-----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, OItRW4AkwsxvSehCs+bPh+wOadlA59ufGUeAG+UZkIneLR+Z/70Xo1c8wJ0EBX9Q lKH3yIwfVJsboe01dR6Bkg== 0000732718-95-000024.txt : 19951119 0000732718-95-000024.hdr.sgml : 19951119 ACCESSION NUMBER: 0000732718-95-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951113 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US WEST INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840926774 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08611 FILM NUMBER: 95590592 BUSINESS ADDRESS: STREET 1: 7800 E ORCHARD RD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037936629 MAIL ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-Q 1 3RD QUARTER 34 _____________________________________________________________________________ __________________________________________________________________ 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 1-8611 U S WEST, Inc. A Delaware Corporation IRS Employer No. 84-0926774 7800 East Orchard Road, Englewood, Colorado 80111-2526 Telephone Number 303-793-6500 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 __ The number of shares outstanding of U S WEST, Inc.'s common stock (net of shares held in treasury), as of November 1, 1995, was: U S WEST Communications Group Common Stock - 481,173,977 shares; U S WEST Media Group Common stock - 481,163,840 shares. U S WEST, Inc. Form 10-Q TABLE OF CONTENTS PART I - FINANCIAL INFORMATION
Item Page 1. U S WEST, Inc. Financial Information Consolidated Statements of Income - Three and nine months ended September 30, 1995 and 1994 3 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 Shareowners' Equity - Nine months ended September 30, 1995 and 1994 7 Notes to Consolidated Financial Statements 8 2. U S WEST, Inc. Management's Discussion and Analysis of Financial 15 Condition and Results of Operations 1. Communications Group Financial Information Combined Statements of Income - Three and nine months ended September 30, 1995 and 1994 31 Combined Balance Sheets - September 30, 1995 and December 31, 1994 32 Combined Statements of Cash Flows - Nine months ended September 30, 1995 and 1994 34 Notes to Combined Financial Statements 35 2. Communications Group Management's Discussion and Analysis of Financial Condition and Results of Operations 39 1. Media Group Financial Information Combined Statements of Income - Three and nine months ended September 30, 1995 and 1994 50 Combined Balance Sheets - September 30, 1995 and December 31, 1994 51 Combined Statements of Cash Flows - Nine months ended September 30, 1995 and 1994 53 Notes to Combined Financial Statements 54 2. Media Group Management's Discussion and Analysis of Financial Condition and Results of Operations 61 PART II - OTHER INFORMATION 1. Legal Proceedings 74 6. Exhibits and Reports on Form 8-K 74
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF INCOME U S WEST, Inc. (Unaudited) 3 Mos 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, Dollars in million (except per share amounts) 1995 1994 1995 1994 Sales and other revenues $ 2,964 $ 2,765 $ 8,686 $ 8,114 Employee-related expenses 1,007 968 2,982 2,822 Other operating expenses 592 532 1,661 1,527 Taxes other than income taxes 103 109 330 322 Depreciation and amortization 573 509 1,695 1,519 Interest expense 137 104 404 323 Equity losses in unconsolidated ventures 38 26 128 83 Gains on asset sales: Rural telephone exchanges 34 - 112 48 Paging assets - - - 68 Guaranteed minority interest expense 2 - 2 - Other income (expense) - net (8) (3) (6) 11 Income before income taxes and extraordinary item 538 514 1,590 1,645 Provision for income taxes 213 196 617 628 Income before extraordinary item 325 318 973 1,017 Extraordinary item: Early extinguishment of debt, net of tax (9) - (9) - NET INCOME 316 318 964 1,017 Preferred dividends 1 - 3 - Earnings available for common stock $ 315 $ 318 $ 961 $ 1,017 Earnings per common share: Income available for common stock before extraordinary item $ 0.69 $ 0.70 $ 2.06 $ 2.25 Extraordinary item (0.02) - (0.02) - EARNINGS PER COMMON SHARE $ 0.67 $ 0.70 $ 2.04 $ 2.25 DIVIDENDS PER COMMON SHARE $ 0.535 $ 0.535 $ 1.605 $ 1.605 AVERAGE COMMON SHARES OUTSTANDING (thousands) 471,229 454,997 470,076 451,037 See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc. (Unaudited) September 30, December 31, Dollars in millions 1995 1994 ASSETS Current assets Cash and cash equivalents $ 108 $ 209 Accounts and notes receivable 1,932 1,693 Inventories and supplies 248 189 Deferred tax asset 339 352 Other 310 323 Total current assets 2,937 2,766 Gross property, plant and equipment 32,278 31,014 Accumulated depreciation 17,936 17,017 Property, plant and equipment - net 14,342 13,997 Investment in Time Warner Entertainment 2,501 2,522 Intangible assets - net 1,824 1,858 Investment in international ventures 1,361 881 Net investment in assets held for sale 418 302 Other assets 1,378 878 Total assets $ 24,761 $ 23,204 See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc. (Unaudited), Continued September 30, December 31, Dollars in millions 1995 1994 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities Short-term debt $ 3,640 $ 2,837 Accounts payable 859 944 Employee compensation 408 367 Dividends payable 253 251 Current portion of restructuring charges 348 337 Other 1,428 1,278 Total current liabilities 6,936 6,014 Long-term debt 5,144 5,101 Postretirement and other postemployment benefit obligations 2,372 2,502 Deferred taxes, credits and other 1,894 2,154 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company guaranteed debentures 600 - Preferred stock subject to mandatory redemption 51 51 Common shareowners' equity: Common shares - no par, 2,000,000,000 authorized, 471,650,698 and 469,343,048 outstanding, respectively 8,161 8,056 Cumulative deficit (223) (458) LESOP guarantee (157) (187) Foreign currency translation adjustments (17) (29) Total common shareowners' equity 7,764 7,382 Total liabilities and common shareowners' equity $ 24,761 $ 23,204 See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) U S WEST, Inc. Dollars in millions Nine Months Ended September 30, 1995 1994 OPERATING ACTIVITIES Net income $ 964 $ 1,017 Adjustments to net income Depreciation and amortization 1,695 1,519 Postretirement medical and life costs, net of cash fundings (86) (13) Gains on asset sales: Rural telephone exchanges (112) (48) Paging assets - (68) Equity losses in unconsolidated ventures 128 83 Deferred income taxes and amortization of investment tax credits 93 192 Changes in operating assets and liabilities: Restructuring payments (268) (167) Accounts and notes receivable (219) (173) Inventories, supplies and other (81) (115) Accounts payable and accrued liabilities 88 108 Other adjustments - net 21 (4) Cash provided by operating activities 2,223 2,331 INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,943) (1,945) Investment in international ventures (576) (214) Proceeds from disposals of property, plant and equipment 166 49 Cash (to) net investment in assets held for sale (108) - Proceeds from sale of paging assets - 143 Other - net (274) (97) Cash (used for) investing activities (2,735) (2,064) FINANCING ACTIVITIES Net proceeds from issuance of short-term debt 688 403 Proceeds from issuance of long-term debt 499 251 Repayments of long-term debt (640) (408) Proceeds from issuance of trust originated preferred securities 581 - Dividends paid on common stock (697) (663) Proceeds from issuance of common stock 43 329 Proceeds from issuance of preferred stock - 50 Purchases of treasury stock (63) - Cash provided by (used for) financing activities 411 (38) Cash (used for) provided by continuing operations (101) 229 Cash to discontinued operations - (59) CASH AND CASH EQUIVALENTS Increase (decrease) (101) 170 Beginning balance 209 128 Ending balance $ 108 $ 298 See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (Unaudited) U S WEST, Inc. Dollars in millions Nine Months Ended September 30, 1995 1994 COMMON SHARES Balance at beginning of period $ 8,056 $ 6,996 Issuance of common stock 103 179 Settlement of litigation - 210 Benefit trust contribution (OPEB) 61 185 Purchase of treasury stock (63) - Other 4 (2) Balance at end of period 8,161 7,568 CUMULATIVE DEFICIT Balance at beginning of period (458) (857) Net income 964 1,017 Dividends declared (760) (730) Market value adjustment for debt securities 31 (49) Balance at end of period (223) (619) LESOP GUARANTEE Balance at beginning of period (187) (243) Activity 30 27 Balance at end of period (157) (216) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance at beginning of period (29) (35) Activity 12 26 Balance at end of period (17) (9) TOTAL COMMON SHAREOWNERS' EQUITY $ 7,764 $ 6,724 COMMON SHARES AUTHORIZED AT SEPTEMBER 30, (Thousands) 2,000,000 2,000,000 COMMON SHARES OUTSTANDING (Thousands) Balance at beginning of period 469,343 441,140 Issuance of common stock 2,513 4,376 Settlement of litigation - 5,506 Benefit trust contribution (OPEB) 1,500 4,600 Purchase of treasury stock (1,705) - Balance at end of period 471,651 455,622 See Notes to Consolidated Financial Statements.
Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) A. 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" or "Company"), pursuant to which U S WEST continues as the surviving corporation. In connection with the merger, the Certificate of Incorporation of U S WEST has been amended and restated to, 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. 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, Inc. ("U S WEST Communications") and certain other subsidiaries of the Company (the "Communications Group") and the Company'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. Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) 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 the Company 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. B. Summary of Significant Accounting Policies Consolidated Financial Statements The Consolidated Financial Statements have been prepared by U S WEST 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 proxy statement mailed to all shareholders on September 5, 1995. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) C. Investment in Time Warner Entertainment On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority capital and residual equity interests in Time Warner Entertainment Company L.P. ("TWE"). Summarized operating results for TWE follow:
Three Mos. Three Mos. Nine Mos. Nine Mos. Dollars in millions Ended Ended Ended Ended Sept. 30, Sept. 30 Sept. 30 Sept. 30, 1995 1994 1995 1994 Revenues $ 2,324 $ 2,203 $ 6,762 $ 6,177 Operating expenses* 2,056 1,968 6,037 5,512 Interest and other - net** 195 170 556 480 Income before income taxes and extraordinary item $ 73 $ 65 $ 169 $ 185 Income before extraordinary item 47 41 107 145 Extraordinary item, net of tax (24) - (24) - Net income $ 23 $ 41 $ 83 $ 145 * Includes 1995 and 1994 depreciation and amortization of $260 and $254, and $761 and $707 for the three and nine months ended, respectively. ** Includes 1995 and 1994 corporate services of $17 and $15, and $47 and $45 for the three months and nine months ended, respectively.
