial $ 75 $ 5 $ 70 $ 19 $ 7 $ 58 Occupational 150 14 136 48 23 111 Total separations 225 19 206 67 30 169 Systems Development Service delivery 73 21 52 13 39 Service assurance 64 12 52 16 36 Capacity provisioning 179 57 122 65 57 All other 44 28 16 3 13 Total systems 360 118 242 97 145 Real estate 130 50 80 58 22 Relocation 105 21 84 13 (30) 41 Retraining and other 60 8 52 18 34 Total 880 216 664 253 411 Remaining 1991 Plan expenditures 56 56 0 - - - Total $ 936 $ 272 $ 664 $ 253 $ - $ 411
Cumulative First Nine Months Separations 1994 Separations 1995 Separations At September 30,1995 Employee separations Managerial 497 581 1,078 Occupational 1,683 1,538 3,221 Total 2,180 2,119 4,299
Recapitalization Plan On October 31, 1995, the shareholders of U S WEST, Inc., a Colorado corporation and parent of the Company, voted to approve a proposal by the Board of Directors to reincorporate 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 Plan see Footnote B in the Notes to the Consolidated Financial Statements. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) , continued Broadband In 1993, the Company announced its intention to build an interactive multimedia telecommunications network (the "Broadband Network") capable of providing voice, data and video services to customers within the region. Limited testing of the Broadband Network began in Omaha, Nebraska in December 1994. A market trial in the Omaha area that will cover up to 50,000 homes commenced in August 1995. 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, U S WEST Communications withdrew the Broadband Applications. The Company is evaluating the relative costs of alternative video technologies, as well as the near-term feasibility of interactive services. In order to satisfy anticipated demand for combined video and telephony services on a cost-effective basis, the Company's strategy may include selective investments in wireless cable technologies. Regulatory On October 11, 1995, the U.S. Justice Department recommended that U S WEST be allowed to offer long-distance telephone service outside its 14-state region. The agreement, among U S WEST, the Justice Department and AT&T, must be approved by U. S. District Court Judge Harold Greene, who oversees the consent decree that broke up AT&T in 1984, and barred the Regional Holding Companies from a number of businesses, including interLATA long distance. If approved by Judge Greene, U S WEST will be able to offer long-distance service outside U S WEST's local service territory. Such an approval would mean that U S WEST would be the first Regional Holding Company allowed to offer interLATA long-distance service outside its region. Union Contract On October 2, 1995, U S WEST union members approved a new three-year contract with the Company. The contract provides for salary increases of 10.6 percent over three years effective January 1 of each year. The contract also provides employees with a lump sum payment of $1,500 in lieu of wage increases becoming effective in August each year. This lump sum payment will be recognized over the life of the contract. The agreement covers 33,000 Communications Workers of America members who work for U S WEST Communications and U S WEST Business Resources. Form 10-Q - Part I U S WEST Communications, Inc. Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued 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 interexchange carriers and other parties related 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 third quarter (i) report dated September 14, 1995, concerning U S WEST Communications, Inc.'s form of 6-5/8% Notes due 2005 and form of 7-1/4% Debentures due 2025. 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. U S WEST Communications, Inc. /s/ John W. Putnam By: __________________________________ John W. Putnam Vice President-Controller November 13, 1995 EX-12 2 EXHIBIT 12 EXHIBIT 12 U S WEST Communications, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Quarter Ended Ended 9/30/95 9/30/94 - ------------------------------------------- ------- ------- Income before income taxes $ 478 $ 457 Interest expense (net of amounts capitalized) 98 82 Interest factor on rentals (1/3) 13 16 -------- -------- Earnings $ 589 $ 555 Interest expense 109 89 Interest factor on rentals (1/3) 13 16 -------- -------- Fixed charges $ 122 $ 105 Ratio of earnings to fixed charges 4.83 5.29 - ------------------------------------------- -------- -------- Year-to- Year-to- date date 9/30/95 9/30/94 - -------------------------------------------- ------- ------- Income before income taxes $ 1,461 $ 1,404 Interest expense (net of amounts capitalized) 284 243 Interest factor on rentals (1/3) 44 52 -------- -------- Earnings $ 1,789 $ 1,699 Interest expense 314 263 Interest factor on rentals (1/3) 44 52 -------- -------- Fixed charges $ 358 $ 315 Ratio of earnings to fixed charges 5.00 5.39 ------------------------------------------- -------- --------
EX-27 3 FINANCIAL DATA SCHEDULE
5 0000068622 U S WEST COMMUNICATIONS, INC. 1,000,000 3-MOS 9-MOS DEC-31-1995 DEC-31-1995 SEP-30-1995 SEP-30-1995 65 65 0 0 1,638 1,638 0 0 160 160 2,175 2,175 30,498 30,498 17,289 17,289 16,136 16,136 4,392 4,392 4,465 4,465 7,286 7,286 0 0 0 0 (3,602) (3,602) 16,136 16,136 2,334 6,909 2,334 6,909 0 0 0 0 1,782 5,234 0 0 98 284 478 1,460 173 543 305 917 0 0 (5) (5) 0 0 300 912 0 0 0 0
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