-----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, JCOclqwCht7kkwR7dlojgvzbkujzsc3RWXdm9gDKBAZRYH52WdjPIYouMAjEv6U2 JCjNKix6Z/NrrDscesnMMg== 0000732718-96-000038.txt : 19961118 0000732718-96-000038.hdr.sgml : 19961118 ACCESSION NUMBER: 0000732718-96-000038 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 96662543 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 FORM 10-Q 3RD QTR 1996 30 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------- FORM 10-Q --------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1996 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 of each class of U S WEST, Inc.'s common stock outstanding (net of shares held in treasury), at October 31, 1996, was: U S WEST Communications Group Common Stock - 479,325,224 shares; U S WEST Media Group Common Stock - 474,030,076 shares U S WEST, Inc. Form 10-Q TABLE OF CONTENTS
Page ---- Item - ----- PART I - FINANCIAL INFORMATION 1. U S WEST, Inc. Financial Information Consolidated Statements of Income - Three and Nine Months Ended September 30, 1996 and 1995 3 Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1995 7 Notes to Consolidated Financial Statements 8 2. U S WEST, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 1. U S WEST Communications Group Financial Information Combined Statements of Income - Three and Nine Months Ended September 30, 1996 and 1995 32 Combined Balance Sheets - September 30, 1996 and December 31, 1995 33 Combined Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1995 35 Notes to Combined Financial Statements 36 2. U S WEST Communications Group Management's Discussion and Analysis of Financial Condition and Results of Operations 39 1. U S WEST Media Group Financial Information Combined Statements of Operations - Three and Nine Months Ended September 30, 1996 and 1995 51 Combined Balance Sheets - September 30, 1996 and December 31, 1995 52 Combined Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1995 54 Notes to Combined Financial Statements 55 2. U S WEST Media Group Management's Discussion and Analysis of Financial Condition and Results of Operations 60 PART II - OTHER INFORMATION 1. Legal Proceedings 73 6. Exhibits and Reports on Form 8-K 73
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF INCOME U S WEST, Inc. (Unaudited) Three Months Ended Three Months Ended Nine Months Ended ------------------- -------------------- ------------------ September 30 1996 September 30, 1995 September 30 1996 ------------------- -------------------- ------------------ Dollars in millions - ----------------------------------------------- Sales and other revenues $ 3,179 $ 2,964 $ 9,353 Operating expenses: Employee-related expenses 1,105 1,007 3,246 Other operating expenses 623 592 1,823 Taxes other than income taxes 101 103 319 Depreciation and amortization 624 573 1,796 ------------------- -------------------- ------------------ Total operating expenses 2,453 2,275 7,184 Income from operations 726 689 2,169 Interest expense 140 137 411 Equity losses in unconsolidated ventures 81 38 224 Gains on sales of rural telephone exchanges 2 34 51 Guaranteed minority interest expense 12 2 36 Other expense - net 1 8 47 ------------------- -------------------- ------------------ Income before income taxes, extraordinary item and cumulative effect of change in accounting principle 494 538 1,502 Provision for income taxes 190 213 588 ------------------- -------------------- ------------------ Income before extraordinary item and cumulative effect of change in accounting principle 304 325 914 Extraordinary item: Early extinguishment of debt, net of tax - (9) - ------------------- -------------------- ------------------ Income before cumulative effect of change in accounting principle 304 316 914 Cumulative effect of change in accounting principle - net of tax - - 34 ------------------- -------------------- ------------------ NET INCOME 304 316 948 Preferred dividends 1 1 3 ------------------- -------------------- ------------------ EARNINGS AVAILABLE FOR COMMON STOCK $ 303 $ 315 $ 945 =================== ==================== ================== Nine Months Ended -------------------- September 30 1995 -------------------- Dollars in millions - ----------------------------------------------- Sales and other revenues $ 8,686 Operating expenses: Employee-related expenses 2,982 Other operating expenses 1,661 Taxes other than income taxes 330 Depreciation and amortization 1,695 -------------------- Total operating expenses 6,668 Income from operations 2,018 Interest expense 404 Equity losses in unconsolidated ventures 128 Gains on sales of rural telephone exchanges 112 Guaranteed minority interest expense 2 Other expense - net 6 -------------------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle 1,590 Provision for income taxes 617 -------------------- Income before extraordinary item and cumulative effect of change in accounting principle 973 Extraordinary item: Early extinguishment of debt, net of tax (9) -------------------- Income before cumulative effect of change in accounting principle 964 Cumulative effect of change in accounting principle - net of tax - -------------------- NET INCOME 964 Preferred dividends 3 -------------------- EARNINGS AVAILABLE FOR COMMON STOCK $ 961 ====================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF INCOME U S WEST, Inc. (Unaudited), continued
Three Months Ended Three Months Ended Nine Months Ended ------------------- -------------------- ------------------- September 30 1996 September 30 1995 September 30 1996 ------------------- -------------------- ------------------- In thousands (except per share amounts) - -------------------------------------------------- COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE: Income before extraordinary item and cumulative effect of change in accounting principle $ 0.60 $ 0.62 $ 1.90 Extraordinary item - (0.01) - Cumulative effect of change in accounting principle - - 0.07 ------------------- -------------------- ------------------- COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE $ 0.60 $ 0.61 $ 1.97 =================== ==================== =================== COMMUNICATIONS GROUP DIVIDENDS PER COMMON SHARE $ 0.535 $ 0.535 $ 1.605 =================== ==================== =================== COMMUNICATIONS GROUP AVERAGE COMMON SHARES OUTSTANDING 478,356 471,229 476,744 =================== ==================== =================== MEDIA GROUP EARNINGS PER COMMON SHARE: Income available for common stock before extraordinary item $ 0.04 $ 0.07 $ 0.01 Extraordinary item - (0.01) - ------------------- -------------------- ------------------- MEDIA GROUP EARNINGS PER COMMON SHARE $ 0.04 $ 0.06 $ 0.01 =================== ==================== =================== MEDIA GROUP AVERAGE COMMON SHARES OUTSTANDING 473,902 471,229 473,501 =================== ==================== =================== U S WEST, Inc. EARNINGS PER COMMON SHARE: Income available for common stock before extraordinary item and cumulative effect of change in accounting principle $ - $ 0.69 $ - Extraordinary item - (0.02) - ------------------- -------------------- ------------------- U S WEST, Inc. EARNINGS PER COMMON SHARE $ - $ 0.67 $ - =================== ==================== =================== U S WEST, Inc. AVERAGE COMMON SHARES OUTSTANDING - 471,229 - =================== ==================== =================== Nine Months Ended -------------------- September 30 1995 -------------------- In thousands (except per share amounts) - -------------------------------------------------- COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE: Income before extraordinary item and cumulative effect of change in accounting principle $ 1.91 Extraordinary item (0.01) Cumulative effect of change in accounting principle - -------------------- COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE $ 1.90 ==================== COMMUNICATIONS GROUP DIVIDENDS PER COMMON SHARE $ 1.605 ==================== COMMUNICATIONS GROUP AVERAGE COMMON SHARES OUTSTANDING 470,076 ==================== MEDIA GROUP EARNINGS PER COMMON SHARE: Income available for common stock before extraordinary item $ 0.15 Extraordinary item (0.01) -------------------- MEDIA GROUP EARNINGS PER COMMON SHARE $ 0.14 ==================== MEDIA GROUP AVERAGE COMMON SHARES OUTSTANDING 470,076 ==================== U S WEST, Inc. EARNINGS PER COMMON SHARE: Income available for common stock before extraordinary item and cumulative effect of change in accounting principle $ 2.06 Extraordinary item (0.02) -------------------- U S WEST, Inc. EARNINGS PER COMMON SHARE $ 2.04 ==================== U S WEST, Inc. AVERAGE COMMON SHARES OUTSTANDING 470,076 ====================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc. (Unaudited) Dollars in millions September 30, 1966 December 31, 1965 - ---------------------------------------- ------------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 160 $ 192 Accounts and notes receivable - net 1,973 1,886 Inventories and supplies 198 227 Deferred tax asset 251 282 Prepaid and other 354 322 ------------------- ------------------ Total current assets 2,936 2,909 ------------------- ------------------ Gross property, plant and equipment 34,265 32,884 Accumulated depreciation 19,038 18,207 ------------------- ------------------ Property, plant and equipment - net 15,227 14,677 Investment in Time Warner Entertainment 2,493 2,483 Intangible assets - net 1,791 1,798 Investment in international ventures 1,371 1,511 Net investment in assets held for sale 404 429 Other assets 1,361 1,264 ------------------- ------------------ Total assets $ 25,583 $ 25,071 =================== ==================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc. (Unaudited), continued Dollars in millions September 30, 1996 December 31, 1995 - ------------------------------------------------- -------------------- ------------------- LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 1,728 $ 1,901 Accounts payable 831 975 Employee compensation 382 385 Dividends payable 257 254 Current portion of restructuring charge 207 282 Other 1,461 1,255 -------------------- ------------------- Total current liabilities 4,866 5,052 -------------------- ------------------- Long-term debt 7,402 6,954 Postretirement and other postemployment benefit obligations 2,420 2,433 Deferred taxes, credits and other 1,962 2,033 Preferred securities of subsidiary trust holding Company-guaranteed debentures 600 600 Preferred stock subject to mandatory redemption 51 51 Common shareowners' equity: Common shares 8,396 8,228 Retained earnings (deficit) 41 (115) LESOP guarantee (109) (127) Foreign currency translation adjustments (46) (38) -------------------- ------------------- Total common shareowners' equity 8,282 7,948 -------------------- ------------------- Total liabilities and shareowners' equity $ 25,583 $ 25,071 ==================== ===================
Contingencies (See Note F to the Consolidated Financial Statements) See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS U S WEST, Inc. (Unaudited) Dollars in millions - ------------------------------------- Nine Months Ended September 30, 1996 1995 - ------------------------------------------------------------------- -------- -------- OPERATING ACTIVITIES Net income $ 948 $ 964 Adjustments to net income: Depreciation and amortization 1,796 1,695 Equity losses in unconsolidated ventures 224 128 Gains on sales of rural telephone exchanges (51) (112) Cumulative effect of change in accounting principle (34) - Deferred income taxes and amortization of investment tax credits (68) 93 Changes in operating assets and liabilities: Restructuring payments (126) (268) Postretirement medical and life costs - net of cash fundings (20) (86) Accounts and notes receivable (87) (219) Inventories, supplies and other current assets (9) (81) Accounts payable and accrued liabilities 171 88 Other - net 33 21 -------- -------- Cash provided by operating activities 2,777 2,223 -------- -------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (2,252) (1,943) Investment in international ventures (227) (576) Proceeds from disposals of property, plant and equipment 129 166 Cash (to) from net investment in assets held for sale 176 (108) Other - net (41) (274) -------- -------- Cash (used for) investing activities (2,215) (2,735) -------- -------- FINANCING ACTIVITIES Net proceeds from issuance of short-term debt 187 688 Proceeds from issuance of long-term debt 346 499 Repayments of long-term debt (561) (640) Proceeds from issuance of trust originated preferred securities - net - 581 Dividends paid on common stock and preferred stock (706) (697) Proceeds from issuance of common stock 140 43 Purchases of treasury stock - (63) -------- -------- Cash (used for) provided by financing activities (594) 411 -------- -------- CASH AND CASH EQUIVALENTS Decrease (32) (101) Beginning balance 192 209 -------- -------- Ending balance $ 160 $ 108 ======== ========
See Notes to Consolidated Financial Statements. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Three and Nine Months Ended September 30, 1996 and 1995 (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Basis of Presentation The Consolidated Financial Statements have been prepared by U S WEST, Inc. ("U S WEST" or the "Company") pursuant to the interim reporting 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 ("GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of U S WEST'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 1995 U S WEST Consolidated Financial Statements and notes thereto included in U S WEST's proxy statement mailed to all shareowners on April 8, 1996. Earnings Per Common Share U S WEST Communications Group earnings per common share and dividends per common share and U S WEST Media Group earnings per common share for 1995 have been presented on a pro forma basis to reflect the Communications Group's and the Media Group's stock as if it had been outstanding since January 1, 1995. For periods prior to the November 1, 1995 recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST. New Accounting Standard Effective January 1, 1996, U S WEST adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and associated intangibles be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. SFAS No. 121 also requires that a company no longer record depreciation expense on assets held for sale. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions, except per share amounts) (Unaudited) Adoption of SFAS No. 121 resulted in income of $34 (net of tax of $22) from the cumulative effect of reversing depreciation expense recorded in prior years related to rural telephone exchanges held for sale. Depreciation expense was reversed from the date the Company formally committed to a plan to dispose of the rural exchange assets through January 1, 1996. The income has been recorded as a cumulative effect of change in accounting principle in accordance with SFAS No. 121. The carrying value of the rural exchange assets was approximately $338 at December 31, 1995. As a result of adopting SFAS No. 121, depreciation expense for the three- and nine-month periods ended September 30, 1996 was reduced by $5 ($3 after tax, or $0.01 per Communications Group share) and $21 ($13 after tax, or $0.03 per Communications Group share), respectively. In 1996, depreciation expense will decrease approximately $25 as a result of adopting SFAS No. 121. The combined effects of lower depreciation expense and the cumulative effect of adoption of the new standard will be directly offset by lower recognized gains on future rural exchange sales. B. Investment in Time Warner Entertainment U S WEST has a 25.51 percent pro-rata priority capital and residual equity interest in Time Warner Entertainment Company L.P. ("TWE"). Summarized operating results for TWE follow:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended ------------------- -------------------- ------------------- -------------------- September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995 ------------------- -------------------- ------------------- -------------------- Revenues $ 2,718 $ 2,324 $ 7,811 $ 6,762 Operating expenses* 2,447 2,056 6,975 6,037 Interest and other - net** 216 195 574 556 ------------------- -------------------- ------------------- -------------------- Income before income taxes and extraordinary item $ 55 $ 73 $ 262 $ 169 =================== ==================== =================== ==================== Income before extraordinary item $ 45 $ 47 $ 213 $ 107 Extraordinary item - (24) - (24) ------------------- -------------------- ------------------- -------------------- Net income $ 45 $ 23 $ 213 $ 83 =================== ==================== =================== ==================== * Includes depreciation and amortization of $322 and $260, and $904 and $761 for the three and nine months ended September 30, 1996 and 1995, respectively. ** Includes corporate services of $17 and $17, and $52 and $47 for the three and nine months ended September 30, 1996 and 1995, respectively.
Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) U S WEST 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 the 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 ($3), and $11 and ($14) for the three and nine months ended September 30, 1996 and 1995, respectively. In addition, TWE recorded an extraordinary loss for 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. C. Investment in International Ventures In connection with its review of the financial and operating performance, market value and capital requirements of its international investment portfolio, management has identified certain investments it believes are appropriate to sell or restructure under acceptable terms. As a result, the Company: 1) sold its cable television interests in Hungary, Norway and Sweden and recorded a second-quarter pretax charge of $31 associated with the sale; and 2) in October 1996, the Company increased its ownership in a cable television joint venture in the Czech Republic to approximately 94 percent. This investment had been accounted for on the equity method and is now being consolidated. D. Continental Acquisition On February 27, 1996, U S WEST announced a definitive agreement to merge with Continental Cablevision, Inc. ("Continental"). Continental is the nation's third-largest cable operator. U S WEST will purchase all of Continental's stock for approximately $4.7 to $4.8 billion and will assume Continental's debt and other obligations, the market value of which amounted to approximately $6.5 billion as of June 30, 1996. Consideration for the $4.7 to $4.8 billion in equity will consist of approximately $1 billion liquidation value ($927 million at market value) of U S WEST preferred stock convertible to Media Group common stock; and, at U S WEST's option, between $1 billion and $1.5 billion in cash, and $2.3 billion to $2.7 billion in shares of Media Group common stock. This reflects an October 7, 1996 amendment whereby the two companies effectively fixed the number of shares of Media Group common stock to be issued in the transaction. The transaction is subject to shareholder vote and is expected to close in the fourth quarter of 1996. See Pro Forma Condensed Combined Financial Statements in the Company's Registration Statement on Form S-4 (Reg. No. 333-13901) for further information on the transaction with Continental. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions, except per share amounts) (Unaudited) E. Preferred Securities of Subsidiary Trust Holding Company-Guaranteed Debentures On October 29, 1996, U S WEST Financing II ("Financing II"), a wholly owned subsidiary trust of U S WEST Capital Funding, Inc. ("CFI"), issued $480 of 8.25 percent Trust Originated Preferred Securities (the "Preferred Securities"). Financing II loaned the proceeds of the issue to CFI, a wholly owned subsidiary of U S WEST, in exchange for CFI's 8.25 percent Subordinated Deferrable Interest Notes ("Deferrable Notes") which are guaranteed by U S WEST and due in 2036. CFI has the right under the Deferrable Notes to defer payment of interest for periods up to 20 consecutive quarters, and correspondingly, quarterly dividend payments on the Preferred Securities can be deferred. To the extent this right is exercised by CFI, U S WEST will not be allowed to declare dividends on any of its classes of capital stock. The sole assets of Financing II are the Deferrable Notes. U S WEST has guaranteed the payment of interest and redemption amounts to the holders of the Preferred Securities. The Preferred Securities are redeemable in whole or in part, for $25 per share on or after October 29, 2001. Upon maturity of the Deferrable Notes, Financing II is required to redeem the Preferred Securities. As of October 29, 1996, 19,200,000 Preferred Securities were outstanding. F. Contingencies At U S WEST Communications, Inc. ("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 $155. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) On April 11, 1996, the Washington State Utilities and Transportation Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995 rate request. In February 1995, U S WEST Communications sought to increase revenues by raising rates for basic residential services over a four-year period. The two major issues in this proceeding involve U S WEST Communications' requests for improved capital recovery and elimination of the imputation of Yellow Pages revenue. Instead of granting U S WEST Communications' request, the Commission ordered approximately $91.5 in annual revenue reductions, effective May 1, 1996. Based on the above ruling, U S WEST Communications filed a lawsuit with the King County Superior Court (the "Court") for an appeal of the order, a temporary stay of the ordered rate reduction and an authorization to implement a revenue increase. On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC. The Court granted the stay pending a decision on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues subject to refund with interest. U S WEST Communications expects its appeal to be successful and plans not to accrue any of the amounts subject to refund. However, an adverse judgment on the appeal would have a significant impact on U S WEST Communications' future results of operations. The Company expects the Court to rule on the appeal in November 1996. U S WEST has commitments and debt guarantees associated with its international investments in the principal amount of approximately $600. In addition, a wholly owned subsidiary of U S WEST has guaranteed debt associated with its international investment in the principal amount of approximately $230 and U S WEST guaranteed certain commitments related to its domestic PCS investment of approximately $75. G. 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. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) Building sales and operating revenues of the capital assets segment were $110 and $30 for the three-month periods, and $161 and $137 for the nine-month periods ended September 30, 1996 and 1995, respectively. During the third quarter of 1996, the Company received $66 from the sale of finance receivables. The components of net investment in assets held for sale follow:
Dollars in millions September 30, 1996 December 31, 1995 - ----------------------------------------------- ------------------- ------------------ ASSETS Cash and cash equivalents $ 21 $ 38 Finance receivables - net 873 953 Investment in real estate - net of valuation 223 368 allowance Bonds, at market value 141 149 Investment in FSA 311 399 Other assets 158 162 ------------------- ------------------ Total assets $ 1,727 $ 2,069 =================== ================== LIABILITIES Debt $ 516 $ 796 Deferred income taxes 676 686 Accounts payable, accrued liabilities and other 120 148 Minority interests 11 10 ------------------- ------------------ Total liabilities 1,323 1,640 ------------------- ------------------ Net investment in assets held for sale $ 404 $ 429 =================== ==================
Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) Selected financial data for U S WEST Financial Services follows:
September 30, 1996 December 31, 1995 ------------------- ------------------ Net finance receivables $ 861 $ 931 Total assets 1,042 1,085 Total debt 233 274 Total liabilities 982 1,024 Shareowner's equity 60 61
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 - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH 1995 Comparative details of income before extraordinary item and cumulative effect of change in accounting principle for the three- and nine-month periods ended September 30 follow:
Three Three Nine Nine ---------- ---------- ---------- ---------- Months Months Months Months ---------- ---------- ---------- ---------- Ended Ended Ended Ended ---------- ---------- ---------- ---------- Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent ---------- ---------- -------- ---------- ---------- -------- 1996 1995 Change 1996 1995 Change ---------- ---------- -------- ---------- ---------- -------- Communications Group $ 286 $ 292 (2.1) $ 904 $ 900 0.4 Media Group 18 33 (45.5) 10 73 (86.3) ---------- ---------- -------- ---------- ---------- -------- Total $ 304 $ 325 (6.5) $ 914 $ 973 (6.1) ========== ========== ======== ========== ========== ======== Earnings per common share before extraordinary item and cumulative effect of change in accounting principle Communications Group $ 0.60 $ 0.62 (3.2) $ 1.90 $ 1.91 (0.5) Media Group 0.04 0.07 (42.9) 0.01 0.15 (93.3)
Communications Group Adjusted to exclude certain nonoperating items, the Communications Group's third-quarter 1996 income before extraordinary item and cumulative effect of change in accounting principle was $282, an increase of $6, or 2.2 percent, compared with third quarter 1995. Third-quarter 1996 earnings per common share before extraordinary item and cumulative effect of change in accounting principle ("earnings per share"), similarly adjusted, were $0.59, unchanged from the prior year. The adjustments include the 1996 current quarter impact of $3 ($0.01 per Communications Group share) from adopting SFAS No. 121, gains of $1 (no share impact) and $21 ($0.04 per Communications Group share) on the sales of rural telephone exchanges during 1996 and 1995, respectively, and expenses of $5 ($0.01 per Communications Group share) associated with the 1995 recapitalization plan. Income before extraordinary item and cumulative effect of change in accounting principle for the nine-month period ended September 30, 1996, adjusted to exclude nonoperating items, was $860, an increase of $25, or 3.0 percent, compared with the same period in 1995. Earnings per share for the nine months ended September 30, 1996, similarly adjusted, was $1.81, compared with $1.78 in the same period in 1995. The adjustments include the 1996 current year-to-date impact of $13 ($0.03 per Communications Group share) from adopting SFAS No. 121, gains of 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 $31 ($0.06 per Communications Group share) and $70 ($0.14 per Communications Group share) on the sales of rural telephone exchanges during 1996 and 1995, respectively, and expenses of $5 ($0.01 per Communications Group share) associated with the 1995 recapitalization plan. Effective January 1, 1996, the Communications Group adopted SFAS No. 121 (See Note A) which, among other things, requires that companies no longer record depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted in a one-time gain of $34 (net of tax of $22), or $0.07 per Communications Group share, related to the cumulative effect of change in accounting principle. Increased income at the Communications Group is primarily attributable to higher demand for services. Partially offsetting the effects of higher demand was an increase in costs incurred to address the requirements associated with increased business growth and continuing service-improvement initiatives. Further offsetting the effects of higher demand were third quarter 1996 costs associated with the discontinuance of the Omaha broadband video service trial. Media Group Media Group's income before extraordinary item decreased $15, to $18, and $63, to $10, for the three- and nine-month periods ended September 30, 1996, respectively. The decreases are primarily a result of a third-quarter 1996 after-tax charge totaling $21 to reorganize and reduce headcount related to domestic directories and international headquarters and a second-quarter 1996 after-tax charge of $19 related to the sale of the Company's cable television interests in Norway, Sweden and Hungary. Increased losses associated with unconsolidated international ventures also contributed to the decrease in income before extraordinary item. These decreases were partially offset by improvement in the wireless communications business. SALES AND OTHER REVENUES An analysis of the change in U S WEST's consolidated sales and other revenues follows:
Three Three Nine Nine ----------- ----------- ----------- ----------- Months Months Months Months ----------- ----------- ----------- ----------- Ended Ended Ended Ended ----------- ----------- ----------- ----------- Sept. 30, Sept. 30, Percent Change Sept. 30, Sept. 30, Percent Change ----------- ----------- --------------- ----------- ----------- --------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Communications Group $ 2,515 $ 2,389 5.3 $ 7,480 $ 7,045 6.2 Media Group 694 604 14.9 1,965 1,725 13.9 Intergroup eliminations (30) (29) (3.4) (92) (84) (9.5) ----------- ----------- --------------- ----------- ----------- --------------- Total $ 3,179 $ 2,964 7.3 $ 9,353 $ 8,686 7.7 =========== =========== =============== =========== =========== ===============
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Communications Group Sales and Other Revenues An analysis of changes in the Communications Group's sales and other revenues follows:
Higher (Higher) Increase Increase (Lower) Lower (Decrease) (Decrease) 1996 1995 Prices Refunds Demand Other Dollars Percent Local service Third quarter $1,208 $1,105 $ 2 $ 1 $ 107 $ (7) $ 103 9.3 Nine months 3,532 3,231 19 (4) 301 (15) 301 9.3 Interstate access Third quarter 606 594 (10) (36) 64 (6) 12 2.0 Nine months 1,854 1,774 (43) (46) 174 (5) 80 4.5 Intrastate access Third quarter 192 186 (2) - 8 - 6 3.2 Nine months 571 558 (17) - 32 (2) 13 2.3 Long-distance network Third quarter 272 298 (1) - (15) (10) (26) (8.7) Nine months 840 891 (6) (1) (28) (16) (51) (5.7) Other services Third quarter 237 206 - - - 31 31 15.0 Nine months 683 591 - - - 92 92 15.6 ------ ------ -------- --------- -------- ------- ----------- ---------- Total revenues Third quarter 2,515 2,389 (11) (35) 164 8 126 5.3 Nine months $7,480 $7,045 $ (47) $ (51) $ 479 $ 54 $ 435 6.2 ====== ====== ======== ========= ======== ======= =========== ==========
Local service revenues increased principally as a result of higher demand for services. Total reported access lines increased 633,000, or 4.3 percent during the last 12 months, of which 234,000 is attributed to second lines. Second line installations increased 31.4 percent during the past year. Access line growth was 5.1 percent when adjusted for sales of approximately 116,000 rural telephone access lines during the last 12 months. Also contributing to the increase in local service revenues was expanded growth in new central office features such as caller identification, last call return and continuous redial. Local service revenues from these features were approximately $50 for the third quarter, an increase of over 90 percent as compared to the same period in 1995. For the nine-month period ended September 30, 1996, approximately $130 of local service revenues was generated from these new central office features, an increase of over 100 percent as compared to 1995. Higher revenues from interstate access services resulted from access line growth and increases of 7.9 and 8.9 percent in interstate billed access minutes of use for the three- and nine-month periods ended September 30, 1996, respectively. The increased volume of business was partially offset by the effects of price reductions and sharing related accruals for refunds to interexchange carriers. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Intrastate access revenues increased slightly for the three- and nine-month periods ended September 30, 1996, primarily due to higher demand partially offset by the effects of price reductions. Long-distance network service revenues decreased by 8.7 and 5.7 percent for the three- and nine-month periods ended September 30, 1996, respectively, compared with the same periods in 1995, primarily due to the effects of competition and the implementation of a multiple toll carrier plan ("MTCP") in Iowa in May 1996. The MTCP allows independent telephone companies to act as toll carriers. The impact of the MTCP for the three- and nine-month periods ended September 30, 1996 was long-distance revenue losses of $10 and $16, offset by increases in intrastate access revenues of $1 and $2, and decreases in other operating expenses (i.e., access expense) of $8 and $13, respectively. Excluding the effects of the MTCP, long-distance network service revenues decreased 5.4 and 3.9 percent for the three- and nine-month periods ended September 30, 1996, respectively. Erosion of long-distance revenue will continue due to the loss of exclusivity of 1+ dialing in Minnesota, effective in February 1996, and in Arizona, effective in April 1996. Revenues from other services increased for the three- and nine-month periods ended September 30, 1996 primarily as a result of continued market penetration in voice messaging service and increases in inside wire service and sales of customer premise equipment. Future revenues at U S WEST Communications may be affected by pending regulatory actions in local regulatory jurisdictions. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Media Group Sales and Other Revenues An analysis of the Media Group's sales and other revenues follows:
Three Three Nine Nine ---------- ---------- ---------- ---------- Months Months Months Months ---------- ---------- ---------- ---------- Ended Ended Ended Ended ---------- ---------- ---------- ---------- Sept. 30, Sept. 30, Percent Chang Sept. 30, Sept. 30, Percent ---------- ---------- -------------- ---------- ---------- -------- 1996 1995 1996 1995 Change ---------- ---------- ---------- ---------- -------- Directory and information services: Domestic $ 276 $ 264 4.5 $ 826 $ 784 5.4 International 40 28 42.9 82 72 13.9 ---------- ---------- -------------- ---------- ---------- -------- 316 292 8.2 908 856 6.1 ---------- ---------- -------------- ---------- ---------- -------- Wireless communications: Cellular service 286 223 28.3 792 616 28.6 Cellular equipment 29 23 26.1 77 60 28.3 ---------- ---------- -------------- ---------- ---------- -------- 315 246 28.0 869 676 28.6 ---------- ---------- -------------- ---------- ---------- -------- Cable and telecommunications 60 56 7.1 176 165 6.7 Other 3 10 (70.0) 12 28 (57.1) ---------- ---------- -------------- ---------- ---------- -------- Sales and other revenues $ 694 $ 604 14.9 $ 1,965 $ 1,725 13.9 ========== ========== ============== ========== ========== ========