The Company accounts for its investment in TWE under the equity method of accounting. U S WEST's recorded share of TWE operating results represents allocated TWE net income or loss adjusted for the amortization of the excess of fair market value over the book value of the partnership net assets. The Company's recorded share of TWE operating results before extraordinary item was ($3) and $1, and ($14) and ($5) for the three months and nine months ended September 30, 1995 and 1994, respectively. In addition, TWE recorded an extraordinary loss for the early extinguishment of debt in third quarter 1995. The Media Group's portion of this extraordinary loss was $4, net of an income tax benefit of $2. Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) D. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company Guaranteed Debentures On September 11, 1995, U S WEST Financing I, a wholly-owned subsidiary of U S WEST ("U S WEST Financing"), issued $600 of 7.96 % Trust Originated Preferred Securities (the "Preferred Securities") and $19 of common securities. U S WEST holds all of the outstanding common securities of U S WEST Financing. U S WEST Financing used the proceeds from such issuance to purchase from U S WEST Capital Funding, Inc., a wholly-owned subsidiary of U S WEST ("Capital Funding"), $619 principal amount of Capital Funding's 7.96% Subordinated Deferrable Interest Notes due 2025 (the "Subordinated Debt Securities"), the obligations under which are guaranteed by U S WEST. The sole assets of U S WEST Financing are and will be the Subordinated Debt Securities. In addition, U S WEST has guaranteed the payment of interest and redemption amounts to holders of Preferred Securities when U S WEST Financing has funds available for such payments as well as Capital Funding's undertaking to pay all of U S WEST Financing's costs, expenses and other obligations. The interest and other payment dates on the Subordinated Debt Securities correspond to the distribution and other payment dates on the Preferred Securities. Under certain circumstances, the Subordinated Debt Securities may be distributed to the holders of Preferred Securities and common securities in liquidation of U S WEST Financing. The Subordinated Debt Securities are redeemable in whole or in part by Capital Funding at any time on or after September 11, 2000, at a redemption price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest. If Capital Funding redeems the Subordinated Debt Securities, U S WEST Financing is required to redeem the Preferred Securities concurrently at $25.00 per share plus accrued and unpaid distributions. As of September 30, 1995, 24,000,000 Preferred Securities were outstanding. E. Debt During third quarter 1995, U S WEST Communications refinanced $410 of commercial paper to take advantage of favorable long-term interest rates. In addition to the commercial paper, U S WEST Communications 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 a tax benefit of $3. Subsequent to third quarter 1995, U S WEST refinanced $1.3 billion of commercial paper, including $750 at U S WEST Communications. Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) F. AirTouch Joint Venture Effective November 1, 1995, AirTouch and the Company have entered into Phase I of their joint venture. In accordance with the closing agreement, during Phase I the Media Group Combined Financial Statements will continue to reflect the Company's existing ownership of the domestic cellular operations. The newly formed Wireless Management Company will provide centralized services to both companies on a contract basis. In Phase II, AirTouch and the Company will contribute their domestic cellular assets to the newly formed venture. This phase will occur within four years, upon obtaining interim regulatory relief, or earlier, at AirTouch's option. G. Contingencies At U S WEST Communications there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. In one such instance, the Utah Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the PSC for 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 to U S WEST Communications is $0 to $140. On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court to prevent the proposed merger of Time Warner and Turner Broadcasting. The Time Warner Entertainment partnership is, among other things, in competition with Turner Broadcasting, and the Company believes that ownership of Turner by Time Warner would constitute breach of contract and fiduciary duties by Time Warner. Time Warner filed a countersuit against the Company on October 11, 1995, alleging misrepresentation, breach of contract and other misconduct on the part of the Company. Time Warner's countersuit seeks a reformation of the Time Warner Entertainment partnership agreement, an order that enjoins U S WEST from breaching the partnership agreement, and unspecified compensatory damages. U S WEST has denied each of the claims in Time Warner's countersuit. A trial date of March 16,1996 has been set. Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) H. Investment in International Ventures The Company's investments in international ventures increased $480 from December 31, 1994. The increase primarily consists of a 20 percent investment in Malaysia to provide local wireline and wireless communications, the acquisition of a 50 percent interest in cable television systems in the Netherlands and the acquisition of a 29 percent interest in cable television systems in the Czech Republic. On October 2, 1995, TeleWest Communications' acquisition and share exchange with SBC CableComms (UK) became effective. U S WEST and Tele-Communications, Inc., the major shareholders, each will own 26.7 percent of the combined company. In fourth quarter 1995, the Company will recognize an after tax gain of approximately $100 in conjunction with the merger. I. Net Investment in Assets Held for Sale Effective January 1, 1995, the capital assets segment has been accounted for in accordance with Staff Accounting Bulletin No. 93, issued by the Securities Exchange Commission, which requires discontinued operations not disposed of within one year of the measurement date to be accounted for prospectively in continuing operations as "net investment in assets held for sale." The net realizable value of the assets will be reevaluated on an ongoing basis with adjustments to the existing reserve, if any, being charged to continuing operations. Prior to January 1, 1995, the entire capital assets segment was accounted for as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. Sales and other revenues of net investment in assets held for sale were $30 and $64, and $137 and $443 for the three months and nine months ended September 30, 1995 and 1994, respectively. Included are the sale of properties for approximately $52 and $253 for the nine months ended September 30, 1995 and 1994, respectively. The sales were in line with Company estimates. Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited)
The components of net investment in assets held for sale follow: September 30, December 31, Dollars in millions 1995 1994 ASSETS Cash $ 16 $ 7 Finance receivables - net 1,005 1,073 Investment in real estate - net of valuation allowance 420 465 Bonds, at market value 165 155 Investment in FSA 374 329 Other assets 198 362 Total assets 2,178 2,391 LIABILITIES Debt 922 1,283 Deferred income taxes 700 693 Accounts payable, accrued liabilities and other 128 103 Minority interests 10 10 Total liabilities 1,760 2,089 Net investment in assets held for sale $ 418 $ 302
Selected financial data for U S WEST Financial Services follows: 3 Months 3 Months 9 Months 9 Months Ended Ended Ended Ended Sept. 30 Sept. 30, Sept. 30, Sept. 30, Dollars in millions 1995 1994 1995 1994 Operating revenues $ 9 $ 15 $ 30 $ 45
September 30, December 31, Dollars in millions 1995 1994 Net finance receivables $ 911 $ 981 Total assets 1,223 1,331 Total debt 419 533 Total liabilities 1,153 1,282 Shareowner's equity 70 49
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts) Results of Operations Comparative details of income before extraordinary item for three and nine months ended September 30 follow:
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent Dollars in millions 1995 1994 Change 1995 1994 Change Communications Group $ 292 $ 267 9.4 $ 900 $ 851 5.8 Media Group: Consolidated: Multimedia content and services 63 63 - 179 190 (5.8) Wireless communications 24 11 - 56 62 (9.7) Cable and telecommunications (1) - - (7) - - Unconsolidated equity investments: Time Warner Entertainment Company, L.P. (3) (2) (50.0) (16) (13) (23.1) TeleWest Communications plc (11) (10) (10.0) (23) (24) 4.2 Mercury One-2-One (18) (16) (12.5) (57) (40) (42.5) Other (21) 5 - (59) (9) - Total Media Group 33 51 (35.3) 73 166 (56.0) Income before extraordinary item $ 325 $ 318 2.2 $ 973 $ 1,017 (4.3) Earnings per common share before extraordinary item $ 0.69 $ 0.70 (1.4) $ 2.06 $ 2.25 (8.4)
Results of Operations - Third Quarter U S WEST's third quarter 1995 income before extraordinary item was $314, a decrease of $4, or 1.3 percent, over third quarter 1994, excluding a gain of $21 on the sale of rural telephone exchanges and expenses of $10 associated with the Recapitalization Plan, all in third quarter 1995. Third quarter 1995 earnings per common share before extraordinary item were $0.67 compared with $0.70 in 1994, excluding the effects of the gain on the sale of rural telephone exchanges ($0.04 per share) and expenses associated with the Recapitalization Plan ($0.02 per share). Earnings per common share reflect approximately 16 million additional average shares outstanding, of which 12.8 million were issued in connection with the acquisition of cable systems in the Atlanta, Georgia metropolitan area (the "Atlanta Systems"). Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued The Communications Group's third quarter income before extraordinary item was $276, an increase of $9, or 3.4 percent, compared with third quarter 1994, excluding the gain on sale of rural telephone exchanges and expenses of $5 associated with the Recapitalization Plan. Increased income at the Communications Group is attributable to higher demand for services, access line growth and lower employee benefit costs, including the effects of certain benefit cost true-ups. Partially offsetting these items was an increase in operating costs incurred to address current customer service issues, increased depreciation expense, and higher interest expense. The Media Group's third quarter income before extraordinary item was $38, a decrease of $13, or 25 percent, compared with third quarter 1994, excluding expenses of $5 associated with the Recapitalization Plan. The decline is primarily due to increased interest expense associated with the acquisition of the Atlanta Systems and the expansion of international investments, partially offset by improvement in the wireless communications business. The amortization of goodwill associated with the Atlanta Systems acquisition also caused a significant increase in the effective tax rate which contributed to lower earnings. Results of Operations - Nine Months For the nine months ended September 30, 1995, income before extraordinary item was $913, a decrease of $32, or 3.4 percent, excluding gains on the sales of rural telephone exchanges of $70 ($0.14 per share) and $31 ($0.07 per share) in 1995 and 1994, respectively, expenses of $10 ($0.02 per share) associated with the Recapitalization Plan in 1995, and a gain of $41 ($0.09 per share) for the sale of paging operations in 1994. Earnings per share were $1.94 for the nine months ended September 30, 1995, as compared with $2.09 in 1994, excluding the one-time items. The Communications Group's income before extraordinary item was $835, an increase of $15, or 1.8 percent, as compared with the nine months ended September 30, 1994, excluding the gains on the sales of rural telephone exchanges and expenses associated with the Recapitalization Plan. The Media Group's income before extraordinary item during the first nine months of 1995 was $78, a decrease of $47, or 38 percent, as compared with the same period 1994, excluding the expenses associated with the Recapitalization Plan in 1995 and the 1994 gain on the sale of paging operations. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Earnings Before Interest, Taxes, Depreciation, Amortization and Other ("EBITDA") Increased demand for the Communications Group's services resulted in growth in EBITDA of 5.8 and 4.8 percent for third quarter and nine months ended September 30, 1995, respectively, as compared with the same periods in 1994. The Media Group's EBITDA increased by approximately 30 percent, to $207, for third quarter 1995, primarily due to improvement in the wireless communications business and acquisition of the Atlanta Systems. Excluding the effects of the acquisition, EBITDA increased by approximately 14 percent. For the nine months ended September 30, 1995, EBITDA increased by approximately 29 percent, to $552, primarily due to improvement in the wireless communications business and acquisition of the Atlanta Systems. Excluding the effects of the acquisition and the paging sale, EBITDA increased by approximately 15 percent. The Company believes EBITDA is an important indicator of the operational strength of its businesses. EBITDA, however, should not be considered as an alternative to operating or net income as an indicator of performance or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. Sales and Other Revenues
An analysis of the change in U S WEST's consolidated sales and other revenues follows: 3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent Dollars in millions 1995 1994 Change 1995 1994 Change Communications Group $ 2,389 $ 2,316 3.2 $ 7,045 $ 6,850 2.8 Media Group 604 482 25.3 1,725 1,359 26.9 Intergroup eliminations (29) (33) (12.1) (84) (95) (11.6) Total $ 2,964 $ 2,765 7.2 $ 8,686 $ 8,114 7.0
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Communications Group Revenue An analysis of changes in the Communications Group's revenues follows:
Lower Increase Increase Price (Higher) (Decrease) (Decrease) Dollars in millions 1995 1994 Changes Refunds Demand Other Dollars Percentage Local service Third quarter $1,105 $1,034 $ 5 ($7) $ 73 $ - $ 71 6.9 Nine months 3,231 3,035 9 (7) 194 - 196 6.5 Interstate access Third quarter 594 573 (9) (5) 36 (1) 21 3.7 Nine months 1,774 1,691 (27) (15) 126 (1) 83 4.9 Intrastate access Third quarter 186 188 (12) 4 6 - (2) (1.1) Nine months 558 541 (24) 7 26 8 17 3.1 Long-distance network Third quarter 298 323 (5) - (14) (6) (25) (7.7) Nine months 891 1,019 (20) - (42) (66) (128) (12.6) Other services Third quarter 206 198 8 8 4.0 Nine months 591 564 27 27 4.8 Total Third quarter 2,389 2,316 (21) (8) 101 1 73 3.2 Nine months $7,045 $6,850 ($62) ($15) $ 304 ($32) $ 195 2.8
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 increases of 10.0 and 9.4 percent in interstate billed access minutes of use for the three and nine months ended September 30, 1995, respectively, as compared with the same periods in 1994. The increased volume of business more than offset the effects of price reductions and refunds. Intrastate access revenues decreased for the three months ended September 30, 1995, compared with the same period in 1994, primarily due to the effects of price reductions, partially offset by higher demand. Intrastate access revenues increased for the nine months ended September 30, 1995, compared with 1994, primarily due to the impacts of multiple toll carrier plans. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued 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 Communications Group 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. Long-distance network revenues decreased by 7.7 and 12.6 percent for the three months and nine months ended September 30, 1995, respectively, compared with the same periods in 1994, primarily due to the effects of competition and price reductions. Adjusted for the effects of MTCP, long-distance network revenues decreased by 6.5 percent for the nine months ended September 30, 1995, as compared with the same period last year. Revenues from other services increased primarily as a result of continued market penetration in voice messaging services, increases in inside wire services, sales of customer premise equipment and wire installation projects, partially offset by decreases in billing and collection revenues. Media Group Revenue An analysis of the Media Group's revenues follows:
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept 30, Sept. 30, Percent Sept 30, Sept 30, Percent Dollars in millions 1995 1994 Change 1995 1994 Change Multimedia content and services $ 292 $ 277 5.4 $ 856 $ 774 10.6 Wireless communications 246 198 24.2 676 563 20.1 Cable and telecommunications 56 - - 165 - - Other 10 7 42.9 28 22 27.3 Total Media Group $ 604 $ 482 25.3 $ 1,725 $ 1,359 26.9
Multimedia Content and Services. Revenues related to Yellow Pages directory advertising increased approximately $17, or 7.3 percent, and $50, or 7.1 percent, in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994, due to pricing and an increase in Yellow Pages advertising volume. Product enhancements and the effect of improved marketing programs on business volume also contributed to the increase in revenues. Excluding the sale of certain non-strategic operations, non-Yellow Pages revenues increased by $4 and $8 in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. International directory publishing revenue decreased by $3 in third quarter 1995 as compared with 1994, primarily due to a delay in publication of certain directories. Revenue for the nine months ended September 30, 1995, increased by $30 compared with 1994 due to the May 1994 purchase of Thomson Directories. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Wireless Communications. Cellular service revenues increased by $55, or 32.7 percent, and $162, or 35.7 percent, in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. This increase is due to a 55 percent increase in subscribers during the last twelve months, partially offset by a 13 percent drop in average revenue per subscriber to $62.00 per month for the nine months ended September 30, 1995, as compared with 1994. The increase in subscribers relates to lower costs for cellular phone equipment and enhanced service offerings, which has resulted in additional penetration into the consumer user market. The decrease in average revenue per subscriber is due to continuing competitive pressures and price sensitivity of non-business users. Cellular equipment revenues decreased by $7, or 23.3 percent, and $21, or 25.9 percent, in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. This decrease is primarily due to a decrease in unit sales and price per unit due to the impacts of competition. Paging revenues for the nine months ended September 30, 1995, decreased $28 as compared with 1994 due to the sale of the paging assets in 1994. Cable and Telecommunications. Domestic cable and telecommunications revenues reflect the December 1994 acquisition of the Atlanta Systems. Costs and Expenses
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30 Sept. 30, Percent Sept. 30, Sept. 30, Percent Dollars in millions 1995, 1994 Change 1995 1994 Change Employee-related expenses $ 1,007 $ 968 4.0 $ 2,982 $ 2,822 5.7 Other operating expenses 592 532 11.3 1,661 1,527 8.8 Taxes other than income taxes 103 109 (5.5) 330 322 2.5 Depreciation and amortization 573 509 12.6 1,695 1,519 11.6 Interest expense 137 104 31.7 404 323 25.1 Equity losses in unconsolidated ventures 38 26 46.2 128 83 54.2 Other income (expense) - net (8) (3) - (6) 11 -
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Communications Group employee-related expense increased $7 and $68 for the three and nine months ended September 30, 1995, respectively, compared with the same periods in 1994. Higher employee-related expenses at the Communications Group 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 at the Communications Group are expected to continue through the remainder of the year. Overtime payments and contract labor increased employee-related expenses at the Communications Group by approximately $54 and $149 for third quarter and the first nine months of 1995, respectively, as compared with the same periods in 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. Since December 1993, the Communications Group 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 developing new business opportunities. Benefits from the net work-force reductions at Communications Group 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 at the Communications Group by the end of 1997 to accommodate business growth, including wireless cable and data transmission services. Employee-related expenses also increased due to the 1994 purchases of the Atlanta Systems and Thomson Directories, and growth initiatives in the multimedia content and services segment. The 1994 purchases of the Atlanta Systems and Thomson Directories increased other operating expenses by $24 and $98 for third quarter and nine months ended 1995, respectively, as compared with the same periods in 1994. Additionally, expansion of the cellular customer base increased other operating expenses by $15 and $39 for third quarter and nine months ended 1995, respectively, as compared with the same periods in 1994. Other operating expenses at Communications Group increased by $15 in third quarter 1995 compared with third quarter 1994. The increase is due to several items, including costs associated with the sales of customer premise equipment and wire installation projects. For the nine months ended September 30, 1995, other operating expenses decreased by $24, 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 at the Communications Group and the purchase of the Atlanta Systems. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Equity losses increased by $12 and $45 in third quarter 1995 and the nine months ended September 30, 1995, respectively, as compared with 1994. The increases were primarily due to costs related to the expansion of the customer base at Mercury One-2-One ("One 2 One") in the nine months ended September 30, 1995, as compared with 1994. Interest expense increased primarily as a result of increased debt at the Communications Group, the purchase of the Atlanta Systems, partially financed through the issuance of short-term debt, new international investments and a reclassification of debt from net investment in assets held for sale. Liquidity and Capital Resources Operating Activities Cash provided by operations decreased by $108 compared with the first nine months of 1994. Business growth was more than offset by the combined effects of an increase of $73 in postretirement benefit funding, an increase of $101 in Restructuring Plan expenditures and higher income tax payments, including approximately $60 related to the partial sale of the Company's joint venture interest in TeleWest. Investing Activities Investments in international ventures were $576 in the nine months ended September 30, 1995, as compared with $214 in 1994. Significant 1995 Media Group investing activities include equity investments in Malaysia to provide local wireline and wireless communications, the acquisition of cable television systems in the Netherlands and Czech Republic and additional capital contributions to One 2 One in the U.K. In March 1995, PCS PrimeCo, L.P. ("PCS PrimeCo") was awarded PCS licenses in 11 markets. The Company's share of the cost of the licenses was approximately $268, all of which was funded by June 30, 1995. Under the PCS PrimeCo partnership agreement, the Company is required to fund 25 percent of PCS PrimeCo's operating and capital costs, including licensing costs. The Company anticipates that its total funding obligations to PCS PrimeCo during the next four years will be significant. Cash provided to the net investment in assets held for sale of $108 for the nine months ended September 30, 1995, primarily reflects the payment of debt. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued At September 30, 1995, the Company guaranteed debt associated with its international investments in the principal amount of approximately $165. In the first nine months of 1995, U S WEST received cash proceeds of $162 from the sale of certain rural telephone exchanges as compared with proceeds of $51 in the same period last year. Financing Activities During the first nine months of 1995, debt increased by $846. Communications Group debt increased by $714, primarily related to increased expenditures (including capital related to service quality issues and implementation of the Restructuring Plan) and cash fundings for postretirement medical and life costs. Media Group debt increased by $132 due to new international investments, cash funding of the PCS licenses and a reclassification of debt from net investment in assets held for sale. These increases were largely offset by reductions of debt related to the investment in TWE and the reduction of commercial paper by issuing Preferred Securities. The Company issued $600 of Trust Originated Preferred Securities (the "Preferred Securities") in third quarter 1995. U S WEST has fully and unconditionally guaranteed the payment of interest and redemption amounts to holders of the Preferred Securities. The Preferred Securities are redeemable in whole or in part by U S WEST at any time on or after September 11, 2000, at a redemption price of $25.00 per Preferred Security. As of September 30, 1995, 24,000,000 Preferred Securities were outstanding. Excluding debt included in net investment in assets held for sale, the percentage of debt to total capital at September 30, 1995, was 51.1 percent compared with 51.8 percent at December 31, 1994. Including debt related to net investment in assets held for sale, the percentage of debt to total capital was 53.6 and 55.5 percent at September 30, 1995, and December 31, 1994, respectively. The percentage of debt to total capital has decreased at September 30, 1995 as compared with December 31, 1994 primarily as a result of issuing the Preferred Securities, which are included as a component of total capital. During the first quarter of 1995, U S WEST purchased 1,704,700 shares of U S WEST Common Stock for $63, at an average price of $37.02 per share. The Company from time to time engages in discussions regarding acquisitions. The Company 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 the Company and/or U S WEST Communications. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Restructuring The Company's 1993 results reflected a $1 billion 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, 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 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.
Following is a schedule of the costs included in the Restructuring Plan: Actual Actual Estimate Estimate Estimate Dollars in millions 1993 1994 1995 1996 1997 Total Cash expenditures: Employee separation (1) $ - $ 19 $ 76 $ 99 $ 66 $ 260 Systems development - 127 161 112 - 400 Real estate - 50 71 9 - 130 Relocation - 21 23 31 5 80 Retraining and other - 16 27 15 7 65 Total cash expenditures - 233 358 266 78 935 Asset write-down 65 - - - - 65 Total Plan 65 233 358 266 78 1,000 Remaining 1991 plan employee costs (1) - 56 - - - 56 Total $ 65 $ 289 $ 358 $ 266 $ 78 $1,056 (1) Employee separation costs, including the balance of the 1991 restructuring reserve at December 31, 1993, aggregate $316.
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued 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 $316, compared with $286 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 Employee separations 1994 (1994) (1) 1995 1996 1997 Total 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
Estimate Actual Estimate Estimate Estimate Employee separation amounts 1994 (1994) (1) 1995 1996 1997 Total Managerial $ 25 $ 5 $ 22 $ 43 $ 20 $ 90 Occupational 15 14 54 56 46 170 Total 40 19 76 99 66 260 Remaining 1991 reserve 56 56 - - - 56 Total $ 96 $ 75 $ 76 $ 99 $ 66 $ 316 (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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Compared with the original estimates, employee reduction and separation amounts shown above have been reduced by 1,219 employees and $27, respectively, in 1995, and increased by 800 employees and $12 in 1996, and 2,170 employees and $66 in 1997, respectively. Systems Development. U S WEST Communications' 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 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 28 37 24 23 84 Total $ 125 $ 127 $ 161 $ 112 $ 400
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), 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 at U S WEST Communications 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 at U S WEST Communications in 1994, 1993 and 1992. U S WEST Communications 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 reserve activity since December 1993.
First Change in Nine Relocation/ Reserve Months Employee Reserve Balance 1994 Reserve 1995 Separation Balance 12/31/93 Activity 12/31/94 Activity Estimates 9/30/95 Employee separations Managerial $ 80 $ 5 $ 75 $ 19 $ 7 $ 63 Occupational 150 14 136 48 23 111 Total separations 230 19 211 67 30 174 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 84 37 47 17 30 Total systems 400 127 273 111 162 Real estate 130 50 80 58 22 Relocation 110 21 89 13 (30) 46 Retraining and other 65 16 49 18 31 Total 935 233 702 267 - 435 Remaining 1991 Plan expenditures 56 56 - - - - Total $ 991 $ 289 $ 702 $ 267 $ - $ 435
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued
Cumulative Separations Employee separations 1994 Separations 1995 Separations At September 30,1995 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, 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 Note A in the Notes to the Consolidated Financial Statements. AirTouch Joint Venture Effective November 1, 1995, AirTouch and the Company have entered into Phase I of their joint venture. In accordance with the closing agreement, during Phase I the Media Group Combined Financial Statements will continue to reflect the Company's existing ownership of the domestic cellular operations. The newly formed Wireless Management Company will provide centralized services to both companies on a contract basis. In Phase II, AirTouch and the Company will contribute their domestic cellular assets to the newly formed venture. This phase will occur within four years, upon obtaining interim regulatory relief, or earlier, at AirTouch's option. TeleWest Merger On October 2, 1995, TeleWest Communications' acquisition and share exchange with SBC CableComms (UK) became effective. U S WEST and Tele-Communications, Inc., the major shareholders, will each own 26.7 percent of the combined company. In fourth quarter 1995, the Media Group will recognize an after tax gain of approximately $100 in conjunction with the merger. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Broadband In 1993, U S WEST 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 Communications Group Region. The Company began limited testing of the Broadband Network 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 Communications Group 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 Communications Group'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 beginning in August of 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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued On October 15, 1995, U S WEST Direct and the CWA reached a tentative agreement on their contract, subject to ratification by the CWA membership. This contract would provide for salary increases of 10.5 percent over three years and provides employees with a lump sum payment of $850. Contingencies At U S WEST Communications there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. In one such instance, the Utah Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the PSC for 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 to U S WEST Communications is $0 to $140. On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court to prevent the proposed merger of Time Warner and Turner Broadcasting. The Time Warner Entertainment partnership is, among other things, in competition with Turner Broadcasting, and the Company believes that ownership of Turner by Time Warner would constitute breach of contract and fiduciary duties by Time Warner. Time Warner filed a countersuit against the Company on October 11, 1995, alleging misrepresentation, breach of contract and other misconduct on the part of the Company. Time Warner's countersuit seeks a reformation of the Time Warner Entertainment partnership agreement, an order that enjoins U S WEST from breaching the partnership agreement, and unspecified compensatory damages. U S WEST has denied each of the claims in Time Warner's countersuit. A trial date of March 16,1996 has been set. 57 Form 10-Q - Part I COMBINED STATEMENTS OF INCOME (Unaudited) U S WEST COMMUNICATIONS GROUP
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Dollars in millions Sept. 30, Sept. 30, Sept. 30, Sept. 30, (except per share amounts) 1995 1994 1995 1994 Operating Revenues: Local service $ 1,105 $ 1,034 $ 3,231 $ 3,035 Interstate access 594 573 1,774 1,691 Intrastate access 186 188 558 541 Long-distance network 298 323 891 1,019 Other services 206 198 591 564 Total operating revenues 2,389 2,316 7,045 6,850 Operating Expenses: Employee-related expenses 835 828 2,479 2,411 Other operating expenses 404 389 1,099 1,123 Taxes other than income taxes 95 102 306 301 Depreciation and amortization 513 476 1,514 1,420 Total operating expenses 1,847 1,795 5,398 5,255 Income from operations 542 521 1,647 1,595 Interest expense 108 94 315 277 Gains on sales of rural telephone exchanges 34 - 112 48 Other expense - net 14 5 30 21 Income before income taxes and extraordinary item 454 422 1,414 1,345 Provision for income taxes 162 155 514 494 Income before extraordinary item 292 267 900 851 Extraordinary item: Early extinguishment of debt, net of tax (5) - (5) - NET INCOME $ 287 $ 267 $ 895 $ 851 Pro form earnings per share: Income before extraordinary item $ 0.62 $ 0.59 $ 1.91 $ 1.89 Extraordinary item (0.01) - (0.01) Pro forma earnings per share $ 0.61 $ 0.59 $ 1.90 $ 1.89 PRO FORMA AVERAGE COMMON SHARES OUTSTANDING (thousands) 471,229 454,997 470,076 451,037 See Notes to Combined Financial Statements.