Media Group sales and other revenues increased 14.9 percent, to $694, and 13.9 percent, to $1,965, for the three- and nine-month periods ended September 30, 1996, respectively. The increases were primarily a result of strong growth in cellular service revenue. Directory and Information Services Revenues related to Yellow Pages directory advertising increased $17, or 6.6 percent, and $51, or 6.7 percent, in the three- and nine-month periods ended September 30, 1996, respectively. The increases are largely a result of a 3.6 percent increase in revenue per local advertiser (primarily a result of price increases of approximately 4.0 percent) and a 1.9 percent increase in local advertisers. These increases were offset by the loss of revenue associated with exited products. International directory publishing revenues increased $12 and $10 in the three- and nine-month periods ended September 30, 1996, respectively. The increases are primarily a result of publishing more directories in 1996 compared with the same periods in 1995. 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 $63, or 28.3 percent, and $176, or 28.6 percent, in the three- and nine-month periods ended September 30, 1996, respectively. These increases are a result of a 43 percent increase in subscribers during the last twelve months, partially offset by an 11 percent drop (on a same property basis) in average revenue per subscriber to $54.00 per month. The increase in subscribers relates to continued growth in demand for wireless services. Cellular equipment revenues increased $6, or 26.1 percent, and $17, or 28.3 percent, in the three- and nine-month periods ended September 30, 1996, respectively. The increases are primarily a result of an increase in unit sales associated with a 33 percent increase in gross customer additions in the first nine months of 1996, partially offset by a decrease in selling price per unit. In July 1994, U S WEST signed an agreement with AirTouch Communications, Inc. ("AirTouch") to combine their domestic cellular properties into a partnership in a multi-phased transaction. During Phase I, which commenced on November 1, 1995, the partners are operating their cellular properties separately. A Wireless Management Company has been formed and is providing centralized services to both companies on a contract basis. In Phase II, the partners will combine their domestic properties into a partnership, subject to obtaining certain authorizations. The parties are seeking to obtain regulatory and other approvals precedent to entering into Phase II. The passage of the Telecommunications Act of 1996 has removed significant regulatory barriers to completion of Phase II. Management expects the interests in the partnership will be approximately 74 percent AirTouch and 26 percent U S WEST (assuming contribution of all domestic cellular properties). The actual interests in the partnership at the commencement of Phase II depend, among other things, on the timing of the Phase II closing and the ability of the partners to combine their domestic properties. U S WEST's interest in the partnership will further adjust depending on the timing of the contribution of its PCS investment. The timing of such contribution is at U S WEST's discretion and will occur either at the closing of Phase II or a date selected by U S WEST, no later than mid-1998. U S WEST has the right to convert its joint venture interest in the domestic cellular properties, valued on a private market basis, into ownership of AirTouch common shares at an appraised public value. In the event the value to be received by U S WEST exceeds 19.9 percent of AirTouch's outstanding common stock, U S WEST will receive the excess in the form of non-voting preferred stock. This right becomes exercisable upon the latter of: 1) completion of Phase II of the merger and 2) contribution of both U S WEST's and AirTouch's interests in PrimeCo Personal Communications ("PrimeCo") to the joint venture. The Company expects that these conditions will be met by early 1997. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Cable and Telecommunications Cable and telecommunications revenues increased $6, or 11.1 percent, and $17, or 10.7 percent, in the three- and nine-month periods ended September 30, 1996, respectively. The increases give effect to a change in the method of recording franchise fees implemented in late 1995 as if it was in effect throughout 1995. A 4.6 percent increase in revenue per subscriber (primarily a result of rate increases) and a 6.0 percent increase in subscribers during the last twelve months were the primary factors underlying the revenue increases. COSTS AND EXPENSES
Three Three Nine Nine ---------- ---------- ---------- ---------- Months Months Months Months ---------- ---------- ---------- ---------- Ended Ended Ended Ended ---------- ---------- ---------- ---------- Sept. 30, Sept. 30, Percent Change Sept. 30, Sept. 30, Percent ---------- ---------- --------------- ---------- ---------- -------- 1996 1995 1996 1995 Change ---------- ---------- ---------- ---------- -------- Employee-related expenses $ 1,105 $ 1,007 9.7 $ 3,246 $ 2,982 8.9 Other operating expenses 623 592 5.2 1,823 1,661 9.8 Taxes other than income taxes 101 103 (1.9) 319 330 (3.3) Depreciation and amortization 624 573 8.9 1,796 1,695 6.0 Interest expense 140 137 2.2 411 404 1.7 Equity losses in unconsolidated ventures 81 38 - 224 128 75.0 Guaranteed minority interest expense 12 2 - 36 2 - Other expense - net 1 8 (87.5) 47 6 -
Employee-Related Expenses Salaries and wages at the Communications Group increased employee-related expenses by approximately $42 and $105 for the three- and nine-month periods ended September 30, 1996, respectively, primarily due to inflation-driven wage increases. Salaries and wages were reduced through employee reductions associated with the Company's restructuring program; however, costs related to workforce additions needed to meet increased business growth and service-improvement initiatives mostly offset these benefits. Contract labor at the Communications Group increased approximately $47 and $109 for the three- and nine-months periods ended September 30, 1996, respectively. The increase was primarily due to increased network operations costs incurred to meet increased business growth and marketing organization costs associated with the implementation of new products and services. Also contributing to the third quarter increase in contract labor was $6 in costs related to the discontinuance of the Omaha broadband video service trial. Approximately $15 of the nine-month increase in Communications Group's employee-related expenses (i.e., contract labor and overtime) was attributed to severe flooding in Washington and Oregon in the first quarter of 1996. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Employee related expenses also increased due to one-time costs of $31 associated with reorganizing and reducing headcount in the Media Group's domestic directories operations and international headquarters. Additional costs associated with expansion of the Media Group's domestic cellular customer base also contributed to the nine-month increase. Partially offsetting the three- and nine-month increases in employee-related expenses at the Communications Group was a reduction in the postretirement benefits accrual and lower travel and conference expenses. Additionally, overtime expense at the Communication Group decreased in the third quarter due to cost reduction efforts. Other Operating Expenses The increase in other operating expense is primarily due to the rapid expansion of the Media Group's domestic cellular subscriber base and increased costs related to implementing a new brand name. One-time costs of $4 associated with reorganizing and reducing headcount in the Media Group's international headquarters also contributed to the increase. Other operating expenses increased at the Communications Group primarily due to increased uncollectibles, higher advertising costs and greater materials and supplies expense. Higher costs associated with increased sales of customer premise equipment combined with an $11 third-quarter 1996 charge related to the discontinuance of the Omaha broadband video service trial also contributed to the increase. Partially offsetting the increase in other operating expense was reduced access expense at the Communications Group of which a portion related to the implementation of the MTCP in Iowa in May 1996. Depreciation and Amortization Increased depreciation and amortization expense was primarily attributable to the effects of a higher depreciable asset base at the Communications Group. Also contributing to the increase was the expansion of the Media Group's domestic cellular network and the placement of upgraded cable and telecommunication assets in service. Partially offsetting the increases were the effects of 1995 sales of rural telephone exchanges and the adoption of SFAS No. 121 at 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 Interest Expense and Other Interest expense increased primarily due to higher average debt levels partially offset by an increase in interest capitalized related to the domestic PCS and international Malaysian investments. Equity losses increased $43 and $96 for the three- and nine-month periods, respectively. The increases are predominantly a result of increased financing costs associated with expansion of the network at TeleWest and start-up and other costs associated with new international investments. The Media Group's domestic PCS investment also contributed to the increase in losses. The Media Group expects losses related to international ventures will be significant in 1996. Guaranteed minority interest expense reflects the September 11, 1995 issuance of Preferred Securities totaling $600. Other expense decreased $7 and increased $41 for the three- and nine-month periods, respectively. The third quarter decrease is primarily a result of costs associated with a recapitalization in 1995. A second-quarter 1996 pre-tax charge of $31, associated with the sale of the Company's cable television interests in Norway, Sweden and Hungary, contributed significantly to the increase in other expense during the nine-month period. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Cash provided by operations increased $554 in the first nine months of 1996, compared with the same period in 1995. Business growth along with a decrease in the cash funding of postretirement benefits and lower restructuring expenditures contributed to the increase in cash provided by operations. The increase was also attributable to increased accounts receivable collection efforts at the Communications Group. Partially offsetting the increase were higher federal income tax payments associated with lower tax benefits from the TWE partnership. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Investing Activities Investments in international ventures were $227 for the first nine months of 1996. Significant 1996 investments include loans provided to the PCS investment in the United Kingdom, Mercury One 2 One ("One 2 One") and the purchase of a 23 percent interest in a venture to provide wireless service in Poland. In connection with its review of the financial and operating performance, market value and capital requirements of its international investment portfolio, management has identified certain investments it believes are appropriate to sell or restructure under acceptable terms. Management expects that sales proceeds could approximate $400 in the next two years. As a result, the Company: 1) sold its cable television interests in Hungary, Norway and Sweden and recorded a second-quarter pretax charge of $31 associated with the sale; and 2) in October 1996, the Company increased its ownership in a cable television joint venture in the Czech Republic to approximately 94 percent. U S WEST from time to time engages in preliminary discussions regarding acquisitions, dispositions and other similar transactions. Any such transaction may include, among other things, the transfer of certain assets, businesses or interests, or the incurrence or assumption of indebtedness, and could be material to the financial condition and results of operations of U S WEST and the Media Group. There is no assurance that any such discussions will result in the consummation of any such transaction. Financing Activities Debt increased $275 as of September 30, 1996, compared with December 31, 1995. The increase is primarily a result of the second-quarter 1996 issuance of $254 of Debt Exchangeable for Common Stock ("DECS"), due May 15, 1999. Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of Financial Security Assurance Holdings Ltd. ("FSA") held by U S WEST or the cash equivalent, at U S WEST's option. The capital assets segment currently owns approximately 40 percent of the outstanding FSA common stock. On October 29, 1996, the Company refinanced commercial paper assigned to the Media Group through the issuance of 8.25 percent Trust Originated Preferred Securities totaling $480. The payment of interest and redemption amounts to holders of the securities are fully and unconditionally guaranteed by U S WEST. U S WEST has commitments and debt guarantees associated with its international investments in the principal amount of approximately $600. In addition, a wholly owned subsidiary of U S WEST has guaranteed debt associated with its international investment in the principal amount of approximately $230 and U S WEST guaranteed certain commitments related to its domestic PCS investment of approximately $75. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Excluding debt associated with the capital assets segment, the Company's percentage of debt to total capital at September 30, 1996, was 50.6 percent compared with 50.7 percent at December 31, 1995. Including debt associated with the capital assets segment, Preferred Securities and other preferred stock, the Company's percentage of debt to total capital was 55.4 percent at September 30, 1996 compared with 56.4 percent at December 31, 1995. On February 27, 1996, U S WEST announced a definitive agreement to merge with Continental Cablevision, Inc. ("Continental"). Continental is the nation's third-largest cable operator. U S WEST will purchase all of Continental's stock for approximately $4.7 to $4.8 billion and will assume Continental's debt and other obligations, the market value of which amounted to approximately $6.5 billion as of June 30, 1996. Consideration for the $4.7 to $4.8 billion in equity will consist of approximately $1 billion liquidation value ($927 million at market value) of U S WEST preferred stock convertible to Media Group common stock; and, at U S WEST's option, between $1 billion and $1.5 billion in cash, and $2.3 billion to $2.7 billion in shares of Media Group common stock. This reflects an October 7, 1996 amendment whereby the two companies effectively fixed the number of shares of Media Group common stock to be issued in the transaction. The transaction is subject to shareholder vote and is expected to close in the fourth quarter of 1996. See Pro Forma Condensed Combined Financial Statements in the Company's Registration Statement on Form S-4 (Reg. No. 333-13901) for further information on the transaction with Continental. During October 1996, in connection with U S WEST's planned merger with Continental, Duff & Phelps and Fitch each lowered U S WEST's credit ratings. The senior unsecured debt ratings were lowered to triple-B-plus, the Preferred Securities were lowered to triple-B, the liquid yield option notes were lowered to triple-B, and the commercial paper ratings were lowered to D-2 and F-2. The credit ratings are being reviewed by Moody's which may result in a downgrading. U S WEST Communications' credit ratings were lowered during October 1996 in connection with the regulatory uncertainty surrounding the WUTC's $91.5 rate reduction order (See "Contingencies") and U S WEST's planned merger with Continental. Duff & Phelps lowered the senior unsecured debt rating to AA-minus and reaffirmed the D-1-plus commercial paper rating. Fitch lowered the senior unsecured debt rating to A-plus and the commercial paper rating to F-1. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued RESTRUCTURING CHARGE 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. Following is a schedule of the costs included in the Restructuring Plan:
Actual Actual Actual Estimate Estimate ------- ------- ------- --------- --------- Restructuring Plan Costs 1993 1994 1995 1996 1997 Total - ------------------------------ ----- ------- ------- ------- --------- --------- Cash expenditures: Employee separation (1) $ - $ 19 $ 76 $ 85 $ 108 $ 288 Systems development - 127 145 128 - 400 Real estate - 50 66 14 - 130 Relocation - 21 24 5 2 52 Retraining and other - 16 23 22 4 65 ----- ------- ------- ------- --------- --------- Total cash expenditures - 233 334 254 114 935 Asset write-down 65 - - - - 65 ----- ------- ------- ------- --------- --------- Total 1993 Restructuring Plan 65 233 334 254 114 1,000 Remaining 1991 plan employee costs (1) - 56 - - - 56 ----- ------- ------- ------- --------- --------- Total $ 65 $ 289 $ 334 $ 254 $ 114 $ 1,056 ===== ======= ======= ======= ========= ========= (1) Employee separation costs, including the balance of the 1991 restructuring reserve at December 31, 1993, aggregate $344.