Form 10-Q - Part I COMBINED BALANCE SHEETS (Unaudited) U S WEST COMMUNICATIONS GROUP
September 30, December 31, Dollars in millions 1995 1994 ASSETS Current assets: Cash and cash equivalents $ 81 $ 116 Accounts and notes receivable 1,699 1,500 Inventories and supplies 222 166 Deferred tax asset 294 300 Other 44 56 Total current assets 2,340 2,138 Gross property, plant and equipment 30,675 29,578 Accumulated depreciation 17,395 16,537 Property, plant and equipment - net 13,280 13,041 Other assets 803 765 Total assets $ 16,423 $ 15,944 See Notes to Combined Financial Statements.
Form 10-Q - Part I COMBINED BALANCE SHEETS (Unaudited), Continued U S WEST COMMUNICATIONS GROUP
September 30, December 31, Dollars in millions 1995 1994 LIABILITIES AND EQUITY Current liabilities: Short-term debt $ 2,092 $ 1,608 Accounts payable 785 888 Employee compensation 350 313 Dividends payable 252 250 Current portion of restructuring charges 342 318 Other 879 831 Total current liabilities 4,700 4,208 Long-term debt 4,746 4,516 Postretirement and other postemployment benefit obligations 2,287 2,427 Deferred taxes, credits and other 1,418 1,614 Communications Group equity 3,272 3,179 Total liabilities and equity $ 16,423 $ 15,944 See Notes to Combined Financial Statements.
Form 10-Q - Part I COMBINED STATEMENTS OF CASH FLOWS (Unaudited) U S WEST COMMUNICATIONS GROUP
Dollars in millions Nine Months Ended September 30, 1995 1994 OPERATING ACTIVITIES Net income $ 895 $ 851 Adjustments to net income: Depreciation and amortization 1,514 1,420 Postretirement medical and life costs, net of cash fundings (156) (208) Gains on sales of rural telephone exchanges (112) (48) Deferred income taxes and amortization of investment tax credits 121 142 Changes in operating assets and liabilities: Restructuring payments (254) (160) Accounts and notes receivable (204) (125) Inventories, supplies and other (63) (61) Accounts payable and accrued liabilities (33) (30) Other adjustments - net (10) (20) Cash provided by operating activities 1,698 1,761 INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,703) (1,746) Proceeds from disposals of property, plant and equipment 161 49 Cash (used for) investing activities (1,542) (1,697) FINANCING ACTIVITIES Net proceeds from issuance of short-term debt 365 332 Proceeds from issuance of long-term debt 499 315 Repayments of long-term debt (256) (271) Dividends paid on common stock (694) (663) Proceeds from issuance of common stock - 211 Equity transfer to Media Group (105) - Cash provided by financing activities (191) (76) CASH AND CASH EQUIVALENTS Increase (decrease) (35) (12) Beginning balance 116 56 Ending balance $ 81 $ 44 See Notes to Combined Financial Statements
Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) A. 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" or "Company"), pursuant to which U S WEST continues as the surviving corporation. In connection with the merger, the Certificate of Incorporation of U S WEST has been amended and restated to, 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. 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, Inc. ("U S WEST Communications") and certain other subsidiaries of the Company (the "Communications Group") and the Company'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. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) 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 the Company 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. B. Summary of Significant Accounting Policies Combined Financial Statements The Combined Financial Statements of the Groups comprise all of the accounts included in the corresponding Consolidated Financial Statements of the Company. Investments in less than majority-owned ventures are generally accounted for using the equity method. The separate Group Combined Financial Statements give effect to the accounting policies that are applicable upon implementation of the Recapitalization Plan. The separate Group Combined Financial Statements have been prepared on a basis that management believes to be reasonable and appropriate and include: (i) the combined historical balance sheets, results of operations and cash flows of the businesses that comprise each of the Groups, with all significant intragroup amounts and transactions eliminated; (ii) in the case of the Communications Group Combined Financial Statements, certain corporate assets and liabilities of U S WEST and related transactions identified with the Communications Group; (iii) in the case of the Media Group Combined Financial Statements, all other corporate assets and liabilities and related transactions of U S WEST; and (iv) an allocated portion of the corporate expense of U S WEST. Transactions between the Communications Group and the Media Group have not been eliminated. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) Notwithstanding the allocation of assets and liabilities (including contingent liabilities) and stockholders' equity between the Communications Group and the Media Group for the purpose of preparing the respective financial statements of such Group, holders of Communications Stock and Media Stock are subject to risks associated with an investment in a single company and all of the Company's businesses, assets and liabilities. Such allocation of assets and liabilities and change in the equity structure of the Company does not result in a distribution or spin-off to shareholders of any assets or liabilities of the Company or any of its subsidiaries or otherwise affect responsibility for the liabilities of the Company or such subsidiaries. As a result, the rights of the holders of the Company's or any of its subsidiaries' debt are not affected. Financial effects arising from either Group that affect the Company's results of operations or financial condition could, if significant, affect the results of operations or financial position of the other Group or the market price of the class of common stock relating to the other Group. Any net losses of the Communications Group or the Media Group, and dividends or distributions on, or repurchases of Communications Stock, Media Stock or Preferred Stock, will reduce the funds of the Company legally available for payment of dividends on both the Communications Stock and Media Stock. Accordingly, the Communications Group Combined Financial Statements should be read in conjunction with the Company's Consolidated Financial Statements and the Media Group Combined Financial Statements. The Combined Financial Statements have been prepared by 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 Combined 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 Combined Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's proxy statement mailed to all shareholders on September 5, 1995. Certain reclassifications within the Combined Financial Statements have been made to conform to the current year presentation. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) C. Contingencies At U S WEST Communications there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. In one such instance, the Utah Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the PSC for 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, U S WEST Communications refinanced $410 of commercial paper to take advantage of favorable long-term interest rates. In addition to the commercial paper, U S WEST Communications 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, U S WEST Communications refinanced $750 of commercial paper. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts) Results of Operations Comparative details of income before extraordinary item for three and nine months ended September 30 follow:
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent Dollars in millions 1995 1994 Change 1995 1994 Change Income before extraordinary item $ 292 $ 267 9.4 $ 900 $ 851 5.8 Pro forma earnings per share before extraordinary item $ 0.62 $ 0.59 5.1 $ 1.91 $ 1.89 1.1
The Communications Group's third quarter 1995 income before extraordinary item was $276, an increase of $9, or 3.4 percent, over third quarter 1994, excluding a gain of $21 on the sale of rural telephone exchanges and expenses of $5 associated with the Recapitalization Plan, both in third quarter 1995. Increased income at the Communications Group is attributable to higher demand for services, access line growth and lower employee benefit costs, including the effects of certain benefit cost true-ups. Partially offsetting these items was an increase in operating costs incurred to address current customer service issues, increased depreciation expense and higher interest expense. Third quarter 1995 pro forma earnings per share before extraordinary item ("earnings per share") were $0.59, unchanged from the prior year, excluding the effects of the gain on sale of rural telephone exchanges ($0.04 per share) and expenses associated with the Recapitalization Plan ($0.01 per share). Earnings per share in 1995 reflect approximately 16 million additional average shares outstanding, of which 12.8 million were issued in connection with the December 1994 purchase by the Media Group of cable television properties in the Atlanta, Georgia area. For the nine months ended September 30, 1995, income before extraordinary item was $835, an increase of $15, or 1.8 percent, excluding gains on the sales of rural telephone exchanges of $70 ($0.14 per share) and $31 ($0.07 per share) in 1995 and 1994, respectively, and expenses of $5 ($0.01 per share) associated with the Recapitalization Plan in 1995. Earnings per share for the nine months ended September 30, 1995, excluding one time items, were $1.78, compared with $1.82 in the same period in 1994. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Increased demand for the Communications Group's services resulted in growth in earnings before interest, taxes, depreciation, amortization and other ("EBITDA") of 5.8 and 4.8 percent for third quarter and nine months ended September 30, 1995, respectively, as compared with the same periods in 1994. The Communications Group believes EBITDA is an important indicator of the operational strength of its businesses. EBITDA, however, should not be considered as an alternative to operating or net income as an indicator of the performance or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. Sales and Other Revenues An analysis of changes in the Communications Group's revenues follows:
Dollars in millions Lower Incr. Inc. Price (Higher) (Decr.) (Decr.) 1995 1994 Changes Refunds Demand Other Dollars Percent Local service Third quarter $1,105 $1,034 $ 5 ($7) $ 73 $ - $ 71 6.9 Nine months 3,231 3,035 9 (7) 194 - 196 6.5 Interstate access Third quarter 594 573 (9) (5) 36 (1) 21 3.7 Nine months 1,774 1,691 (27) (15) 126 (1) 83 4.9 Intrastate access Third quarter 186 188 (12) 4 6 - (2) (1.1) Nine months 558 541 (24) 7 26 8 17 3.1 Long-distance network Third quarter 298 323 (5) - (14) (6) (25) (7.7) Nine months 891 1,019 (20) - (42) (66) (128) (12.6) Other services Third quarter 206 198 8 8 4.0 Nine months 591 564 27 27 4.8 Total Third quarter 2,389 2,316 (21) (8) 101 1 73 3.2 Nine months $7,045 $6,850 ($62) ($15) $ 304 ($32) $ 195 2.8
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 increases of 10.0 and 9.4 percent in interstate billed access minutes of use for the three and nine months ended September 30, 1995, respectively, as compared with the same periods in 1994. The increased volume of business more than offset the effects of price reductions and refunds. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Intrastate access revenues decreased for the three months ended September 30, 1995, compared with the same period in 1994, primarily due to the effects of price reductions, partially offset by higher demand. Intrastate access revenues increased for the nine months ended September 30, 1995, compared with 1994, 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 Communications Group 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. Long-distance network revenues decreased by 7.7 and 12.6 percent for the three months and nine months ended September 30, 1995, respectively, compared with the same periods in 1994, primarily due to the effects of competition and price reductions. 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. Revenues from other services increased primarily as a result of continued market penetration in voice messaging services, increases in inside wire services, sales of customer premise equipment and wire installation projects, partially offset by decreases in billing and collection revenues. Costs and Expenses
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 1995 1994 Change 1995 1994 Change Employee-related expenses $ 835 $ 828 0.8 $ 2,479 $ 2,411 2.8 Other operating expenses 404 389 3.9 1,099 1,123 (2.1) Taxes other than income taxes 95 102 (6.9) 306 301 1.7 Depreciation and amortization 513 476 7.8 1,514 1,420 6.6 Interest expense 108 94 14.9 315 277 13.7 Other expense-net 14 5 - 30 21 42.9
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 through the remainder of the year. Overtime payments and contract labor increased employee-related expenses by approximately $54 and $149 for third quarter and the first nine months of 1995, respectively, as compared with the same periods in 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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Since December 1993, the Communications Group 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 Communications Group 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. The increase in other operating expenses during third quarter 1995 is due to several items, including costs associated with the sales of customer premise equipment and wire installation projects. For the nine months ended September 30, 1995, 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. Liquidity and Capital Resources Cash provided by operations decreased by $63 compared with the first nine months of 1994. Business growth was more than offset by the effects of increased expenditures related to implementation of the Restructuring Plan. U S WEST, Inc. ("U S WEST" or "Company") from time to time engages in discussions regarding acquisitions. The Company 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 the Company and/or U S WEST Communications. In the first nine months of 1995, Communications Group received cash proceeds of $162 from the sale of certain rural telephone exchanges as compared with proceeds of $51 in the same period last year. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued During the first nine months of 1995, debt increased by $714 and the percentage of debt to total capital increased from 65.8 percent at December 31, 1994, to 67.6 percent at September 30, 1995. The increase in debt and the percentage of debt to total capital was primarily related to increased expenditures (including capital related to service quality issues and implementation of the Restructuring Plan) and cash fundings for postretirement medical and life costs. During the first nine months of 1995, the Communications Group made cash equity infusions of $105 to the Media Group. As of November 1, 1995, the effective date of the Recapitalization Plan, the Company does not intend to transfer funds between the Groups, except for certain short-term, ordinary course advances of funds associated with the Company's centralized cash management. Such short-term transfers of funds will be accounted for as short-term loans between the Groups bearing interest at the market rate at which management determines the borrowing Group could obtain funds on a short-term basis. If the Board of Directors of U S WEST (the "Board"), in its sole discretion, determines that a transfer of funds between the Groups should be accounted for as a long-term loan, the Board would establish the terms on which such loan would be made, including the interest rate, amortization schedule, maturity and redemption terms. Such terms would generally reflect the then prevailing terms upon which management determines such Group could borrow funds on a similar basis. The financial statements of the borrowing Group will be charged with the amount of any such loan, as well as with periodic interest accruing thereon. The Board may determine that a transfer of funds from the Communications Group to the Media Group should be accounted for as an equity contribution, in which case an Inter-Group Interest (determined by the Board based on the then current Market Value of shares of Media Stock) will either be created or increased, as applicable. Similarly, if an Inter-Group Interest exists, the Board may determine that a transfer of funds from the Media Group to the Communications Group should be accounted for as a reduction in the Inter-Group Interest. Restructuring The Communications Group'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 Communications Group is consolidating its 560 customer service centers into 26 centers in 10 cities and reducing its total work force by approximately 9,000 employees. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued 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 $ 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 Communications Group 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. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Employee Separation. Net employee reductions will total 9,000 under the Restructuring Plan. While the Communications Group 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 1,061 497 612 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 Estimate 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 Communications Group 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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), 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 Communications Group 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 Communications Group 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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Progress Under the Restructuring Plan: Following is a reconciliation of restructuring reserve activity since December 1993.