Employee separation costs include severance payments, health-care coverage and postemployment education benefits associated with the planned reduction of 10,000 employees. 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. Real estate costs include preparation costs for the new service centers. The Company has consolidated its 560 customer service centers into 26 centers in 10 cities. 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. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued The timing and mix of employee separations has been changed. Managerial and occupational employee separations under the Restructuring Plan are estimated to be 3,670 and 6,330, respectively, as compared with previous estimates of 2,738 and 7,262. As a result of this change, the currently estimated cost for employee separations is $344, compared with $316 as previously estimated. The cost increase will be funded through a transfer from the reserve for employee relocations. Additionally, 1,000 employee separations previously scheduled for 1997 will occur in 1996. Accordingly, estimated employee separation costs increased by $49 in 1996, of which $21 was transferred from 1997 and $28 was reallocated from the reserve for employee relocations. Following are current estimates of employee separations and separation costs:
Actual Actual Estimate Estimate ------------ ------- --------- --------- Employee Separations 1994 1995 1996 1997 Total - ------------------------- ------------ ------- --------- --------- ------- Managerial 497 682 1,435 1,056 3,670 Occupational 1,683 1,643 565 2,439 6,330 ------------ ------- --------- --------- ------- Total 2,180 2,325 2,000 3,495 10,000 ============ ======= ========= ========= ======= Actual Actual Estimate Estimate ------------ ------- --------- --------- Employee Separation Costs 1994(1) 1995 1996 1997 Total - ------------------------- ------------ ------- --------- --------- ------- Managerial $ 5 $ 30 $ 72 $ 51 $ 158 Occupational 14 46 13 57 130 ------------ ------- --------- --------- ------- Total 19 76 85 108 288 Remaining 1991 reserve 56 - - - 56 ------------ ------- --------- --------- ------- Total $ 75 $ 76 $ 85 $ 108 $ 344 ============ ======= ========= ========= ======= (1) Includes the remaining employees and the separation amounts associated with the balance of a 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), continued Progress Under the Restructuring Plan: Following is a reconciliation of restructuring reserve activity during the first nine months of 1996:
Change in ------------------ Relocation/ ------------------ First Nine Employee --------------- ------------------ Reserve Balance Months Separation Reserve Balance ------------------ --------------- ------------------ ------------------- December 31, 1995 1996 Activity Amounts (1) September 30, 1996 ------------------ --------------- ------------------ ------------------- Employee separations Managerial $ 68 $ (28) $ 55 $ 95 Occupational 97 (11) (27) 59 ------------------ --------------- ------------------ ------------------- Total separations 165 (39) 28 154 Systems development Service delivery 44 (26) - 18 Service assurance 26 (7) - 19 Capacity provisioning 42 (22) - 20 All other 16 (12) - 4 ------------------ --------------- ------------------ ------------------- Total systems 128 (67) - 61 Real estate 14 (4) - 10 Relocation 35 (2) (28) 5 Retraining and other 26 (14) - 12 ------------------ --------------- ------------------ ------------------- Total $ 368 $ (126) $ - $ 242 ================== =============== ================== =================== (1) As a result of the change in the estimated mix of total employee separations, $27 was transferred from the occupational to the managerial employee separation reserve. Additionally, $28 was reallocated from the relocation reserve to the managerial employee separation reserve.
First Nine Cumulative ---------------- ------------------ 1994 1995 Months Separations At ----------- ----------- ---------------- ------------------ Separations Separations 1996 Separations September 30, 1996 ----------- ----------- ---------------- ------------------ Employee separations Managerial 497 682 549 1,728 Occupational 1,683 1,643 444 3,770 ----------- ----------- ---------------- ------------------ Total 2,180 2,325 993 5,498 =========== =========== ================ ==================
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued 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 $155. On April 11, 1996, the WUTC acted on U S WEST Communications' 1995 rate request. In February 1995, U S WEST Communications sought to increase revenues by raising rates for basic residential services over a four-year period. The two major issues in this proceeding involve U S WEST Communications' requests for improved capital recovery and elimination of the imputation of Yellow Pages revenue. Instead of granting U S WEST Communications' request, the Commission ordered approximately $91.5 in annual revenue reductions, effective May 1, 1996. Based on the above ruling, U S WEST Communications filed a lawsuit with the King County Superior Court (the "Court") for an appeal of the order, a temporary stay of the ordered rate reduction and an authorization to implement a revenue increase. On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC. The Court granted the stay pending a decision made on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues subject to refund with interest. U S WEST Communications expects its appeal to be successful and plans not to accrue any of the amounts subject to refund. However, an adverse judgment on the appeal would have a significant impact on U S WEST Communications' future results of operations. The Company expects the Court to rule on the appeal in November 1996. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued REGULATORY ENVIRONMENT On August 8, 1996, the Federal Communications Commission ("FCC") established a framework of detailed national rules that will enable the states and the FCC to begin implementing the local competition provisions of the Telecommunications Act of 1996. Included in the order are requirements that local exchange carriers ("LECs"): a) provide interconnection to any requesting telecommunications carrier at any technically feasible point, equal in quality to that provided by the incumbent LEC; b) provide unrestricted access to network services on an unbundled basis; c) provide physical collocation of equipment necessary for interconnection at the incumbent LEC's premises, unless physical collocation is not practical for technical reasons or because of space limitations; and d) offer for resale any telecommunications services that the LEC provides at retail to subscribers who are not telecommunications carriers. The order also stipulates that commercial mobile radio service operators ("CMRS"), which include the Company's wireless operations, are entitled to reciprocal compensation arrangements and that a LEC may not charge a CMRS provider for terminating LEC-originated traffic. The FCC's order continues to provide for access charge recovery by LECs from interexchange carriers until it further evaluates the issues of access charge reform and universal service. The FCC order also established rigid costing and pricing rules which, from the Company's perspective, significantly impede negotiations with new entrants, State Public Utility Commission ("PUC") interconnection rulemakings, and interconnection arbitrations. U S WEST appealed the FCC order and sought a stay of portions of the order, including certain pricing provisions, pending appellate review. On October 15, 1996, the Eighth Circuit Court of Appeals ("Eighth Circuit") issued its order granting a stay of all the pricing provisions of the FCC order. The stay does not postpone implementation of the Telecommunications Act of 1996. Rather the effect of the stay is to have interconnection and network unbundled element pricing be resolved through negotiations or state PUC arbitrations without the PUCs being limited in their consideration of relevant costs. Subsequently, the FCC and certain interexchange carriers requested the United States Supreme Court ("Supreme Court") to review and vacate the Eighth Circuit stay. On October 31, 1996, the Supreme Court denied these requests. Thereafter, the FCC and certain interexchange carriers petitioned the Supreme Court for further consideration of vacating the stay. On November 12, 1996, the Supreme Court rejected these further petitions. Thus, the Eighth Circuit stay will remain in effect until modified by that court or until the appeal is resolved. A decision on the appeal is expected by May 1997. The order's impact on the Company's future results is unknown. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued OTHER ITEMS U S WEST Communications and the other regional Bell operating companies ("RBOCs") continue to explore the disposal of their interests in Bell Communications Research Inc. ("Bellcore"), one-seventh of which is owned by U S WEST Communications. The majority of the research and development activities of the Communications Group are currently conducted at Bellcore. Following such disposal, Bellcore and other third parties will provide research and development and other services to the Communications Group on a contract basis. Some of the information presented in or in connection with this report constitutes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results will not differ materially from its expectations. Factors that could cause actual results to differ from expectations include: (i) greater than anticipated competition from new entrants into the local exchange and intralata toll markets, (ii) changes in demand for the Company's products and services, including optional custom calling features, (iii) higher than anticipated employee levels, capital expenditures, and operating expenses at the Communications Group as a result of unusually rapid in-region growth, (iv) the gain or loss of significant customers, (v) pending regulatory actions in state jurisdictions, (vi) regulatory changes affecting the telecommunications industry, including changes that could have an impact on the competitive environment in the local exchange market, (vii) a change in economic conditions in the various markets served by the Company's operations that could adversely affect the level of demand for cable, wireless, directories or other services offered by the Company, (viii) greater than anticipated competitive activity requiring new pricing for services, (ix) higher than anticipated start-up costs associated with new business opportunities, (x) increases in fraudulent activity with respect to wireless services, (xi) unexpected developments that could postpone or otherwise impede the Continental Cablevision transaction, or (xii) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. Form 10-Q - Part I
COMBINED STATEMENTS OF INCOME U S WEST COMMUNICATIONS GROUP (Unaudited) Three Months Ended Three Months Ended Nine Months Ended -------------------- --------------------- ------------------- September 30, 1996 September 30, 1995 September 30, 1996 -------------------- --------------------- ------------------- Dollars in millions (except per share amounts) - ---------------------------------------------------------- Operating revenues: Local service $ 1,208 $ 1,105 $ 3,532 Interstate access service 606 594 1,854 Intrastate access service 192 186 571 Long-distance network services 272 298 840 Other services 237 206 683 -------------------- --------------------- ------------------- Total operating revenues 2,515 2,389 7,480 Operating expenses: Employee-related expenses 900 835 2,688 Other operating expenses 402 404 1,177 Taxes other than income taxes 94 95 291 Depreciation and amortization 545 513 1,580 -------------------- --------------------- ------------------- Total operating expenses 1,941 1,847 5,736 -------------------- --------------------- ------------------- Income from operations 574 542 1,744 Interest expense 111 108 332 Gains on sales of rural telephone exchanges 2 34 51 Other expense - net 10 14 22 -------------------- --------------------- ------------------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle 455 454 1,441 Provision for income taxes 169 162 537 -------------------- --------------------- ------------------- Income before extraordinary item and cumulative effect of change in accounting principle 286 292 904 Extraordinary item: Early extinguishment of debt, net of tax - (5) - -------------------- --------------------- ------------------- Income before cumulative effect of change in accounting principle 286 287 904 Cumulative effect of change in accounting principle - net of tax - - 34 -------------------- --------------------- ------------------- NET INCOME $ 286 $ 287 $ 938 ==================== ===================== =================== EARNINGS PER COMMON SHARE: Income before extraordinary item and cumulative effect of change in accounting principle $ 0.60 $ 0.62 $ 1.90 Extraordinary item - (0.01) - Cumulative effect of change in accounting principle - - 0.07 -------------------- --------------------- ------------------- EARNINGS PER COMMON SHARE $ 0.60 $ 0.61 $ 1.97 ==================== ===================== =================== DIVIDENDS PER COMMON SHARE $ 0.535 $ 0.535 $ 1.605 AVERAGE COMMON SHARES OUTSTANDING (thousands) 478,356 471,229 476,744 Nine Months Ended -------------------- September 30, 1995 -------------------- Dollars in millions (except per share amounts) - ---------------------------------------------------------- Operating revenues: Local service $ 3,231 Interstate access service 1,774 Intrastate access service 558 Long-distance network services 891 Other services 591 -------------------- Total operating revenues 7,045 Operating expenses: Employee-related expenses 2,479 Other operating expenses 1,099 Taxes other than income taxes 306 Depreciation and amortization 1,514 -------------------- Total operating expenses 5,398 -------------------- Income from operations 1,647 Interest expense 315 Gains on sales of rural telephone exchanges 112 Other expense - net 30 -------------------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle 1,414 Provision for income taxes 514 -------------------- Income before extraordinary item and cumulative effect of change in accounting principle 900 Extraordinary item: Early extinguishment of debt, net of tax (5) -------------------- Income before cumulative effect of change in accounting principle 895 Cumulative effect of change in accounting principle - net of tax - -------------------- NET INCOME $ 895 ==================== EARNINGS PER COMMON SHARE: Income before extraordinary item and cumulative effect of change in accounting principle $ 1.91 Extraordinary item (0.01) Cumulative effect of change in accounting principle - -------------------- EARNINGS PER COMMON SHARE $ 1.90 ==================== DIVIDENDS PER COMMON SHARE $ 1.605 AVERAGE COMMON SHARES OUTSTANDING (thousands) 470,076
See Notes to Combined Financial Statements. Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP (Unaudited) Dollars in millions September 30, 1996 December 31, 1995 - ---------------------------------------- ------------------- ------------------ ASSETS Current assets: Cash and cash equivalents $ 106 $ 172 Accounts and notes receivable - net 1,593 1,617 Inventories and supplies 185 193 Deferred tax asset 231 259 Prepaid and other 67 51 ------------------- ------------------ Total current assets 2,182 2,292 ------------------- ------------------ Gross property, plant and equipment 32,124 31,178 Accumulated depreciation 18,325 17,649 ------------------- ------------------ Property, plant and equipment - net 13,799 13,529 Other assets 841 764 ------------------- ------------------ Total assets $ 16,822 $ 16,585 =================== ==================
See Notes to Combined Financial Statements. Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP (Unaudited), continued Dollars in millions September 30, 1996 December 31, 1995 - ----------------------------------------------- ------------------- ------------------ LIABILITIES AND EQUITY Current liabilities: Short-term debt $ 1,115 $ 1,065 Accounts payable 661 851 Employee compensation 288 316 Dividends payable 257 254 Current portion of restructuring charge 202 270 Other 1,061 851 ------------------- ------------------ Total current liabilities 3,584 3,607 ------------------- ------------------ Long-term debt 5,661 5,689 Postretirement and other postemployment benefit obligations 2,331 2,351 Deferred taxes, credits and other 1,429 1,462 Communications Group equity 3,817 3,476 ------------------- ------------------ Total liabilities and equity $ 16,822 $ 16,585 =================== ==================
Contingencies (See Note B to the Combined Financial Statements) See Notes to Combined Financial Statements. Form 10-Q - Part I
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP CASH FLOWS (Unaudited) Dollars in millions - --------------------------------------------------------- Nine Months Ended September 30, 1996 1995 - --------------------------------------------------------- -------- -------- OPERATING ACTIVITIES Net income $ 938 $ 895 Adjustments to net income: Depreciation and amortization 1,580 1,514 Gains on sales of rural telephone exchanges (51) (112) Cumulative effect of change in accounting principle (34) - Deferred income taxes and amortization of investment tax credits (11) 121 Changes in operating assets and liabilities: Restructuring payments (114) (254) Postretirement medical and life costs - net of cash fundings (28) (156) Accounts and notes receivable 24 (204) Inventories, supplies and other current assets (14) (63) Accounts payable and accrued liabilities 72 (33) Other - net (5) (10) -------- -------- Cash provided by operating activities 2,357 1,698 -------- -------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,891) (1,703) Proceeds from sales of rural telephone exchanges 130 162 Payments for disposals of property, plant and equipment (1) (1) -------- -------- Cash (used for) investing activities (1,762) (1,542) -------- -------- FINANCING ACTIVITIES Net proceeds from issuance of short-term debt 195 365 Proceeds from issuance of long-term debt 16 499 Repayments of long-term debt (278) (256) Dividends paid on common stock (703) (694) Proceeds from issuance of common stock 109 - Advance to Media Group - (105) -------- -------- Cash (used for) financing activities (661) (191) -------- -------- CASH AND CASH EQUIVALENTS Decrease (66) (35) Beginning balance 172 116 -------- -------- Ending balance $ 106 $ 81 ======== ========
See Notes to Combined Financial Statements. Form 10-Q - Part I U S WEST COMMUNICATIONS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS For the Three Months and Nine Months Ended September 30, 1996 and 1995 (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Basis of Presentation The Combined Financial Statements have been prepared by U S WEST, Inc. ("U S WEST" or the "Company") pursuant to the interim reporting 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 ("GAAP") have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of U S WEST'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 1995 U S WEST Consolidated Financial Statements, the U S WEST Communications Group Combined Financial Statements and the U S WEST Media Group Combined Financial Statements and notes thereto included in U S WEST's proxy statement mailed to all shareowners on April 8, 1996. Earnings Per Common Share Earnings per common share and dividends per common share for 1995 have been presented on a pro forma basis to reflect the Communications Group's stock as if it had been outstanding since January 1, 1995. For periods prior to the November 1, 1995 recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST. New Accounting Standard Effective January 1, 1996, U S WEST adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and associated intangibles be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. SFAS No. 121 also requires that a company no longer record depreciation expense on assets held for sale. Form 10-Q - Part I U S WEST COMMUNICATIONS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) Adoption of SFAS No. 121 resulted in income of $34 (net of tax of $22) from the cumulative effect of reversing depreciation expense recorded in prior years related to rural telephone exchanges held for sale. Depreciation expense was reversed from the date the Company formally committed to a plan to dispose of the rural exchange assets through January 1, 1996. The income has been recorded as a cumulative effect of change in accounting principle in accordance with SFAS No. 121. The carrying value of the rural exchange assets was approximately $338 at December 31, 1995. As a result of adopting SFAS No. 121, depreciation expense for the three- and nine-month periods ended September 30, 1996 was reduced by $5 ($3 after tax, or $0.01 per share) and $21 ($13 after tax, or $0.03 per share), respectively. In 1996, depreciation expense will decrease approximately $25 as a result of adopting SFAS No. 121. The combined effects of lower depreciation expense and the cumulative effect of adoption of the new standard will be directly offset by lower recognized gains on future rural exchange sales. B. Contingencies At U S WEST Communications, Inc. ("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 $155. On April 11, 1996, the Washington State Utilities and Transportation Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995 rate request. In February 1995, U S WEST Communications sought to increase revenues by raising rates for basic residential services over a four-year period. The two major issues in this proceeding involve U S WEST Communications' requests for improved capital recovery and elimination of the imputation of Yellow Pages revenue. Instead of granting U S WEST Communications' request, the Commission ordered approximately $91.5 in annual revenue reductions, effective May 1, 1996. Based on the above ruling, U S WEST Communications filed a lawsuit with the King County Superior Court (the "Court") for an appeal of the order, a temporary stay of the ordered rate reduction and an authorization to implement a revenue increase. Form 10-Q - Part I U S WEST COMMUNICATIONS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC. The Court granted the stay pending a decision on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues subject to refund with interest. U S WEST Communications expects its appeal to be successful and plans not to accrue any of the amounts subject to refund. However, an adverse judgment on the appeal would have a significant impact on U S WEST Communications' future results of operations. The Company expects the Court to rule on the appeal in November 1996. 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 - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH 1995 Comparative details of income before extraordinary item and cumulative effect of change in accounting principle for the three- and nine-month periods ended September 30 follow:
Three Months Ended Three Months Ended ------------------- ------------------- September 30, 1996 September 30, 1995 ------------------- ------------------- Income before extraordinary item and cumulative effect of change in accounting principle $ 286 $ 292 =================== =================== Earnings per common share before extraordinary item and cumulative effect of change in accounting principle $ 0.60 $ 0.62 =================== =================== Nine Months Nine Months Ended Ended -------------- ---------------- Percent Sept. 30, 1996 Sept. 30, 1995 Percent ------- -------------- --------------- -------- Change Change -------- ------ Income before extraordinary item and cumulative effect of change in accounting principles (2.1) $ 904 $ 900 0.4 ======== =============== =============== ======== Earnings per common share before extraordinary item and cumulative effect of change in accounting principle (3.2) $ 1.90 $ 1.91 (0.5) ======== ================ ============== ========
Adjusted to exclude certain nonoperating items, the Communications Group's third-quarter 1996 income before extraordinary item and cumulative effect of change in accounting principle was $282, an increase of $6, or 2.2 percent, compared with third quarter 1995. Third-quarter 1996 earnings per common share before extraordinary item and cumulative effect of change in accounting principle ("earnings per share"), similarly adjusted, were $0.59, unchanged from the prior year. The adjustments include the 1996 current quarter impact of $3 ($0.01 per share) from adopting SFAS No. 121, gains of $1 (no share impact) and $21 ($0.04 per share) on the sales of rural telephone exchanges during 1996 and 1995, respectively, and expenses of $5 ($0.01 per share) associated with the 1995 recapitalization plan. Income before extraordinary item and cumulative effect of change in accounting principle for the nine-month period ended September 30, 1996, adjusted to exclude nonoperating items, was $860, an increase of $25, or 3.0 percent, compared with the same period in 1995. Earnings per share for the nine months ended September 30, 1996, similarly adjusted, was $1.81, compared with $1.78 in the same period in 1995. The adjustments include the 1996 current year-to-date impact of $13 ($0.03 per share) from adopting SFAS No. 121, gains of $31 ($0.06 per share) and $70 ($0.14 per share) on the sales of rural telephone exchanges during 1996 and 1995, respectively, and expenses of $5 ($0.01 per share) associated with the 1995 recapitalization plan. 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 Effective January 1, 1996, the Communications Group adopted SFAS No. 121 (See Note A) which, among other things, requires that companies no longer record depreciation expense on assets held for sale. Adoption of SFAS No. 121 resulted in a one-time gain of $34 (net of tax of $22), or $0.07 per share, related to the cumulative effect of change in accounting principle. Increased income at the Communications Group is primarily attributable to higher demand for services. Partially offsetting the effects of higher demand was an increase in costs incurred to address the requirements associated with increased business growth and continuing service-improvement initiatives. Further offsetting the effects of higher demand were third quarter 1996 costs associated with the discontinuance of the Omaha broadband video service trial. Increased demand for the Communications Group's services resulted in growth in earnings before interest, taxes, depreciation, amortization and other ("EBITDA") of 6.1 and 5.2 percent for the three- and nine-month periods ended September 30, 1996, respectively. EBITDA also excludes gains on sales of certain rural telephone exchanges in 1996 and 1995. The Communications Group believes EBITDA is an important indicator of the operational strength of the business. EBITDA, however, should not be considered as an alternative to operating or net income as an indicator of the performance of the Communications Group's business or as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued OPERATING REVENUES An analysis of changes in the Communications Group's operating revenues follows:
Higher (Higher) Increase Increase (Decrease) -------- --------- ----------- -------------------- (Lower) Lower (Decrease) -------- --------- ----------- 1996 1995 Prices Refunds Demand Other Dollars Percent ------ -------- --------- --------- -------- ----------- -------------------- -------- Local service Third quarter $1,208 $ 1,105 $ 2 $ 1 $ 107 $ (7) $ 103 9.3 Nine months 3,532 3,231 19 (4) 301 (15) 301 9.3 Interstate access Third quarter 606 594 (10) (36) 64 (6) 12 2.0 Nine months 1,854 1,774 (43) (46) 174 (5) 80 4.5 Intrastate access Third quarter 192 186 (2) - 8 - 6 3.2 Nine months 571 558 (17) - 32 (2) 13 2.3 Long-distance network Third quarter 272 298 (1) - (15) (10) (26) (8.7) Nine months 840 891 (6) (1) (28) (16) (51) (5.7) Other services Third quarter 237 206 - - - 31 31 15.0 Nine months 683 591 - - - 92 92 15.6 ------ -------- --------- --------- -------- ----------- -------------------- -------- Total revenues Third quarter 2,515 2,389 (11) (35) 164 8 126 5.3 Nine months $7,480 $ 7,045 $ (47) $ (51) $ 479 $ 54 $ 435 6.2 ====== ======== ========= ========= ======== =========== ==================== ========
Local service revenues increased principally as a result of higher demand for services. Total reported access lines increased 633,000, or 4.3 percent during the last 12 months, of which 234,000 is attributed to second lines. Second line installations increased 31.4 percent during the past year. Access line growth was 5.1 percent when adjusted for sales of approximately 116,000 rural telephone access lines during the last 12 months. Also contributing to the increase in local service revenues was expanded growth in new central office features such as caller identification, last call return and continuous redial. Local service revenues from these features were approximately $50 for the third quarter, an increase of over 90 percent as compared to the same period in 1995. For the nine-month period ended September 30, 1996, approximately $130 of local service revenues was generated from these new central office features, an increase of over 100 percent as compared to 1995. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Higher revenues from interstate access services resulted from access line growth and increases of 7.9 and 8.9 percent in interstate billed access minutes of use for the three- and nine-month periods ended September 30, 1996, respectively. The increased volume of business was partially offset by the effects of price reductions and sharing related accruals for refunds to interexchange carriers. Intrastate access revenues increased slightly for the three- and nine-month periods ended September 30, 1996, primarily due to higher demand partially offset by the effects of price reductions. Long-distance network service revenues decreased by 8.7 and 5.7 percent for the three- and nine-month periods ended September 30, 1996, respectively, compared with the same periods in 1995, primarily due to the effects of competition and the implementation of a multiple toll carrier plan ("MTCP") in Iowa in May 1996. The MTCP allows independent telephone companies to act as toll carriers. The impact of the MTCP for the three- and nine-month periods ended September 30, 1996 was long-distance revenue losses of $10 and $16, offset by increases in intrastate access revenues of $1 and $2, and decreases in other operating expenses (i.e., access expense) of $8 and $13, respectively. Excluding the effects of the MTCP, long-distance network service revenues decreased 5.4 and 3.9 percent for the three- and nine-month periods ended September 30, 1996, respectively. Erosion of long-distance revenue will continue due to the loss of exclusivity of 1+ dialing in Minnesota, effective in February 1996, and in Arizona, effective in April 1996. Revenues from other services increased for the three- and nine-month periods ended September 30, 1996 primarily as a result of continued market penetration in voice messaging service and increases in inside wire service and sales of customer premise equipment. Future revenues at U S WEST Communications may be affected by pending regulatory actions in local regulatory jurisdictions Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued COSTS AND EXPENSES
Three Months Ended Three Months Ended Nine Months Ended ------------------- -------------------- ------------------- September 30,1996 September 30, 1995 Percent Change September 30, 1996 ------------------- -------------------- --------------- ------------------- Employee-related expenses $ 900 $ 835 7.8 $ 2,688 Other operating expenses 402 404 (0.5) 1,177 Taxes other than income taxes 94 95 (1.1) 291 Depreciation and amortization 545 513 6.2 1,580 Interest expense 111 108 2.8 332 Other expense - net 10 14 (28.6) 22 Nine Months Ended ------------------- September 30, 1995 Percent ------------------- -------- Change -------- Employee-related expenses $ 2,479 8.4 Other operating expenses 1,099 7.1 Taxes other than income taxes 306 (4.9) Depreciation and amortization 1,514 4.4 Interest expense 315 5.4 Other expense - net 30 (26.7)
Employee-related expenses increased $65 and $209 for the three- and nine-month periods ended September 30, 1996, respectively. The increases are primarily attributable to continued efforts to meet the requirements associated with increased business growth and service-improvement initiatives. Salaries and wages increased employee-related expenses by approximately $42 and $105 for the three- and nine-month periods ended September 30, 1996, respectively, primarily due to inflation-driven wage increases. Salaries and wages were reduced through employee reductions associated with the Company's restructuring program; however, costs related to workforce additions needed to meet increased business growth and service-improvement initiatives mostly offset these benefits. Contract labor increased approximately $47 and $109 for the three- and nine-months periods ended September 30, 1996, respectively. The increase was primarily due to increased network operations costs incurred to meet increased business growth and marketing organization costs associated with the implementation of new products and services. Also contributing to the third quarter increase in contract labor was $6 in costs related to the discontinuance of the Omaha broadband video service trial. Approximately $15 of the nine-month increase in employee-related expenses (i.e., contract labor and overtime) was attributed to severe flooding in Washington and Oregon in the first quarter of 1996. Partially offsetting the increases in employee-related expenses was a reduction in the postretirement benefits accrual and lower travel and conference expenses. Additionally, overtime expense decreased in the third quarter due to cost reduction efforts. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued The increase in other operating expenses for the nine-month period ended September 30, 1996 is primarily due to increased uncollectibles, higher advertising costs and greater materials and supplies expense. Higher costs associated with increased sales of customer premise equipment combined with an $11 third-quarter 1996 charge related to the discontinuance of the Omaha broadband video service trial also contributed to the increase. Partially offsetting these increases was reduced access expense of which a portion related to the implementation of the MTCP in Iowa in May 1996. During the three-month period ended September 30, 1996, the cost increases mentioned above were more than offset by the decrease in access expense which contributed to the slight decrease in other operating expenses. Increased depreciation and amortization expense was attributable to the effects of a higher depreciable asset base, partially offset by the effects of 1995 sales of rural telephone exchanges, and the effects of adopting SFAS No. 121. Interest expense increased primarily due to higher average debt levels. The decrease in other expense for the three- and nine-month periods ended September 30, 1996 is primarily a result of costs associated with the 1995 recapitalization plan. PROVISION FOR INCOME TAXES
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended ------------------- ------------------- -------------------- -------------------- September 30, 1996 September 30, 1995 Percent September 30, 1996 September 30, 1995 Percent ------------------- ------------------- ------- -------------------- -------------------- ------- Change Change ------- ------- Provision for income taxes $ 169 $ 162 4.3 $ 537 $ 514 4.5 Effective tax rate - - - 37.3% 36.4% -
The increase in the effective tax rate resulted primarily from higher income before income taxes and lower amortization of the investment tax credit. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations increased by $659, to $2,357, in the first nine months of 1996 compared with 1995. The increase in operating cash flow is primarily due to growth in EBITDA, a decrease in the cash funding of postretirement benefits, lower restructuring payments and increased accounts receivable collection efforts. During 1996, debt increased by $22 and the percentage of debt to total capital decreased from 66.0 percent at December 31, 1995, to 64.0 percent at September 30, 1996. The decrease in the percentage of debt to total capital is primarily attributable to increased net income and equity issuances for the dividend reinvestment plan, the employee savings plan and exercise of stock options. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued During October 1996, U S WEST Communications' credit ratings were lowered in connection with the regulatory uncertainty surrounding the WUTC's $91.5 rate reduction order (See "Contingencies") and U S WEST's planned merger with Continental Cablevision, Inc. Duff & Phelps lowered the senior unsecured debt rating to AA-minus and reaffirmed the D-1-plus commercial paper rating. Fitch lowered the senior unsecured debt rating to A-plus and the commercial paper rating to F-1. RESTRUCTURING CHARGE 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. Following is a schedule of the costs included in the Restructuring Plan:
Actual Actual Estimate Estimate ------- ------- --------- --------- Restructuring Plan Costs 1994 1995 1996 1997 Total - -------------------------------------- ------- ------- --------- --------- ------ Cash expenditures: Employee separation (1) $ 19 $ 76 $ 82 $ 106 $ 283 Systems development 118 129 113 - 360 Real estate 50 66 14 - 130 Relocation 21 21 5 - 47 Retraining and other 8 23 22 7 60 ------- ------- --------- --------- ------ Total cash expenditures 216 315 236 113 880 Remaining 1991 plan employee costs (1) 56 - - - 56 ------- ------- --------- --------- ------ Total $ 272 $ 315 $ 236 $ 113 $ 936 ======= ======= ========= ========= ====== (1) Employee separation costs, including the balance of the 1991 restructuring reserve at December 31, 1993, aggregate $339.