Change in First Nine Relocation Reserve Months Employee Reserve Reserve 1994 Balance 1995 Separation Balance 12/31/93 Activity 12/31/94 Activity Estimates 9/30/95 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 - - - - 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, 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 Note A in the Notes to the Combined Financial Statements. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), continued Broadband In 1993, the Communications Group announced its intention to build an interactive multimedia telecommunications network (the "Broadband Network") capable of providing voice, data and video services to customers within its 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 Communications Group 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 Communications Group'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 Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), 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 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. 85 Form 10-Q - Part I COMBINED STATEMENTS OF INCOME (Unaudited) U S WEST MEDIA GROUP
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, Dollars in millions (except per share amounts) 1995 1994 1995 1994 Sales and other revenues $ 604 $ 482 $ 1,725 $ 1,359 Cost of sales and other revenues 193 161 539 433 Selling, general and administrative 204 162 634 498 Depreciation and amortization 60 33 181 99 Interest expense 29 10 89 46 Equity losses in unconsolidated ventures 38 26 128 83 Gain on sale of paging assets - - - 68 Guaranteed minority interest expense 2 - 2 - Other income - net 6 2 24 32 Income before income taxes and extraordinary item 84 92 176 300 Provision for income taxes 51 41 103 134 Income before extraordinary item 33 51 73 166 Extraordinary item: Early extinguishment of debt, net of tax (4) - (4) - NET INCOME 29 51 69 166 Preferred dividends 1 - 3 - Earnings available after preferred stock dividend $ 28 $ 51 $ 66 $ 166 Pro forma earnings per common share: Income available for common stock before extraordinary item $ 0.07 $ 0.11 $ 0.15 $ 0.37 Extraordinary item ( 0.01) - ( 0.01) - PRO FORMA EARNINGS PER COMMON SHARE $ 0.06 $ 0.11 $ 0.14 $ 0.37 PRO FORMA AVERAGE COMMON SHARES OUTSTANDING (thousands) 471,229 454,997 470,076 451,037 See Notes to Combined Financial Statements.
Form 10-Q - Part I COMBINED BALANCE SHEETS (Unaudited) U S WEST MEDIA GROUP
September 30, Decmeber 31, Dollars in millions 1995 1994 ASSETS Current assets: Cash and cash equivalents $ 27 $ 93 Accounts and notes receivable 250 212 Deferred directory costs 246 234 Receivable from Communications Group 89 109 Other 91 108 Total current assets 703 756 Gross property, plant and equipment 1,603 1,436 Accumulated depreciation 541 480 Property, plant and equipment - net 1,062 956 Investment in Time Warner Entertainment 2,501 2,522 Intangible assets - net 1,824 1,858 Investment in international ventures 1,361 881 Net investment in assets held for sale 418 302 Other assets 581 119 Total assets $ 8,450 $ 7,394 See Notes to Combined Financial Statements.
Form 10-Q - Part I COMBINED BALANCE SHEETS (Unaudited), Continued U S WEST MEDIA GROUP
September 30, December 31, Dollars in millions 1995 1994 LIABILITIES AND EQUITY Current liabilities: Short-term debt $ 1,548 $ 1,229 Accounts payable 169 170 Income taxes payable 202 86 Deferred revenue and customer deposits 96 76 Other 327 372 Total current liabilities 2,342 1,933 Long-term debt 398 585 Deferred taxes, credits and other 567 622 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company guaranteed debentures 600 - Preferred stock subject to mandatory redemption 51 51 Media Group equity 4,649 4,390 Company LESOP guarantee (157) (187) Total equity 4,492 4,203 Total liabilities and equity $ 8,450 $ 7,394 See Notes to Combined Financial Statements.
Form 10-Q - Part I COMBINED STATEMENTS OF CASH FLOWS (Unaudited) U S WEST MEDIA GROUP
Dollars in millions Nine Months Ended September 30, 1995 1994 OPERATING ACTIVITIES Net income $ 69 $ 166 Adjustments to net income: Depreciation and amortization 181 99 Gain on sale of paging assets - (68) Equity losses in unconsolidated ventures 128 83 Deferred income taxes and amortization of investment tax credits (28) 50 Changes in operating assets and liabilities: Accounts and notes receivable (15) (48) Deferred directory costs, prepaid and other (18) (58) Accounts payable and accrued liabilities 107 131 Other adjustments - net 40 26 Cash provided by operating activities 464 381 INVESTING ACTIVITIES Expenditures for property, plant and equipment (240) (199) Investment in international ventures (576) (214) Cash (to) net investment in assets held for sale (108) - Proceeds from sale of paging assets - 143 Other - net (269) (97) Cash (used for) investing activities (1,193) (367) FINANCING ACTIVITIES Net proceeds from issuance of short-term debt 323 71 Repayments of long-term debt (384) (201) Proceeds from issuance of trust originated preferred securities - net 581 - Dividends paid on preferred stock (3) - Proceeds from issuance of common stock 104 305 Proceeds form issuance of preferred stock - 50 Equity transfer from Communications Group 105 - Purchase of treasury stock (63) - Cash provided by financing activities 663 225 Cash (used for) provided by continuing operations (66) 239 Cash (to) discontinued operations - (59) CASH AND CASH EQUIVALENTS (Decrease) increase (66) 180 Beginning balance 93 72 Ending balance $ 27 $ 252 See Notes to Combined Financial Statements.
Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) A. 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" or "Company"), pursuant to which U S WEST continues as the surviving corporation. In connection with the merger, the Certificate of Incorporation of U S WEST has been amended and restated to, 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. 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, Inc. ("U S WEST Communications") and certain other subsidiaries of the Company (the "Communications Group") and the Company'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. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) 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 the Company 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. B. Summary of Significant Accounting Policies Combined Financial Statements The Combined Financial Statements of the Groups comprise all of the accounts included in the corresponding Consolidated Financial Statements of the Company. Investments in less than majority-owned ventures are generally accounted for using the equity method. The separate Group Combined Financial Statements give effect to the accounting policies that are applicable upon implementation of the Recapitalization Plan. The separate Group Combined Financial Statements have been prepared on a basis that management believes to be reasonable and appropriate and include: (i) the combined historical balance sheets, results of operations and cash flows of the businesses that comprise each of the Groups, with all significant intragroup amounts and transactions eliminated; (ii) in the case of the Communications Group Combined Financial Statements, corporate assets and liabilities of U S WEST and related transactions identified with the Communications Group; (iii) in the case of the Media Group Combined Financial Statements, all other corporate assets and liabilities and related transactions of U S WEST; and (iv) an allocated portion of the corporate expense of U S WEST. Transactions between the Communications Group and the Media Group have not been eliminated. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) Notwithstanding the allocation of assets and liabilities (including contingent liabilities) and stockholders' equity between the Communications Group and the Media Group for the purpose of preparing the respective financial statements of such Group, holders of Communications Stock and Media Stock are subject to risks associated with an investment in a single company and all of the Company's businesses, assets and liabilities. Such allocation of assets and liabilities and change in the equity structure of the Company does not result in a distribution or spin-off to shareholders of any assets or liabilities of the Company or any of its subsidiaries or otherwise affect responsibility for the liabilities of the Company or such subsidiaries. As a result, the rights of the holders of the Company's or any of its subsidiaries' debt are not affected. Financial effects arising from either Group that affect the Company's results of operations or financial condition could, if significant, affect the results of operations or financial position of the other Group or the market price of the class of common stock relating to the other Group. Any net losses of the Communications Group or the Media Group, and dividends or distributions on, or repurchases of Communications Stock, Media Stock or Preferred Stock, will reduce the funds of the Company legally available for payment of dividends on both the Communications Stock and Media Stock. Accordingly, the Media Group Combined Financial Statements should be read in conjunction with the Company's Consolidated Financial Statements and the Communications Group Combined Financial Statements. The Combined Financial Statements have been prepared by 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 Combined 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 Combined Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's proxy statement mailed to all shareholders on September 5, 1995. Certain reclassifications within the Combined Financial Statements have been made to conform to the current year presentation. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) C. Investment in Time Warner Entertainment On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority capital and residual equity interests in Time Warner Entertainment Company L.P. ("TWE"). Summarized operating results for TWE follow:
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1995 1994 1995 1994 Revenues $ 2,324 $ 2,203 $ 6,762 $ 6,177 Operating expenses* 2,056 1,968 6,037 5,512 Interest and other - net** 195 170 556 480 Income before income taxes and extraordinary item $ 73 $ 65 $ 169 $ 185 Income before extraordinary 47 41 107 145 item Extraordinary item, net of tax (24) - (24) - Net income $ 23 $ 41 $ 83 $ 145 * Includes 1995 and 1994 depreciation and amortization of $260 and $254, and $761 and $707 for the three and nine months ended, respectively. ** Includes 1995 and 1994 corporate services of $17 and $15, and $47 and $45 for the three months and nine months ended, respectively.