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Employee separation costs include severance payments, health-care coverage and postemployment education benefits associated with the planned reduction of 10,000 employees. 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. Real estate costs include preparation costs for the new service centers. The Communications Group has consolidated its 560 customer service centers into 26 centers in 10 cities. 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 timing and mix of employee separations has been changed. Managerial and occupational employee separations under the Restructuring Plan are estimated to be 3,670 and 6,330, respectively, as compared with previous estimates of 2,738 and 7,262. As a result of this change, the currently estimated cost for employee separations is $339, compared with $311 as previously estimated. The cost increase will be funded through a transfer from the reserve for employee relocations. Additionally, 1,000 employee separations previously scheduled for 1997 will occur in 1996. Accordingly, estimated employee separation costs increased by $49 in 1996, of which $21 was transferred from 1997 and $28 was reallocated from the reserve for employee relocations. Following are current estimates of employee separations and separation costs:
Actual Actual Estimate Estimate ------ ------ -------- -------- Employee Separations 1994 1995 1996 1997 Total - -------------------- ------ ------ -------- -------- ------ Managerial 497 682 1,435 1,056 3,670 Occupational 1,683 1,643 565 2,439 6,330 ------ ------ -------- -------- ------ Total 2,180 2,325 2,000 3,495 10,000 ====== ====== ======== ======== ======
Actual Actual Estimate Estimate ------------- ------- --------- --------- Employee Separation Costs 1994(1) 1995 1996 1997 Total - ------------------------- ------------- ------- --------- --------- ------ Managerial $ 5 $ 30 $ 69 $ 49 $ 153 Occupational 14 46 13 57 130 ------------- ------- --------- --------- ------ Total 19 76 82 106 283 Remaining 1991 reserve 56 - - - 56 ------------- ------- --------- --------- ------ Total $ 75 $ 76 $ 82 $ 106 $ 339 ============= ======= ========= ========= ====== (1) Includes the remaining employees and the separation amounts associated with the balance of a 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), continued Progress Under the Restructuring Plan: Following is a reconciliation of restructuring reserve activity during the first nine months of 1996:
Change in ----------------- Relocation/ ----------------- First Nine Employee --------------- ----------------- Reserve Balance Months Separation Reserve Balance ------------------ --------------- ----------------- ------------------- December 31, 1995 1996 Activity Amounts (1) September 30, 1996 ------------------ --------------- ----------------- ------------------- Employee separations Managerial $ 63 $ (28) $ 55 $ 90 Occupational 97 (11) (27) 59 ------------------ --------------- ----------------- ------------------- Total separations 160 (39) 28 149 Systems development Service delivery 44 (26) - 18 Service assurance 26 (7) - 19 Capacity provisioning 42 (22) - 20 All other 1 - - 1 ------------------ --------------- ----------------- ------------------- Total systems 113 (55) - 58 Real estate 14 (4) - 10 Relocation 33 (2) (28) 3 Retraining and other 29 (14) - 15 ------------------ --------------- ----------------- ------------------- Total $ 349 $ (114) $ - $ 235 ================== =============== ================= =================== (1) As a result of the change in the estimated mix of total employee separations, $27 was transferred from the occupational to the managerial employee separation reserve. Additionally, $28 was reallocated from the relocation reserve to the managerial employee separation reserve.
First Nine Cumulative ---------------- ------------------ 1994 1995 Months Separations At ----------- ----------- ---------------- ------------------ Separations Separations 1996 Separations September 30, 1996 ----------- ----------- ---------------- ------------------ Employee separations Managerial 497 682 549 1,728 Occupational 1,683 1,643 444 3,770 ----------- ----------- ---------------- ------------------ Total 2,180 2,325 993 5,498 =========== =========== ================ ==================
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued 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 $155. On April 11, 1996, the WUTC acted on U S WEST Communications' 1995 rate request. In February 1995, U S WEST Communications sought to increase revenues by raising rates for basic residential services over a four-year period. The two major issues in this proceeding involve U S WEST Communications' requests for improved capital recovery and elimination of the imputation of Yellow Pages revenue. Instead of granting U S WEST Communications' request, the Commission ordered approximately $91.5 in annual revenue reductions, effective May 1, 1996. Based on the above ruling, U S WEST Communications filed a lawsuit with the King County Superior Court (the "Court") for an appeal of the order, a temporary stay of the ordered rate reduction and an authorization to implement a revenue increase. On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC. The Court granted the stay pending a decision made on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues subject to refund with interest. U S WEST Communications expects its appeal to be successful and plans not to accrue any of the amounts subject to refund. However, an adverse judgment on the appeal would have a significant impact on U S WEST Communications' future results of operations. The Company expects the Court to rule on the appeal in November 1996. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued REGULATORY ENVIRONMENT On August 8, 1996, the Federal Communications Commission ("FCC") established a framework of detailed national rules that will enable the states and the FCC to begin implementing the local competition provisions of the Telecommunications Act of 1996. Included in the order are requirements that local exchange carriers ("LECs"): a) provide interconnection to any requesting telecommunications carrier at any technically feasible point, equal in quality to that provided by the incumbent LEC; b) provide unrestricted access to network services on an unbundled basis; c) provide physical collocation of equipment necessary for interconnection at the incumbent LEC's premises, unless physical collocation is not practical for technical reasons or because of space limitations; and d) offer for resale any telecommunications services that the LEC provides at retail to subscribers who are not telecommunications carriers. The order also stipulates that commercial mobile radio service operators ("CMRS"), which include the Company's wireless operations, are entitled to reciprocal compensation arrangements and that a LEC may not charge a CMRS provider for terminating LEC-originated traffic. The FCC's order continues to provide for access charge recovery by LECs from interexchange carriers until it further evaluates the issues of access charge reform and universal service. The FCC order also established rigid costing and pricing rules which, from the Company's perspective, significantly impede negotiations with new entrants, State Public Utility Commission ("PUC") interconnection rulemakings, and interconnection arbitrations. U S WEST appealed the FCC order and sought a stay of portions of the order, including certain pricing provisions, pending appellate review. On October 15, 1996, the Eighth Circuit Court of Appeals ("Eighth Circuit") issued its order granting a stay of all the pricing provisions of the FCC order. The stay does not postpone implementation of the Telecommunications Act of 1996. Rather the effect of the stay is to have interconnection and network unbundled element pricing be resolved through negotiations or state PUC arbitrations without the PUCs being limited in their consideration of relevant costs. Subsequently, the FCC and certain interexchange carriers requested the United States Supreme Court ("Supreme Court") to review and vacate the Eighth Circuit stay. On October 31, 1996, the Supreme Court denied these requests. Thereafter, the FCC and certain interexchange carriers petitioned the Supreme Court for further consideration of vacating the stay. On November 12, 1996, the Supreme Court rejected these further petitions. Thus, the Eighth Circuit stay will expected to remain in effect until modified by that court or until the appeal is resolved. A decision on the appeal is expected by May 1997. The order's impact on the Company's future results is unknown. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued OTHER ITEMS U S WEST Communications and the other regional Bell operating companies ("RBOCs") continue to explore the disposal of their interests in Bell Communications Research Inc. ("Bellcore"), one-seventh of which is owned by U S WEST Communications. The majority of the research and development activities of the Communications Group are currently conducted at Bellcore. Following such disposal, Bellcore and other third parties will provide research and development and other services to the Communications Group on a contract basis. Form 10-Q - Part I COMBINED STATEMENTS OF OPERATIONS U S WEST MEDIA GROUP (Unaudited)
Three Months Ended Three Months Ended Nine Months Ended ------------------- -------------------- -------------------- September 30, 1996 September 30, 1995 September 30, 1996 ------------------- -------------------- -------------------- Dollars in millions (except per share amounts) - ---------------------------------------------- Sales and other revenues: Directory and information services $ 316 $ 292 $ 908 Wireless communications 315 246 869 Cable and telecommunications 60 56 176 Other 3 10 12 ------------------- -------------------- -------------------- Total sales and other revenues 694 604 1,965 Operating expenses: Cost of sales and other revenues 221 193 626 Selling, general and administrative 242 204 698 Depreciation and amortization 79 60 216 ------------------- -------------------- -------------------- Total operating expenses 542 457 1,540 Income from operations 152 147 425 Interest expense 30 29 80 Equity losses in unconsolidated ventures 81 38 224 Guaranteed minority interest expense 12 2 36 Other income (expense) - net 10 6 (24) ------------------- -------------------- -------------------- Income before income taxes and extraordinary item 39 84 61 Provision for income taxes 21 51 51 ------------------- -------------------- -------------------- Income before extraordinary item 18 33 10 Extraordinary item: Early extinguishment of debt - net of tax - (4) - ------------------- -------------------- -------------------- NET INCOME 18 29 10 Preferred dividends 1 1 3 ------------------- -------------------- -------------------- EARNINGS AVAILABLE FOR COMMON STOCK $ 17 $ 28 $ 7 ------------------- -------------------- -------------------- EARNINGS PER COMMON SHARE: Income available for common stock before extraordinary item $ 0.04 $ 0.07 $ 0.01 Extraordinary item - ( 0.01) - ------------------- -------------------- -------------------- EARNINGS PER COMMON SHARE $ 0.04 $ 0.06 $ 0.01 =================== ==================== ==================== AVERAGE COMMON SHARES OUTSTANDING (thousands) 473,902 471,229 473,501 =================== ==================== ==================== Nine Months Ended -------------------- September 30, 1995 -------------------- Dollars in millions (except per share amounts) - ---------------------------------------------- Sales and other revenues: Directory and information services $ 856 Wireless communications 676 Cable and telecommunications 165 Other 28 -------------------- Total sales and other revenues 1,725 Operating expenses: Cost of sales and other revenues 539 Selling, general and administrative 634 Depreciation and amortization 181 -------------------- Total operating expenses 1,354 Income from operations 371 Interest expense 89 Equity losses in unconsolidated ventures 128 Guaranteed minority interest expense 2 Other income (expense) - net 24 -------------------- Income before income taxes and extraordinary item 176 Provision for income taxes 103 -------------------- Income before extraordinary item 73 Extraordinary item: Early extinguishment of debt - net of tax (4) -------------------- NET INCOME 69 Preferred dividends 3 -------------------- EARNINGS AVAILABLE FOR COMMON STOCK $ 66 -------------------- EARNINGS PER COMMON SHARE: Income available for common stock before extraordinary item $ 0.15 Extraordinary item ( 0.01) -------------------- EARNINGS PER COMMON SHARE $ 0.14 ==================== AVERAGE COMMON SHARES OUTSTANDING (thousands) 470,076 ====================
See Notes to Combined Financial Statements. Form 10-Q - Part I COMBINED BALANCE SHEETS U S WEST MEDIA GROUP (Unaudited)
September 30, December 31, -------------- ------------- Dollars in millions 1996 1995 - ----------------------------------------- -------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 54 $ 20 Accounts and notes receivable 391 287 Deferred directory costs 254 247 Receivable from Communications Group 71 106 Other 66 81 -------------- ------------- Total current assets 836 741 -------------- ------------- Gross property, plant and equipment 2,140 1,706 Accumulated depreciation 712 558 -------------- ------------- Property, plant and equipment - net 1,428 1,148 Investment in Time Warner Entertainment 2,493 2,483 Intangible assets - net 1,791 1,798 Investment in international ventures 1,371 1,511 Net investment in assets held for sale 404 429 Other assets 530 505 -------------- ------------- Total assets $ 8,853 $ 8,615 ============== =============
See Notes to Combined Financial Statements. Form 10-Q - Part I COMBINED BALANCE SHEETS U S WEST MEDIA GROUP (Unaudited), Continued
September 30, December 31, --------------- -------------- Dollars in millions 1996 1995 - ------------------------------------------------ --------------- -------------- LIABILITIES AND EQUITY Current liabilities: Short-term debt $ 613 $ 836 Accounts payable 247 235 Deferred revenue and customer deposits 85 87 Other 419 411 --------------- -------------- Total current liabilities 1,364 1,569 --------------- -------------- Long-term debt 1,741 1,265 Deferred taxes, credits and other 632 658 Preferred securities of subsidiary trust holding Company-guaranteed debentures 600 600 Preferred stock subject to mandatory redemption 51 51 Media Group equity 4,574 4,599 Company LESOP guarantee (109) (127) --------------- -------------- Total equity 4,465 4,472 --------------- -------------- Total liabilities and equity $ 8,853 $ 8,615 =============== ==============
Contingencies (See Note F to the Combined Financial Statements) See Notes to Combined Financial Statements. Form 10-Q - Part I COMBINED STATEMENTS OF CASH FLOWS U S WEST MEDIA GROUP (Unaudited)
Nine Months Ended September 30, 1996 -------------------------------------- Dollars in millions - --------------------------------------------------------- OPERATING ACTIVITIES Net income $ 10 Adjustments to net income: Depreciation and amortization 216 Equity losses in unconsolidated ventures 224 Deferred income taxes and amortization of investment tax credits (57) Provision for uncollectibles 46 Changes in operating assets and liabilities: Accounts and notes receivable (115) Deferred directory costs, prepaid and other 5 Accounts payable and accrued liabilities 45 Other adjustments - net 46 -------------------------------------- Cash provided by operating activities 420 -------------------------------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (361) Investment in international ventures (227) Investment in domestic PCS (50) Cash (to) from net investment in assets held for sale 176 Other - net 9 -------------------------------------- Cash (used for) investing activities (453) -------------------------------------- FINANCING ACTIVITIES Net (repayments of) proceeds from issuance of short-term debt (8) Repayments of long-term debt (283) Proceeds from issuance of trust originated preferred securities - net - Proceeds from issuance of long-term debt 330 Proceeds from issuance of common stock 31 Dividends paid on preferred stock (3) Advance from Communications Group - Purchase of treasury stock - -------------------------------------- Cash provided by financing activities 67 CASH AND CASH EQUIVALENTS Increase (decrease) 34 Beginning balance 20 -------------------------------------- Ending balance $ 54 ====================================== Nine Months Ended September 30, 1995 -------------------------------------- Dollars in millions - --------------------------------------------------------- OPERATING ACTIVITIES Net income $ 69 Adjustments to net income: Depreciation and amortization 181 Equity losses in unconsolidated ventures 128 Deferred income taxes and amortization of investment tax credits (28) Provision for uncollectibles 37 Changes in operating assets and liabilities: Accounts and notes receivable (52) Deferred directory costs, prepaid and other (18) Accounts payable and accrued liabilities 107 Other adjustments - net 40 -------------------------------------- Cash provided by operating activities 464 -------------------------------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (240) Investment in international ventures (576) Investment in domestic PCS (266) Cash (to) from net investment in assets held for sale (108) Other - net (3) -------------------------------------- Cash (used for) investing activities (1,193) -------------------------------------- FINANCING ACTIVITIES Net (repayments of) proceeds from issuance of short-term debt 323 Repayments of long-term debt (384) Proceeds from issuance of trust originated preferred securities - net 581 Proceeds from issuance of long-term debt - Proceeds from issuance of common stock 104 Dividends paid on preferred stock (3) Advance from Communications Group 105 Purchase of treasury stock (63) -------------------------------------- Cash provided by financing activities 663 CASH AND CASH EQUIVALENTS Increase (decrease) (66) Beginning balance 93 -------------------------------------- Ending balance $ 27 ======================================
See Notes to Combined Financial Statements Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Basis of Presentation The Combined Financial Statements have been prepared by U S WEST, Inc. ("U S WEST" or the "Company") pursuant to the interim reporting 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 U S WEST'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 1995 U S WEST Consolidated Financial Statements, the U S WEST Media Group Combined Financial Statements and the U S WEST Communications Group Combined Financial Statements and notes thereto included in U S WEST's proxy statement mailed to all shareowners on April 8, 1996. Earnings Per Common Share Earnings per common share for 1995 has been presented on a pro forma basis to reflect the Media Group's stock as if it had been outstanding since January 1, 1995. For periods prior to the November 1, 1995 recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) B. Investment in Time Warner Entertainment U S WEST has a 25.51 percent pro-rata priority capital and residual equity interest in Time Warner Entertainment Company L.P. ("TWE"). Summarized operating results for TWE follow:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended ------------------- -------------------- ------------------- -------------------- September 30, 1996 September 30, 1995 September 30, 1996 September 30, 1995 ------------------- -------------------- ------------------- -------------------- Revenues $ 2,718 $ 2,324 $ 7,811 $ 6,762 Operating expenses* 2,447 2,056 6,975 6,037 Interest and other - net** 216 195 574 556 ------------------- -------------------- ------------------- -------------------- Income before income taxes and extraordinary item $ 55 $ 73 $ 262 $ 169 =================== ==================== =================== ==================== Income before extraordinary item $ 45 $ 47 $ 213 $ 107 Extraordinary item - (24) - (24) ------------------- -------------------- ------------------- -------------------- Net income $ 45 $ 23 $ 213 $ 83 =================== ==================== =================== ==================== * Includes depreciation and amortization of $322 and $260, and $904 and $761 for the three and nine months ended September 30,1996 and 1995, respectively. ** Includes corporate services of $17 and $17, and $52 and $47 for the three and nine months ended September 30, 1996 and 1995, respectively.
U S WEST 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 the 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 ($3), and $11 and ($14) for the three and nine months ended September 30, 1996 and 1995, respectively. In addition, TWE recorded an extraordinary loss for 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 U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) C. Investment in International Ventures In connection with its review of the financial and operating performance, market value and capital requirements of its international investment portfolio, management has identified certain investments it believes are appropriate to sell or restructure under acceptable terms. As a result, the Company: 1) sold its cable television interests in Hungary, Norway and Sweden and recorded a second-quarter pretax charge of $31 associated with the sale; and 2) in October 1996, the Company increased its ownership in a cable television joint venture in the Czech Republic to approximately 94 percent. This investment had been accounted for on the equity method and is now being consolidated. D. Continental Acquisition On February 27, 1996, U S WEST announced a definitive agreement to merge with Continental Cablevision, Inc. ("Continental"). Continental is the nation's third-largest cable operator. U S WEST will purchase all of Continental's stock for approximately $4.7 to $4.8 billion and will assume Continental's debt and other obligations, the market value of which amounted to approximately $6.5 billion as of June 30, 1996. Consideration for the $4.7 to $4.8 billion in equity will consist of approximately $1 billion liquidation value ($927 million at market value) of U S WEST preferred stock convertible to Media Group common stock; and, at U S WEST's option, between $1 billion and $1.5 billion in cash, and $2.3 billion to $2.7 billion in shares of Media Group common stock. This reflects an October 7, 1996 amendment whereby the two companies effectively fixed the number of shares of Media Group common stock to be issued in the transaction. The transaction is subject to shareholder vote and is expected to close in the fourth quarter of 1996. See Pro Forma Condensed Combined Financial Statements in the Company's Registration Statement on Form S-4 (Reg. No. 333-13901) for further information on the transaction with Continental. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) E. Preferred Securities of Subsidiary Trust Holding Company-Guaranteed Debentures On October 29, 1996, U S WEST Financing II ("Financing II"), a wholly owned subsidiary trust of U S WEST Capital Funding, Inc. ("CFI"), issued $480 of 8.25 percent Trust Originated Preferred Securities (the "Preferred Securities"). Financing II loaned the proceeds of the issue to CFI, a wholly owned subsidiary of U S WEST, in exchange for CFI's 8.25 percent Subordinated Deferrable Interest Notes ("Deferrable Notes") which are guaranteed by U S WEST and due in 2036. CFI has the right under the Deferrable Notes to defer payment of interest for periods up to 20 consecutive quarters, and correspondingly, quarterly dividend payments on the Preferred Securities can be deferred. To the extent this right is exercised by CFI, U S WEST will not be allowed to declare dividends on any of its classes of capital stock. The sole assets of Financing II are the Deferrable Notes. U S WEST has guaranteed the payment of interest and redemption amounts to the holders of the Preferred Securities. The Preferred Securities are redeemable in whole or in part, for $25 per share on or after October 29, 2001. Upon maturity of the Deferrable Notes, Financing II is required to redeem the Preferred Securities. As of October 29, 1996, 19,200,000 Preferred Securities were outstanding. F. Contingencies U S WEST has commitments and debt guarantees associated with its international investments in the principal amount of approximately $600. In addition, a wholly owned subsidiary of U S WEST has guaranteed debt associated with its international investment in the principal amount of approximately $230 and U S WEST guaranteed certain commitments related to its domestic PCS investment of approximately $75. G. 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. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) Building sales and operating revenues of the capital assets segment were $110 and $30 for the three-month periods, and $161 and $137 for the nine-month periods ended September 30, 1996 and 1995, respectively. During the third quarter of 1996, the Company received $66 from the sale of finance receivables. The components of net investment in assets held for sale follow:
Dollars in millions September 30, 1996 December 31, 1995 - ------------------------------------------------------ ------------------- ------------------ ASSETS Cash and cash equivalents $ 21 $ 38 Finance receivables - net 873 953 Investment in real estate - net of valuation allowance 223 368 Bonds, at market value 141 149 Investment in FSA 311 399 Other assets 158 162 ------------------- ------------------ Total assets $ 1,727 $ 2,069 =================== ================== LIABILITIES Debt $ 516 $ 796 Deferred income taxes 676 686 Accounts payable, accrued liabilities and other 120 148 Minority interests 11 10 ------------------- ------------------ Total liabilities 1,323 1,640 ------------------- ------------------ Net investment in assets held for sale $ 404 $ 429 =================== ==================
Selected financial data for U S WEST Financial Services follows:
September 30, 1996 December 31, 1995 ------------------- ------------------ Net finance receivables $ 861 $ 931 Total assets 1,042 1,085 Total debt 233 274 Total liabilities 982 1,024 Shareowner's equity 60 61
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions) The following discussion is based on the U S WEST Media Group Combined Financial Statements prepared in accordance with generally accepted accounting principles ("GAAP"). The discussion should be read in conjunction with the U S WEST, Inc. Consolidated Financial Statements. A discussion of the Media Group's operations on a proportionate basis follows the GAAP discussion. RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH 1995 SALES AND OTHER REVENUES
Three Months Ended Three Months Ended Nine Months Ended ------------------- ------------------- ------------------- September 30, 1996 September 30, 1995 Percent Change September 30, 1996 ------------------- ------------------- --------------- ------------------- Directory and information services: Domestic $ 276 $ 264 4.5 $ 826 International 40 28 42.9 82 ------------------- ------------------- --------------- ------------------- 316 292 8.2 908 ------------------- ------------------- --------------- ------------------- Wireless communications: Cellular service 286 223 28.3 792 Cellular equipment 29 23 26.1 77 ------------------- ------------------- --------------- ------------------- 315 246 28.0 869 ------------------- ------------------- --------------- ------------------- Cable and telecommunications 60 56 7.1 176 Other 3 10 (70.0) 12 ------------------- ------------------- --------------- ------------------- Sales and other revenues $ 694 $ 604 14.9 $ 1,965 =================== =================== =============== =================== Nine Months Ended ------------------- September 30, 1995 Percent ------------------- -------- Change -------- Directory and information services: Domestic $ 784 5.4 International 72 13.9 ------------------- -------- 856 6.1 ------------------- -------- Wireless communications: Cellular service 616 28.6 Cellular equipment 60 28.3 ------------------- -------- 676 28.6 ------------------- -------- Cable and telecommunications 165 6.7 Other 28 (57.1) ------------------- -------- Sales and other revenues $ 1,725 13.9 =================== ========
Media Group sales and other revenues increased 14.9 percent, to $694, and 13.9 percent, to $1,965, for the three- and nine-month periods ended September 30, 1996, respectively. The increases were primarily a result of strong growth in cellular service revenue. Directory and Information Services Revenues related to Yellow Pages directory advertising increased $17, or 6.6 percent, and $51, or 6.7 percent, in the three- and nine-month periods ended September 30, 1996, respectively. The increases are largely a result of a 3.6 percent increase in revenue per local advertiser (primarily a result of price increases of approximately 4.0 percent) and a 1.9 percent increase in local advertisers. These increases were offset by the loss of revenue associated with exited products. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued International directory publishing revenues increased $12 and $10 in the three- and nine-month periods ended September 30, 1996, respectively. The increases are primarily a result of publishing more directories in 1996 compared with the same periods in 1995. Wireless Communications Cellular service revenues increased $63, or 28.3 percent, and $176, or 28.6 percent, in the three- and nine-month periods ended September 30, 1996, respectively. These increases are a result of a 43 percent increase in subscribers during the last twelve months, partially offset by an 11 percent drop (on a same property basis) in average revenue per subscriber to $54.00 per month. The increase in subscribers relates to continued growth in demand for wireless services. Cellular equipment revenues increased $6, or 26.1 percent, and $17, or 28.3 percent, in the three- and nine-month periods ended September 30, 1996, respectively. The increases are primarily a result of an increase in unit sales associated with a 33 percent increase in gross customer additions in the first nine months of 1996, partially offset by a decrease in selling price per unit. Cable and Telecommunications Cable and telecommunications revenues increased $6, or 11.1 percent, and $17, or 10.7 percent, in the three- and nine-month periods ended September 30, 1996, respectively. The increases give effect to a change in the method of recording franchise fees implemented in late 1995 as if it was in effect throughout 1995. A 4.6 percent increase in revenue per subscriber (primarily a result of rate increases) and a 6.0 percent increase in subscribers during the last twelve months were the primary factors underlying the revenue increases. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued INCOME FROM OPERATIONS
Three Months Ended Three Months Ended Nine Months Ended -------------------- -------------------- -------------------- September 30, 1996 September 30, 1995 Percent September 30, 1996 -------------------- -------------------- -------- -------------------- Change -------- Directory and information services: Domestic $ 101 $ 102 (1.0) $ 326 International 3 (3) - (8) -------------------- -------------------- -------- -------------------- 104 99 5.1 318 -------------------- -------------------- -------- -------------------- Wireless communications 90 56 60.7 200 Cable and telecommunications (1) 7 - 15 Other (41) (15) - (108) - ----------------------------------- -------------------- -------------------- -------- -------------------- Income from operations $ 152 $ 147 3.4 $ 425 ==================== ==================== ======== ==================== Nine Months Ended -------------------- September 30, 1995 Percent -------------------- ------- Change ------- Directory and information services: Domestic $ 300 8.7 International (8) - -------------------- ------- 292 8.9 -------------------- ------- Wireless communications 131 52.7 Cable and telecommunications 15 - Other (67) 61.2 - ----------------------------------- -------------------- ------- Income from operations $ 371 14.6 ==================== =======
During the three- and nine-month periods ended September 30, 1996, Media Group operating income increased 27.2 percent, to $187, and 19.5 percent, to $460, respectively. Earnings before interest, taxes, depreciation and amortization ("EBITDA") increased 28.5 percent, to $266, and 19.4 percent, to $676, respectively, for the same periods. These results exclude the one-time effects of a third-quarter 1996 charge totaling $35 to reorganize and reduce headcount at domestic directories and international headquarters. Also excluded is a charge of $14 recorded in the first and second quarters of 1995 to exit certain domestic directories product lines. The increases were primarily a result of strong growth in wireless communications operations and decreased spending related to exited domestic directories product lines. 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 Directory and Information Services During the three- and nine-month periods ended September 30, 1996, operating income related to domestic directory and information services increased 23.5 percent*, to $126, and 11.8 percent*, to $351, respectively, and EBITDA increased 23.1 percent*, to $133, and 12.7 percent*, to $374, respectively. Decreased spending in 1996, primarily related to exited product lines along with a decrease in the amount of Media Group corporate costs allocated to this line of business has contributed to these increases. The Yellow Pages EBITDA margin of 50 percent* in 1996, has remained unchanged from a year ago. * These results exclude the one-time effects of a third-quarter 1996 charge of $25 to reorganize and reduce headcount in the domestic directories operation. Also excluded is a charge of $14 recorded in the first and second quarters of 1995 to exit certain domestic directories product lines. Operating income for international directory publishing operations increased $6 in the third quarter primarily as a result of additional books published in the quarter. Wireless Communications Cellular operating income increased 60.7 percent, to $90, and 52.7 percent, to $200, for the three- and nine-month periods ended September 30, 1996, respectively. Cellular EBITDA increased 49.4 percent, to $127, and 41.5 percent, to $307, for the same periods, respectively. The increases in operating income and EBITDA are a result of revenue increases associated with the rapidly expanding customer base combined with efficiency gains. The 1996 decline in revenue per customer of 11 percent, on a comparable basis, has been more than offset by decreases in the cost incurred to acquire a customer and the cost to support a customer. Support costs per customer decreased 19 percent and acquisition costs per customer added decreased 6 percent during the nine-month period ended September 30, 1996. The cellular service EBITDA margin has increased to 44.4 percent and 38.8 percent for the three- and nine-month periods, respectively, compared with 38.1 percent and 35.2 percent for the same periods a year ago, respectively. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued In July 1994, U S WEST signed an agreement with AirTouch Communications, Inc. ("AirTouch") to combine their domestic cellular properties into a partnership in a multi-phased transaction. During Phase I, which commenced on November 1, 1995, the partners are operating their cellular properties separately. A Wireless Management Company has been formed and is providing centralized services to both companies on a contract basis. In Phase II, the partners will combine their domestic properties into a partnership, subject to obtaining certain authorizations. The parties are seeking to obtain regulatory and other approvals precedent to entering into Phase II. The passage of the Telecommunications Act of 1996 has removed significant regulatory barriers to completion of Phase II. Management expects the interests in the partnership will be approximately 74 percent AirTouch and 26 percent U S WEST (assuming contribution of all domestic cellular properties). The actual interests in the partnership at the commencement of Phase II depend, among other things, on the timing of the Phase II closing and the ability of the partners to combine their domestic properties. U S WEST's interest in the partnership will further adjust depending on the timing of the contribution of its PCS investment. The timing of such contribution is at U S WEST's discretion and will occur either at the closing of Phase II or a date selected by U S WEST, no later than mid-1998. U S WEST has the right to convert its joint venture interest in the domestic cellular properties, valued on a private market basis, into ownership of AirTouch common shares at an appraised public value. In the event the value to be received by U S WEST exceeds 19.9 percent of AirTouch's outstanding common stock, U S WEST will receive the excess in the form of non-voting preferred stock. This right becomes exercisable upon the latter of: 1) completion of Phase II of the merger and 2) contribution of both U S WEST's and AirTouch's interests in PrimeCo Personal Communications ("PrimeCo") to the joint venture. The Company expects that these conditions will be met by early 1997. Cable and Telecommunications Cable and telecommunications operating income decreased $8 during the three-month period. This decrease is primarily the result of increased depreciation expense associated with placing upgraded assets in service. During the nine-month period the increased depreciation was offset by an increase in EBITDA primarily related to rate increases and subscriber growth. Other The decrease in other operating income is primarily a result of a decrease in the amount of Media Group corporate costs allocated to the Yellow Pages and cellular businesses and an increase in the amount of U S WEST corporate costs allocated to the Media Group. This decrease also includes a one-time third-quarter 1996 charge of $10 related to staff reductions at international headquarters. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued INTEREST EXPENSE AND OTHER