The Company accounts for its investment in TWE under the equity method of accounting. U S WEST's recorded share of TWE operating results represents allocated TWE net income or loss adjusted for the amortization of the excess of fair market value over the book value of the partnership net assets. The Company's recorded share of TWE operating results before extraordinary item was ($3) and $1, and ($14) and ($5) for the three months and nine months ended September 30, 1995 and 1994, respectively. In addition, TWE recorded an extraordinary loss for the early extinguishment of debt in third quarter 1995. The Media Group's portion of this extraordinary loss was $4, net of an income tax benefit of $2. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) D. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company Guaranteed Debentures On September 11, 1995, U S WEST Financing I, a wholly-owned subsidiary of U S WEST ("U S WEST Financing"), issued $600 million of 7.96 % Trust Originated Preferred Securities (the "Preferred Securities") and $19 of common securities. U S WEST holds all of the outstanding common securities of U S WEST Financing. U S WEST Financing used the proceeds from such issuance to purchase from U S WEST Capital Funding, Inc., a wholly-owned subsidiary of U S WEST ("Capital Funding"), $619 principal amount of Capital Funding's 7.96% Subordinated Deferrable Interest Notes due 2025 (the "Subordinated Debt Securities"), the obligations under which are guaranteed by U S WEST. The sole assets of U S WEST Financing are and will be the Subordinated Debt Securities. In addition, U S WEST has guaranteed the payment of interest and redemption amounts to holders of Preferred Securities when U S WEST Financing has funds available for such payments as well as Capital Funding's undertaking to pay all of U S WEST Financing's costs, expenses and other obligations. The interest and other payment dates on the Subordinated Debt Securities correspond to the distribution and other payment dates on the Preferred Securities. Under certain circumstances, the Subordinated Debt Securities may be distributed to the holders of Preferred Securities and common securities in liquidation of U S WEST Financing. The Subordinated Debt Securities are redeemable in whole or in part by Capital Funding at any time on or after September 11, 2000, at a redemption price of $25.00 per Subordinated Debt Security plus accrued and unpaid interest. If Capital Funding redeems the Subordinated Debt Securities, U S WEST Financing is required to redeem the Preferred Securities concurrently at $25.00 per share plus accrued and unpaid distributions. As of September 30, 1995, 24,000,000 Preferred Securities were outstanding. E. Airtouch Joint Venture Effective November 1, 1995, AirTouch and the Company have entered into Phase I of their joint venture. In accordance with the closing agreement, during Phase I the Media Group Combined Financial Statements will continue to reflect the Company's existing ownership of the domestic cellular operations. The newly formed Wireless Management Company will provide centralized services to both companies on a contract basis. In Phase II, AirTouch and the Company will contribute their domestic cellular assets to the newly formed venture. This phase will occur within four years, upon obtaining interim regulatory relief, or earlier, at AirTouch's option. Form 10-Q - Part I NOTES TO COMBINED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) F. Investment in International Ventures The Media Group's investments in international ventures increased $480 from December 31, 1994. The increase primarily consists of a 20 percent investment in Malaysia to provide local wireline and wireless communications, the acquisition of a 50 percent interest in cable television systems in the Netherlands and the acquisition of a 29 percent interest in cable television systems in the Czech Republic. On October 2, 1995, TeleWest Communications' acquisition and share exchange with SBC CableComms (UK) became effective. U S WEST and Tele-Communications, Inc., the major shareholders, will each own 26.7 percent of the combined company. In fourth quarter 1995, the Media Group will recognize an after tax gain of approximately $100 in conjunction with the merger. G. Debt Subsequent to third quarter 1995, U S WEST refinanced $1.3 billion of commercial paper, to take advantage of favorable long-term interest rates, including $550 at the Media Group. H. Contingencies On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court to prevent the proposed merger of Time Warner and Turner Broadcasting. The Time Warner Entertainment partnership is, among other things, in competition with Turner Broadcasting, and the Company believes that ownership of Turner by Time Warner would constitute breach of contract and fiduciary duties by Time Warner. Time Warner filed a countersuit against the Company on October 11, 1995, alleging misrepresentation, breach of contract and other misconduct on the part of the Company. Time Warner's countersuit seeks a reformation of the Time Warner Entertainment partnership agreement, an order that enjoins U S WEST from breaching the partnership agreement, and unspecified compensatory damages. U S WEST has denied each of the claims in Time Warner's countersuit. A trial date of March 16,1996 has been set. I. Net Investment in Assets Held for Sale Effective January 1, 1995, the capital assets segment has been accounted for in accordance with Staff Accounting Bulletin No. 93, issued by the Securities Exchange Commission, which requires discontinued operations not disposed of within one year of the measurement date to be accounted for prospectively in continuing operations as "net investment in assets held for sale." The net realizable value of the assets will be reevaluated on an ongoing basis with adjustments to the existing reserve, if any, being charged to continuing operations. Prior to January 1, 1995, the entire capital assets segment was accounted for as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. Sales and other revenues of net investment in assets held for sale were $30 and $64, and $137 and $443 for the three months and nine months ended September 30, 1995 and 1994, respectively. Included are the sale of properties for approximately $52 and $253 for the nine months ended September 30, 1995 and 1994, respectively. The sales were in line with Company estimates. The components of net investment in assets held for sale follow:
September 30, December 31, Dollars in millions 1995 1994 ASSETS Cash $ 16 $ 7 Finance receivables - net 1,005 1,073 Investment in real estate - net of valuation allowance 420 465 Bonds, at market value 165 155 Investment in FSA 374 329 Other assets 198 362 Total assets 2,178 2,391 LIABILITIES Debt 922 1,283 Deferred income taxes 700 693 Accounts payable, accrued liabilities and other 128 103 Minority interests 10 10 Total liabilities 1,760 2,089 Net investment in assets held for sale $ 418 $ 302
Selected financial data for U S WEST Financial Services follows:
Three Three Nine Nine Mos. Ended Mos. Ended Mos. Ended Mos. Ended September 30, September 30, September 30, September 30, 1995 1994 1995 1994 Operating revenues $ 9 $ 15 $ 30 $ 45
September 30, December 31, 1995 1994 Net finance receivables $ 911 $ 981 Total assets 1,223 1,331 Total debt 419 533 Total liabilities 1,153 1,282 Shareowner's equity 70 49
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) Results of Operations Net income of the Media Group declined by $13, or 25 percent, in third quarter 1995 as compared with third quarter 1994, excluding expenses of $5 associated with the Recapitalization Plan and an extraordinary loss of $4 for the early retirement of debt by TWE. The decline is due primarily to increased interest expense associated with the acquisition of cable systems in the Atlanta, Georgia metropolitan area (the "Atlanta Systems") and interest expense associated with expansion in international investments, partially offset by improvement in the wireless communications business. The amortization of goodwill associated with the Atlanta Systems acquisition also caused a significant increase in the effective tax rate which contributed to lower earnings. EBITDA increased by approximately 30 percent, to $207, due primarily to improvement in the wireless communication business and the acquisition of the Atlanta Systems. Excluding the effects of the acquisition, EBITDA increased by approximately 14 percent. Net income of the Media Group declined by $47, or 38 percent, for the nine months ended September 30, 1995 as compared with 1994, excluding the effects of the 1994 gain on sale of paging assets of $41 and the 1995 expenses of $5 associated with the Recapitalization Plan and the extraordinary loss of $4 for the early retirement of debt by TWE. The decline is due primarily to increased interest expense associated with the Atlanta Systems acquisition, expansion in international investments and higher equity losses related to international growth initiatives, partially offset by improvement in the wireless communications business. The amortization of intangible assets and goodwill associated with the Atlanta Systems acquisition caused a significant increase in the effective tax rate and also contributed to the decrease in earnings. EBITDA increased by approximately 29 percent, to $552, due primarily to improvement in the wireless communication business and the acquisition of the Atlanta Systems. Excluding the effects of the acquisition and the paging sale, EBITDA increased by approximately 15 percent. The Media Group considers EBITDA an important indicator of the operational strength and performance of its businesses. EBITDA, however, should not be considered as an alternative to operating or net income as an indicator of the performance of the Media Group's businesses 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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Following is a summary of income before extraordinary item by industry segment and for significant unconsolidated, equity investments:
Three Three; Mos. Nine Nine Mos. Ended Mos. Mos. Ended Sept. 30, Ended Enced Percent Sept. 30, 1994 Percent Sept. 30, Sept. 30, Percent Ownership 1995 Change 1995 1994 (3) Change Consolidated Multimedia content and services 100 $ 63 $ 63 - $ 179 $ 190 (5.8) Wireless communications 100 24 11 - 56 62 (9.7) Cable and telecommunications 100 (1) - - (7) - - Unconsolidated equity investments: Time Warner Entertainment Company, L.P. (1) 25.5 (3) (2) (50.0) (16) (13) (23.1) TeleWest Communications 37.8 (11) (10) (10.0) (23) (24) 4.2 plc Mercury One-2-One 50.0 (18) (16) (12.5) (57) (40) (42.5) Other (2) (21) 5 - (59) (9) - Income before extraordinary item $ 33 $ 51 (35.3) $ 73 $ 166 (56.0) (1) Percent ownership represents pro rata priority capital and residual equity interests. (2) Includes other unconsolidated equity investments and divisional expenses. (3) Wireless communications includes the $41 gain on sale of paging assets.
Multimedia Content and Services. Income related to Yellow Pages directory advertising increased by approximately 7 percent and 8 percent in third quarter and the nine months ended September 30, 1995 as compared with 1994, to $75 and $225, respectively. The increase is due to pricing, product enhancements and the effect of improved marketing programs on business volume. However, Yellow Pages income growth was offset by losses related to international directory publishing operations and the effect of increased expenditures related to new products and other growth initiatives, including development of interactive services. Second quarter 1995 includes an after tax charge of approximately $9 related to the exit of certain product lines. This charge is part of the Media Group's ongoing efforts to evaluate each product for financial and market feasibility. The Media Group views new service offerings as an important part of its growth strategy. Accordingly, the Media Group anticipates that investments in new products and services in 1995 will continue to offset expected income growth related to the Yellow Pages business. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Wireless Communication. Wireless communications income increased $13 and $35 in third quarter and for the nine months ended September 30, 1995 as compared with 1994, excluding the 1994 gain on sale of paging assets of $41. The increase in wireless communications income is attributable to continued strong growth in cellular subscribers. The domestic cellular subscriber base reached 1,269,000 at September 30, 1995, a 55 percent increase as compared with September 30, 1994. Cellular service EBITDA approximated $85 and $217 for third quarter and the nine months ended September 30, 1995, increases of $28 and $79, or 49 percent and 58 percent, respectively, compared to 1994. Cellular service revenue growth, in addition to economies of scale and expense controls, resulted in a third quarter 1995 cellular service EBITDA margin of 38.0 percent compared to 33.8 percent in 1994 and EBITDA margin for the nine months ended September 30, 1995 was 35.3 percent compared to 30.4 percent in 1994. Effective November 1, 1995, AirTouch and the Company have entered into Phase I of their joint venture. In accordance with the closing agreement, during Phase I the Media Group Combined Financial Statements will continue to reflect the Company's existing ownership of the domestic cellular operations. The newly formed Wireless Management Company will provide centralized services to both companies on a contract basis. In Phase II, AirTouch and the Company will contribute their domestic cellular assets to the newly formed venture. This phase will occur within four years, upon obtaining interim regulatory relief, or earlier, at AirTouch's option. Cable and Telecommunication. The 1995 loss in cable and telecommunications operations is the result of amortization of intangible assets related to the December 1994 acquisition of the Atlanta Systems. The Atlanta Systems contributed EBITDA of approximately $26 and $74 in third quarter and the nine months ended September 30, 1995, respectively. The subscriber base of the Atlanta Systems increased 7.5 percent during the last twelve months, to 517,000 at September 30, 1995. Operating Results of Unconsolidated Equity Investments. The loss before extraordinary item related to the Media Group's interests in TWE increased in third quarter and the nine months ended September 30, 1995 compared to 1994 due primarily to higher TWE financing costs, minority interest expense and depreciation charges, partially offset by increased EBITDA related to cable, programming and filmed entertainment. Cable subscribers served by TWE increased by 6 percent compared to a year ago excluding the impact of recent cable transactions. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court to prevent the proposed merger of Time Warner and Turner Broadcasting. The Time Warner Entertainment partnership is, among other things, in competition with Turner Broadcasting, and the Company believes that ownership of Turner by Time Warner would constitute breach of contract and fiduciary duties by Time Warner. Time Warner filed a countersuit against the Company on October 11, 1995, alleging misrepresentation, breach of contract and other misconduct on the part of the Company. Time Warner's countersuit seeks a reformation of the Time Warner Entertainment partnership agreement, an order that enjoins U S WEST from breaching the partnership agreement, and unspecified compensatory damages. U S WEST has denied each of the claims in Time Warner's countersuit. A trial date of March 16,1996 has been set. International businesses are experiencing rapid growth, and will continue to incur near term start-up losses. New investments in 1995 include a 20 percent investment in Malaysia to provide local wireline and wireless communications, the acquisition of a 50 percent interest in cable television systems in the Netherlands and the acquisition of a 29 percent interest in cable television systems in the Czech Republic. On October 2, 1995, TeleWest Communications' acquisition and share exchange with SBC CableComms (UK) became effective. U S WEST and Tele-Communications, Inc., the major shareholders, will each own 26.7 percent of the combined company. In fourth quarter 1995, the Media Group will recognize an after tax gain of approximately $100 in conjunction with the merger. The new entity will be the largest cable television and cable telephony operator in the United Kingdom. Subscribers to U S WEST's international cable joint venture operations in the United Kingdom, Norway, Sweden and Hungary grew to 854,000, a 12.8 percent increase from a year ago. Including the recent acquisitions in the Czech Republic and Netherlands, international cable subscribers total approximately 1,720,000 at September 30, 1995. Subscribers to U S WEST's international wireless joint venture operations in the United Kingdom, Hungary, the Czech Republic, Slovakia and Russia grew to 579,000 at September 30, 1995, which is more than two times the customer base at September 30, 1994. Mercury One 2 One ("One 2 One") added 135,000 customers during the nine months ended September 30, 1995, a 65.9 percent increase since December 31, 1994. One 2 One served 340,000 customers at September 30, 1995, compared with 139,000 customers at September 30, 1994. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Sales and Other Revenues
3 Mos. 3 Mos. 9 Mos. 9 Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 1995 1994 Change 1995 1994 Change Multimedia content and services: Domestic $ 264 $ 246 7.3 $ 784 $ 732 7.1 International 28 31 (9.7) 72 42 71.4 292 277 5.4 856 774 10.6 Wireless communications: Cellular service 223 168 32.7 616 454 35.7 Cellular equipment 23 30 (23.3) 60 81 (25.9) Paging sales & service (1) - - - - 28 - 246 198 24.2 676 563 20.1 Cable and telecommunications 56 - - 165 - - Other 10 7 42.9 28 22 27.3 Sales and other revenues $ 604 $ 482 25.3 $ 1,725 $ 1,359 26.9 ____________________ (1) The paging business was sold in June 1994. Results reflect operations for the six months ending June 30, 1994.
Multimedia Content and Services. Revenues related to Yellow Pages directory advertising increased approximately $17, or 7.3 percent, and $50, or 7.1 percent, in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994, due to pricing and an increase in Yellow Pages advertising volume. Product enhancements and the effect of improved marketing programs on business volume also contributed to the increase in revenues. Excluding the sale of certain non-strategic operations, non-Yellow Pages revenues increased by $4 and $8 in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. International directory publishing revenue decreased by $3 in third quarter 1995 as compared with 1994, primarily due to a delay in publication of certain directories. Revenue for the nine months ended September 30, 1995 increased by $30 compared to 1994 due to the May 1994 purchase of Thomson Directories. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Wireless Communications. Cellular service revenues increased $55, or 32.7 percent, and $162, or 35.7 percent, in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. This increase is due to a 55 percent increase in subscribers during the last twelve months, partially offset by a 13 percent drop in average revenue per subscriber to $62.00 per month for the nine months ended September 30, 1995 as compared with 1994. The increase in subscribers relates to lower costs for cellular phone equipment and enhanced service offerings, which has resulted in additional penetration into the consumer user market. The decrease in average revenue per subscriber is due to continuing competitive pressures and price sensitivity of non-business users. Cellular equipment revenues decreased by $7, or 23.3 percent, and $21, or 25.9 percent, in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. This decrease is primarily due to a decrease in unit sales and price per unit due to the impacts of competition. Cable and Telecommunications. Domestic cable and telecommunications revenues reflect the December 1994 acquisition of the Atlanta Systems. Cost of Sales and Other Revenues
Three Three Nine Nine Mos. Mos. Mos. Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 1995 1994 Change 1995 1994 Change Multimedia content and services: Domestic $ 99 $ 86 15.1 $ 285 $ 254 12.2 International 20 21 (4.8) 50 29 72.4 119 107 11.2 335 283 18.4 Wireless communications: Cost of cellular service 30 24 25.0 91 63 44.4 Cost of cellular equipment 29 30 (3.3) 71 81 (12.3) Cost of paging sales & service (1) - - - - 6 - 59 54 9.3 162 150 8.0 Cable and telecommunications 15 - - 42 - - Costs of sales and other revenues $ 193 $ 161 19.9 $ 539 $ 433 24.5 ____________________ (1) The paging business was sold in June 1994. Results reflect operations for six months ending June 30, 1994.
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Multimedia Content and Services. Cost of sales related to domestic publishing operations increased primarily due to product enhancements and increased printing and delivery costs associated with growth in the Yellow Pages directory business. The decrease in third quarter 1995 cost of sales for international directory publishing operations as compared with 1994 is primarily due to a delay in publication of certain directories. The increase in cost of sales in the nine months ended September 30, 1995 is a result of the 1994 acquisition of Thomson Directories. Wireless Communications. Network maintenance expenses increased by $2 in third quarter 1995 as compared with 1994 due primarily to additional network usage and expansion of the wireless network. Billing and other expenses increased by $4, due primarily to a larger average customer base. Land-line telecommunications and network maintenance expenses increased by $11 for the nine months ended September 30, 1995 as compared with 1994 due primarily to additional network usage and expansion of the wireless network. Billing expenses increased by $10, due primarily to a larger average customer base. Costs associated with fraudulent activity and roaming costs increased by $7. During 1995, the cellular equipment margin has declined as a result of increased equipment concessions associated with the direct marketing channel. The cellular equipment margin is expected to continue to decline as a result of this change in distribution mix. Cable and Telecommunications. Cable and telecommunications costs reflect the December 1994 acquisition of the Atlanta Systems. Selling, General and Administrative Expenses
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 1995 1994 Change 1995 1994 Change Multimedia content and services: Domestic $ 57 $ 53 7.5 $ 182 $ 161 13.0 International 7 3 - 22 8 - 64 56 14.3 204 169 20.7 Wireless communications (1) 102 87 17.2 297 264 12.5 Cable and telecommunications 16 - - 50 - - Other 22 19 15.8 83 65 27.7 $ 204 $ 162 25.9 $ 634 $ 498 27.3 ___________________ (1) The paging business was sold in June 1994. Results reflect operations for six months ending June 30, 1994.
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Multimedia Content and Services. In domestic operations, costs related to the development of new database marketing and interactive services increased by $5 in third quarter 1995 as compared with 1994. Partially offsetting these cost increases was the effect of the sale of certain non-strategic operations. In domestic operations, costs related to the development of new database marketing and interactive services increased by $15 in the nine months ended September 30, 1995 as compared with 1994. Additionally, a charge of $14 was incurred to recognize costs associated with exiting certain product lines. Other selling, general and administrative expenses decreased by $8, primarily related to the effect of the sale of certain non-strategic operations. The increase in selling, general and administrative expenses related to international directory publishing operations in third quarter 1995 as compared with 1994 is due to a reclassification and increased marketing, salary and wage expenses. The increase for the nine months ended September 30, 1995 as compared with 1994 is primarily due to the May 1994 acquisition of Thomson Directories. Wireless Communications. Selling, general and administrative expenses increased by $15, or 17.2 percent, in third quarter 1995 as compared with 1994. Commissions paid to retailers increased by $10, primarily as a result of a 39 percent increase in gross customer additions. Other selling, general and administrative expenses increased by $5, primarily due to increased advertising expenditures and bad debts. Excluding the effects of the sale of the paging business in 1994, selling, general and administrative expenses increased by $44, or 17.5 percent, in the nine months ended September 30, 1995 as compared with 1994. Commissions paid to retailers increased by $33, primarily as a result of a 47 percent increase in gross customer additions. Other selling, general and administrative expenses increased by $11, primarily due to increased advertising expenditures and bad debts. Cable and Telecommunications. Cable and telecommunications costs reflect the December 1994 acquisition of the Atlanta Systems. Other. The increase in these other selling, general and administrative expenses is primarily attributable to additional resources being allocated to accommodate growth in domestic and international operations. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Depreciation and Amortization
Three Three Nine Nine Months Months Months Months Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 1995 1994 Change 1995 1994 Change Multimedia content and services $ 8 $ 7 14.3 $ 26 $ 18 44.4 Wireless communications (1) 29 24 20.8 86 74 16.2 Cable and telecommunications 19 - - 59 - - Other 4 2 100.0 10 7 42.9 $ 60 $ 33 81.8 $ 181 $ 99 82.8 ____________________ (1) The paging business was sold in June 1994. Results reflect operations for six months ending June 30, 1994.
Depreciation and amortization related to wireless operations increased by $17 in the nine months ended September 30, 1995 as compared with 1994, excluding the effects of the sale of the paging business in 1994. Multimedia content and services depreciation and amortization increased principally due to the effects of the May 1994 acquisition of Thomson Directories. Cable and telecommunications depreciation and amortization reflect the December 1994 acquisition of the Atlanta Systems. Interest Expense and Other Interest expense increased by $19 and $43 in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. The increase in interest expense is primarily a result of incremental financing costs associated with the December 1994 acquisition of the Atlanta Systems, new international investments and a reclassification of debt from net investment in assets held for sale. Equity losses increased by $12 and $45 in third quarter and the nine months ended September 30, 1995, respectively, as compared with 1994. The increases were primarily due to costs related to the expansion of the customer base at One 2 One in the nine months ended September 30, 1995, as compared with 1994. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Provision for Income Taxes
Three Three Nine Nine Months Months Mos. Mos. Ended Ended Ended Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 1995 1994 Change 1995 1994 Change Provision for income taxes $ 51 $ 41 24.4 $ 103 $ 134 (23.1) Effective tax rate 60.7 44.6 - 58.5 44.7 -
The increase in the effective tax rate reflects the impact of lower pretax income, the effects of goodwill amortization related to the acquisition of the Atlanta Systems, a benefit recorded in 1994 related to the sale of the paging assets, higher state and foreign income taxes and expenses associated with the Recapitalization Plan. Liquidity and Capital Resources Operating Activities During the nine months ended September 30, 1995, cash provided by operating activities of the Media Group increased by $83 as compared with 1994. Cash provided by operating activities for the nine months ended September 30, 1995 includes an income tax payment of approximately $60 related to the 1994 partial sale of the Media Group's joint venture interest in TeleWest. Adjusted for the income tax payment, operating cash flow of the Media Group increased by $143. Growth in operating cash flow from wireless communication services and the acquisition of the Atlanta Cable systems contributed to the increase. Investing Activities Total capital expenditures of the Media Group were $240 for the nine months ended September 30, 1995 as compared with $199 for the nine months ended September 30, 1995 of 1994, the majority of which were devoted to the enhancement and expansion of the cellular network. Investments in international ventures were $576 for the nine months ended September 30, 1995 as compared with $214 for 1994. Significant 1995 Media Group investing activities include equity investments in Malaysia to provide local wireline and wireless communications, the acquisitions of cable television systems in the Netherlands and Czech Republic and additional capital contributions to One 2 One in the U.K. In March 1995, PCS PrimeCo was awarded PCS licenses in 11 markets. The Media Group's share of the cost of the licenses was approximately $268 all of which was funded by June 30, 1995. Under the PCS PrimeCo partnership agreement, the Company is required to fund 25 percent of PCS PrimeCo's operating and capital costs, including licensing costs. The Company anticipates that its total funding obligations to PCS PrimeCo during the next four years will be significant. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Cash provided to the net investment in assets held for sale of $108 for the nine months ended September 30, 1995 primarily reflects the payment of debt. At September 30, 1995, the Company guaranteed debt associated with its international investments in the principal amount of approximately $165. Financing Activities Debt increased by $132 due to new international investments, cash funding of the PCS licenses and a reclassification of debt from net investment in assets held for sale. These increases were largely offset by reductions of debt related to the investment in TWE and a reduction of commercial paper by issuing Preferred Securities. The Company issued $600 of Trust Originated Preferred Securities (the "Preferred Securities") in third quarter 1995. U S WEST has fully and unconditionally guaranteed the payment of interest and redemption amounts to holders of the Preferred Securities. The Preferred Securities are redeemable in whole or in part by U S WEST at any time on or after September 11, 2000, at a redemption price of $25.00 per Preferred Security. As of September 30, 1995, 24,000,000 Preferred Securities were outstanding. Excluding debt included in net investment in assets held for sale, the Media Group's percentage of debt to total capital at September 30, 1995, was 27.5 percent compared to 30.1 percent at December 31, 1994. Including debt related to net investment in assets held for sale, the Media Group's percentage of debt to total capital was 35.8 and 42.4 percent at September 30, 1995, and December 31, 1994, respectively. The percentage of debt to total capital has decreased at September 30, 1995, as compared with December 31, 1994 primarily as a result of issuing the Preferred Securities which are included as a component of total capital. The Media Group reinvests earnings, if any, for future growth and does not expect to pay dividends on the Media Stock in the foreseeable future. The Media group expects that cash from operations will not be adequate to fund expected cash requirements in the foreseeable future. Additional financing will primarily come from a combination of new debt and equity. The Media Group will also continue to employ strategic alliances in executing its business strategies. The Media Group from time to time engages in discussions regarding acquisitions. The Company may fund any such acquisitions, if consummated, with internally generated funds, debt or equity. The incurrence of indebtedness to fund such acquisitions and/or the assumption of indebtedness in connection with such acquisitions could result in a downgrading of the Company's credit rating. During the nine months ended September 30, 1995, the Media Group received a $105 transfer of equity from the Communications Group. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Union Contract On October 15, 1995, U S WEST Direct and the CWA reached a tentative agreement on their contract, subject to ratification by the CWA membership. This contract would provide for salary increases of 10.5 percent over three years and provides employees with a lump sum payment of $850. 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. Selected Proportionate Data The following table is not required by GAAP or intended to replace the Combined Financial Statements prepared in accordance with GAAP. It is presented supplementally because the Company believes that proportionate data facilitates the understanding and assessment of its Combined Financial Statements. The following table includes allocations of Media Group corporate activity. The table does not reflect financial data of the capital assets segment, which had net assets of $418 at September 30, 1995 and $302 at December 31, 1994. The financial information included below departs materially from GAAP because it aggregates the revenues and operating income of entities not controlled by the Media Group with those of the consolidated operations of the Media group. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Selected Proportionate Data, continued
Cable & Cable & Wireless Wireless Multimedia Multimedia Telecommu- Telecommu-nications Commu- Commu- Content & Content & nications International nications nications Services Services Dollars in millions Domestic (3) Domestic International Domestic International Total (1) (3) THREE MONTHS ENDED SEPTEMBER 30, 1995 Revenue $ 655 $ 32 $ 223 $ 75 $ 267 $ 28 $1,280 Operating income (loss) 59 (21) 50 (16) 104 (6) 170 Net income (loss) (14) (23) 23 (16) 65 (6) 29 EBITDA (2) $ 162 $ (10) $ 77 $ - $ 111 $ (3) $ 337 Subscribers (thousands) 2,825 599 1,162 271 NA NA 4,857 THREE MONTHS ENDED SEPTEMBER 30, 1994 Revenue $ 566 $ 21 $ 166 $ 52 $ 248 $ 31 $1,084 Operating income (loss) 41 (23) 29 (28) 102 4 125 Net income (loss) (1) (14) 15 (12) 63 - 51 EBITDA (2) $ 123 $ (13) $ 48 $ (15) $ 108 $ 7 $ 258 Subscribers (thousands) 2,349 232 694 124 NA NA 3,399 NINE MONTHS ENDED SEPTEMBER 30, 1995 Revenue $ 1,906 $ 82 $ 584 $ 200 $ 791 $ 72 $3,635 Operating income (loss) 136 (64) 112 (62) 302 (15) 409 Net income (loss) (46) (36) 54 (76) 184 (11) 69 EBITDA (2) $ 440 $ (34) $ 189 $ (25) $ 322 $ (7) $ 885 NINE MONTHS ENDED SEPTEMBER 30, 1994 Revenue $ 1,589 $ 64 $ 479 $ 121 $ 738 $ 42 $3,033 Operating income (loss) 110 (58) 65 (68) 300 1 350 Net income (loss) (15) (32) 69 (47) 193 (2) 166 EBITDA (2) $ 343 $ (33) $ 125 $ (38) $ 318 $ 5 $ 720 (1) The proportionate results are based on the Media Group's 25.51 percent pro rata priority and residual equity interests in reported TWE results. The reported TWE results are prepared in accordance with GAAP and have not been adjusted to report TWE investments accounted for under the equity method on a proportionate basis. (2) Proportionate EBITDA represents the Media Group's equity interest in the entities multiplied by the entity's EBITDA. As such, proportionate EBITDA does not represent cash available to the Media Group. The Media Group considers EBITDA an important indicator of the operational strength and performance of its businesses. EBITDA, however, should not be considered as an alternative to operating or net income as an indicator of the performance of the Media Group's businesses or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. (3) Previously reported amounts have been reclassified to conform with the current presentation.
Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. Legal Proceedings On September 22, 1995, the Company filed a lawsuit in Delaware Chancery Court to prevent the proposed merger of Time Warner and Turner Broadcasting. The Time Warner Entertainment partnership is, among other things, in competition with Turner Broadcasting, and the Company believes that ownership of Turner by Time Warner would constitute breach of contract and fiduciary duties by Time Warner. Time Warner filed a countersuit against the Company on October 11, 1995, alleging misrepresentation, breach of contract and other misconduct on the part of the Company. Time Warner's countersuit seeks a reformation of the Time Warner Entertainment partnership agreement, an order that enjoins U S WEST from breaching the partnership agreement, and unspecified compensatory damages. U S WEST has denied each of the claims in Time Warner's countersuit. A trial date of March 16,1996 has been set. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Statement regarding computation of earnings per share of U S WEST, Inc. 12 Statement regarding computation of earnings to fixed charges ratio of U S WEST, Inc. (b) Reports on Form 8-K filed during the third quarter (i) Form 8-K/A report dated July 12, 1995, to Form 8-K filed May 23, 1995, concerning the consolidated financial statements of Time Warner Entertainment Company, L.P. for the years ended December 31, 1994, 1993 and 1992 and for the three month periods ended March 31, 1995 and 1994; the financial statements of Mercury One 2 One for the year ended March 31, 1995; the combined financial statements of Georgia Cable Holdings and subsidiary partnerships for the years ended December 31, 1993 and 1992; and the consolidated financial statements of Wometco Cable Corp. and subsidiaries for the years ended December 31, 1993 and 1992; (ii) report dated July 28, 1995, concerning the release of earnings for the second quarter ended June 30, 1995, and related exhibits; (iii) Form 8-K/A report dated August 24, 1995, to Form 8-K filed May 23, 1995, concerning the consolidated financial statements of Time Warner Entertainment Company, L.P. for the years ended December 31, 1994, 1993 and 1992 and for the three month periods ended March 31, 1995 and 1994; the financial statements of Mercury One 2 One for the year ended March 31, 1995; the combined financial statements of Georgia Cable Holdings and subsidiary partnerships for the years ended December 31, 1993 and 1992; and the consolidated financial statements of Wometco Cable Corp. and subsidiaries for the years ended December 31, 1993 and 1992; (iv) report dated September 22, 1995, concerning U S WEST's announcement entitled "U S WEST Files to Stop Time Warner-Turner Merger"; and (v) report dated September 28, 1995, concerning U S WEST's proposal to reincorporate in 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, including the Proxy Statement and Prospectus mailed to shareholders of U S WEST in connection with the Special Meeting of Shareholders held October 31, 1995. 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, Inc. By: /S/ James T. Anderson James T. Anderson Acting Executive Vice President and Chief Financial Officer November 13, 1995 EX-11 2 EXHIBIT 11 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, 1995 1994 1995 1994 --------- ---------- --------- ---------- Income before extraordinary item $ 324,765 $ 318,427 $ 972,441 $ 1,016,982 Extraordinary item (net of tax): Early extinguishment of debt (8,650) - (8,650) - ---------- ---------- ---------- ---------- Net income 316,115 318,427 963,791 1,016,982 Less preferred dividends 855 292 2,536 292 Net income available for ---------- ---------- ---------- ---------- common share calculation $ 315,260 $ 318,135 $ 961,255 $ 1,016,690 ========== ========== ========== ========== Weighted average common shares 471,229 454,997 470,076 451,037 outstanding ========== ========== ========== ========== Income available for common before extraordinary item $ 0.69 $ 0.70 $ 2.06 $ 2.25 Extraordinary item (net of tax): Early extinguishment of debt (0.02) - (0.02) - ---------- ---------- ---------- ---------- Earnings per common share $ 0.67 $ 0.70 $ 2.04 $ 2.25 ========== ========== ========== ==========
EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended EQUIVALENT SHARE: Sept 30, Sept 30, 1995 1994 1995 1994 --------- ---------- --------- ---------- Income before extraordinary item $ 324,765 $ 318,427 $ 972,441 $ 1,016,982 Extraordinary item (net of tax): Early extinguishment of debt (8,650) - (8,650) - ---------- ---------- ---------- ---------- Net income 316,115 318,427 963,791 1,016,982 Less preferred dividends 855 292 2,536 292 Net income available for ---------- ---------- ---------- ---------- common share calculation $ 315,260 $ 318,135 $ 961,255 $ 1,016,690 ========== ========== ========== ========== Weighted average common shares 471,229 454,997 470,076 451,037 outstanding Incremental shares from assumed exercise of stock options 806 493 616 504 ---------- ---------- ---------- ---------- Total common shares 472,035 455,490 470,692 451,541 ========== ========== ========== ========== Income available for common before extraordinary item $ 0.69 $ 0.70 $ 2.06 $ 2.25 Extraordinary item (net of tax): Early extinguishment of debt (0.02) - (0.02) - ---------- ---------- ---------- ---------- Earnings per common and $ 0.67 $ 0.70 $ 2.04 $ 2.25 common equivalent share ========== ========== ========== ==========
EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended FULL DILUTION: Sept. 30, Sept. 30, 1995 1994 1995 1994 --------- ---------- --------- ---------- Income before extraordinary item $ 324,765 $ 318,427 $ 972,441 $ 1,016,982 Interest on Convertible Liquid Yield Option Notes (LYONS) 5,545 5,440 16,707 16,215 ---------- ---------- ---------- ---------- Adjusted income before extraordinary item 330,310 323,867 989,148 1,033,197 Extraordinary item (net of tax): Early extinguishment of debt (8,650) - (8,650) - ---------- ---------- ---------- ---------- Adjusted net income 321,660 323,867 980,498 1,033,197 Less preferred dividends 855 292 2,536 292 ---------- ---------- ---------- ---------- Adjusted net income available for common share calculation $ 320,805 $ 323,575 $ 977,962 $ 1,032,905 ========== ========== ========== ========== Weighted average common shares outstanding 471,229 454,997 470,076 451,037 Incremental shares from assumed exercise of stock options 1,057 493 1,042 504 Shares issued upon conversion of LYONS 9,634 9,894 9,800 10,112 ---------- ---------- ---------- ---------- Total common shares 481,920 465,384 480,918 461,653 ========== ========== ========== ========== Adjusted income available for common before extraordinary item $ 0.68 $ 0.70 $ 2.05 $ 2.24 Extraordinary item (net of tax): Early extinguishment of debt (0.02) - (0.02) - ---------- ---------- ---------- ---------- Earnings per common share - $ 0.66 $ 0.70 $ 2.03 $ 2.24 assuming full dilution ========== ========== ========== ==========
EX-12 3 EXHIBIT 12 EXHIBIT 12
U S WEST, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions) Quarter Ended 9/30/95 9/30/94 Income before income taxes $ 538 $ 514 Interest expense (net of amounts capitalized) 137 104 Interest factor on rentals (1/3) 22 23 Equity losses in unconsolidated ventures 2 - Guaranteed minority interest expense 2 - -------- -------- Earnings $ 701 $ 641 Interest expense 156 114 Interest factor on rentals (1/3) 22 23 Guaranteed minority interest expense 2 - Preferred stock dividends 2 - -------- -------- Fixed charges $ 182 $ 137 Ratio of earnings to fixed charges 3.85 4.68 - ------------------------------------------ -------- --------
Year-to-Date 9/30/95 9/30/94 Income before income taxes $ 1,590 $ 1,645 Interest expense (net of amounts capitalized) 404 323 Interest factor on rentals (1/3) 71 70 Equity losses in unconsolidated ventures 28 - Guaranteed minority interest expense 2 - -------- -------- Earnings $ 2,095 $ 2,038 Interest expense 448 348 Interest factor on rentals (1/3) 71 70 Guaranteed minority interest expense 2 - Preferred stock dividends 5 - -------- -------- Fixed charges $ 526 $ 418 Ratio of earnings to fixed charges 3.98 4.88 - ------------------------------------------- -------- --------
EX-12 4 EXHIBIT 12 EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES Dollars in Millions)
Quarter Ended 9/30/95 9/30/94 -------- -------- Income before income taxes $ 538 $ 514 Interest expense (net of amounts capitalized) 137 104 Interest factor on rentals (1/3) 22 23 Equity losses in unconsolidated ventures 2 - Guaranteed minority interest expense 2 - -------- -------- Earnings $ 701 $ 641 Interest expense 156 114 Interest factor on rentals (1/3) 22 23 Guaranteed minority interest expense 2 - -------- -------- Fixed charges $ 180 $ 137 Ratio of earnings to fixed charges 3.89 4.68 - -------------------------------------------- -------- -------- Year-to-Date 9/30/95 9/30/94 -------- -------- Income before income taxes $ 1,590 $ 1,645 Interest expense (net of amounts capitalized) 404 323 Interest factor on rentals (1/3) 71 70 Equity losses in unconsolidated ventures 28 - Guaranteed minority interest expense 2 - -------- -------- Earnings $ 2,095 $ 2,038 Interest expense 448 348 Interest factor on rentals (1/3) 71 70 Guaranteed minority interest expense 2 - -------- -------- Fixed charges $ 521 $ 418 Ratio of earnings to fixed charges 4.02 4.88 -------------------------------------------- -------- --------
EX-12 5 EXHIBIT 12 EXHIBIT 12
U S WEST Financial Services, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Thousands) Quarter Ended 9/30/95 9/30/94 Income before income taxes $2,297 $ 2,539 Interest expense 7,113 9,655 Interest factor on rentals (1/3) 5 21 - - Earnings $9,415 $12,215 Interest expense 7,113 9,655 Interest factor on rentals (1/3) 5 21 - - Fixed charges $7,118 $ 9,676 Ratio of earnings to fixed charges 1.32 1.26 - ------------------------------------------ - - Year-to-Date 9/30/95 9/30/94 Income before income taxes $ 7,677 $ 4,639 Interest expense 23,682 32,428 Interest factor on rentals (1/3) 36 98 - - Earnings $31,395 $37,165 Interest expense 23,682 32,428 Interest factor on rentals (1/3) 36 98 - - Fixed charges $23,718 $32,526 Ratio of earnings to fixed charges 1.32 1.14 - ------------------------------------------ - -
EX-27 6 FINANCIAL DATA SCHEDULE
5 0000732718 U S WEST, INC. 1,000,000 3-MOS 9-MOS DEC-31-1995 DEC-31-1995 SEP-30-1995 SEP-30-1995 108 108 0 0 1,932 1,932 0 0 248 248 2,937 2,937 32,278 32,278 17,936 17,936 24,761 24,761 6,936 6,936 5,144 5,144 8,161 8,161 651 651 0 0 (397) (397) 24,761 24,761 2,964 8,686 2,964 8,686 0 0 0 0 2,275 6,668 0 0 137 404 538 1,590 213 617 325 973 0 0 (9) (9) 0 0 316 964 .67 2.04 .66 2.03
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