Three Months Ended Three Months Ended Nine Months Ended ------------------- ------------------- -------------------- September 30, 1996 September 30, 1995 Percent September 30, 1996 ------------------- ------------------- ------- -------------------- Change ------- Interest expense $ 30 $ 29 3.4 $ 80 Equity losses in unconsolidated ventures 81 38 - 224 Guaranteed minority interest expense 12 2 - 36 Other income (expense) - net 10 6 66.7 (24) Nine Months Ended ------------------- September 30, 1995 Percent ------------------- -------- Change -------- Interest expense $ 89 (10.1) Equity losses in unconsolidated ventures 128 75.0 Guaranteed minority interest expense 2 - Other income (expense) - net 24 -
Interest expense increased $1 and decreased $9 for the three- and nine-month periods, respectively. Increased interest expense related to issuing Debt Exchangeable for Common Stock ("DECS") in 1995 and 1996 was offset during the three-month period, and more than offset during the nine-month period, by an increase in interest capitalized related to the domestic PCS and international Malaysian investments. Equity losses increased $43 and $96 for the three- and nine-month periods, respectively. The increases are predominantly a result of increased financing costs associated with expansion of the network at TeleWest and start-up and other costs associated with new international investments. The Media Group's domestic PCS investment also contributed to the increase in losses. The Media Group expects losses related to international ventures will be significant in 1996. Guaranteed minority interest expense reflects the September 11, 1995 issuance of Preferred Securities totaling $600. Other income (expense) increased $4 and decreased $48 for the three- and nine-month periods, respectively. The third-quarter increase is primarily a result of costs associated with a recapitalization in 1995. A second-quarter 1996 pre-tax charge of $31, associated with the sale of the Company's cable television interests in Norway, Sweden and Hungary, contributed significantly to the increase in other expense during the nine-month period. 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 Months Ended Three Months Ended Nine Months Ended Nine Months Ended ------------------- ------------------- -------------------- -------------------- September 30, 1996 September 30, 1995 Percent September 30, 1996 September 30, 1995 ------------------- ------------------- -------- -------------------- -------------------- Change -------- Provision for income taxes $ 21 $ 51 (58.8) $ 51 $ 103 Effective tax rate - - - 83.6% 58.5% Percent -------- Change -------- Provision for income taxes (50.5) Effective tax rate -
The increase in the effective tax rate reflects the impact of lower pretax income in relationship to goodwill amortization, primarily related to the acquisition of the Atlanta Systems, and foreign income taxes. These relationships can vary significantly during the year depending on the level of pretax income. NET INCOME Net income of the Media Group decreased $11, to $18, and $59, to $10, for the three- and nine- month periods ended September 30, 1996, respectively. The decreases are primarily a result of the third-quarter 1996 after-tax charge totaling $21 to reorganize and reduce headcount related to domestic directories and international headquarters and the second-quarter 1996 after-tax charge of $19 related to the sale of the Company's cable television interests in Norway, Sweden and Hungary. Increased losses associated with unconsolidated international ventures also contributed to the decrease in net income. These decreases in net income were partially offset by improvement in the wireless communications business. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Cash provided by operating activities of the Media Group decreased $44 in the first nine months of 1996, compared with 1995. Growth in EBITDA was more than offset by higher federal income tax payments associated with lower tax benefits from the TWE partnership and higher interest payments in 1996. Investing Activities Capital expenditures of the Media Group were $361 for the first nine months of 1996. The majority of expenditures in 1996 were devoted to the enhancement and expansion of the cellular network and upgrade of the Atlanta cable systems to 750 megahertz capacity. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Investments in international ventures were $227 for the first nine months of 1996. Significant 1996 investments include loans provided to the PCS investment in the United Kingdom, Mercury One 2 One ("One 2 One") and the purchase of a 23 percent interest in a venture to provide wireless service in Poland. Domestically, the Media Group invested $50 to fund the network build activities at PrimeCo. In connection with its review of the financial and operating performance, market value and capital requirements of its international investment portfolio, management has identified certain investments it believes are appropriate to sell or restructure under acceptable terms. Management expects that sales proceeds could approximate $400 in the next two years. As a result, the Company: 1) sold its cable television interests in Hungary, Norway and Sweden and recorded a second-quarter pretax charge of $31 associated with the sale; and 2) in October 1996, the Company increased its ownership in a cable television joint venture in the Czech Republic to approximately 94 percent. U S WEST from time to time engages in preliminary discussions regarding acquisitions, dispositions and other similar transactions. Any such transaction may include, among other things, the transfer of certain assets, businesses or interests, or the incurrence or assumption of indebtedness, and could be material to the financial condition and results of operations of U S WEST and the Media Group. There is no assurance that any such discussions will result in the consummation of any such transaction. Financing Activities Debt increased $253 as of September 30, 1996, compared with December 31, 1995. The increase is primarily a result of the second-quarter 1996 issuance of $254 of exchangeable notes, or DECS, due May 15, 1999. Upon maturity, each DECS will be mandatorily redeemed by U S WEST for shares of Financial Security Assurance Holdings Ltd. ("FSA") held by U S WEST or the cash equivalent, at U S WEST's option. The capital assets segment currently owns approximately 40 percent of the outstanding FSA common stock. On October 29, 1996, the Company refinanced commercial paper through the issuance of 8.25 percent Trust Originated Preferred Securities totaling $480. The payment of interest and redemption amounts to holders of the securities are fully and unconditionally guaranteed by U S WEST. U S WEST has commitments and debt guarantees associated with its international investments in the principal amount of approximately $600. In addition, a wholly owned subsidiary of U S WEST has guaranteed debt associated with its international investment in the principal amount of approximately $230 and U S WEST guaranteed certain commitments related to its domestic PCS investment of approximately $75. Excluding debt associated with the capital assets segment, the Media Group's percentage of debt to total capital at September 30, 1996, was 31.5 percent compared with 29.1 percent at December 31, 1995. Including debt associated with the capital assets segment, Preferred Securities and other preferred stock, the Media Group's percentage of debt to total capital was 44.1 percent at September 30, 1996 compared with 44.2 percent at December 31, 1995. 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 February 27, 1996, U S WEST announced a definitive agreement to merge with Continental Cablevision, Inc. ("Continental"). Continental is the nation's third-largest cable operator. U S WEST will purchase all of Continental's stock for approximately $4.7 to $4.8 billion and will assume Continental's debt and other obligations, the market value of which amounted to approximately $6.5 billion as of June 30, 1996. Consideration for the $4.7 to $4.8 billion in equity will consist of approximately $1 billion liquidation value ($927 million at market value) of U S WEST preferred stock convertible to Media Group common stock; and, at U S WEST's option, between $1 billion and $1.5 billion in cash, and $2.3 billion to $2.7 billion in shares of Media Group common stock. This reflects an October 7, 1996 amendment whereby the two companies effectively fixed the number of shares of Media Group common stock to be issued in the transaction. The transaction is subject to shareholder vote and is expected to close in the fourth quarter of 1996. See Pro Forma Condensed Combined Financial Statements in the Company's Registration Statement on Form S-4 (Reg. No. 333-13901) for further information on the transaction with Continental. During October 1996, in connection with U S WEST's planned merger with Continental, Duff & Phelps and Fitch each lowered U S WEST's credit ratings. The senior unsecured debt ratings were lowered to triple-B-plus, the Preferred Securities were lowered to triple-B, the liquid yield option notes were lowered to triple-B and the commercial paper ratings were lowered to D-2 and F-2. The credit ratings are being reviewed by Moody's which may result in a downgrading. The Media Group expects that cash from operations will not be adequate to fund expected cash requirements in the foreseeable future. Additional financing will come primarily from new debt. 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 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 table does not reflect financial data of the capital assets segment, which had net assets of $404 at September 30, 1996 and $429 at December 31, 1995. 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.
Cable and Wireless Directory and Infor- Corp & Telecomm. Communications mation Services Other Total -------------- ---------------- --------------------- -------- ------ Dollars in millions Dom. (1) Int'l Dom. Int'l Dom. Int'l - ----------------------------------- -------------- ---------------- --------------------- -------- ------ ------- THREE MONTHS ENDED SEPTEMBER 30, 1996 Revenue $ 753 $ 57 $ 286 $ 111 $ 276 $ 54 $ 3 Operating income (loss) 49 (43) 73 (22) 101 - (7) Net income (loss) (18) (51) 46 (28) 59 3 7 EBITDA (2) 176 (16) 106 1 108 5 (5) Subscribers/Advertisers (thousands) 3,023 647 1,664 419 482 264 - THREE MONTHS ENDED SEPTEMBER 30, 1995 (3) Revenue $ 649 $ 32 $ 221 $ 75 $ 264 $ 28 $11 Operating income (loss) 55 (21) 49 (16) 102 (6) 7 Net income (loss) (11) (23) 24 (16) 65 (6) (4) EBITDA (2) 156 (10) 76 - 108 (3) 10 Subscribers/Advertisers (thousands) 2,790 599 1,162 271 473 254 - Dollars in millions - ----------------------------------- THREE MONTHS ENDED SEPTEMBER 30, 1996 Revenue $1,540 Operating income (loss) 151 Net income (loss) 18 EBITDA (2) 375 Subscribers/Advertisers (thousands) 6,499 THREE MONTHS ENDED SEPTEMBER 30, 1995 (3) Revenue $1,280 Operating income (loss) 170 Net income (loss) 29 EBITDA (2) 337 Subscribers/Advertisers (thousands) 5,549
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 and Wireless Directory and Infor- Corp & -------------- ---------------- --------------------- -------- Telecomm. Communications mation Services Other Total -------------- ---------------- --------------------- -------- ------ Dollars in millions Dom. (1) Int'l Dom. Int'l Dom. Int'l - --------------------------- -------------- ---------------- --------------------- -------- ------ ------- NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenue $ 2,168 $ 157 $ 787 $ 298 $ 826 $ 131 $ 9 $4,376 Operating income (loss) 172 (115) 154 (63) 327 (7) (37) 431 Net income (loss) (26) (157) 88 (70) 193 (9) (9) 10 EBITDA (2) 516 (36) 253 1 349 5 (30) 1,058 NINE MONTHS ENDED SEPTEMBER 30, 1995 (3) Revenue $ 1,890 $ 82 $ 580 $ 200 $ 784 $ 72 $ 27 $3,635 Operating income (loss) 132 (64) 112 (62) 300 (15) 6 409 Net income (loss) (39) (36) 56 (76) 186 (11) (11) 69 EBITDA (2) 431 (34) 188 (25) 318 (7) 14 885 (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 I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued PROPORTIONATE RESULTS OF OPERATIONS - THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH 1995 Proportionate Media Group revenues increased 20 percent, to $1.5 billion and $4.4 billion, for the three- and nine-month periods ended September 30, 1996, respectively. Proportionate EBITDA increased 22 percent, to $410* and $1.1 billion*, for the same periods. Strong growth in domestic cable and telecommunications and wireless communications contributed to the increases. Subscribers/advertisers increased 17 percent to 6.5 million over the last twelve months. Strong growth in domestic wireless and international operations contributed to the increase in subscribers/advertisers. Cable and Telecommunications Proportionate revenues for the domestic cable and telecommunications operations increased 16 percent, to $753, and 15 percent, to $2.2 billion, for the three- and nine-month periods, respectively. Proportionate EBITDA increased 13 percent, to $176, and 20 percent, to $516, for the same periods. Proportionate revenue and EBITDA growth is primarily due to double-digit growth in the TWE cable, programming and filmed entertainment operations combined with Media Group domestic cable overhead reductions. TWE cable growth is attributed to rate increases and subscriber growth of 4.0 percent, on a comparable basis. International cable and telecommunications proportionate revenues increased 78 percent, to $57, and 91 percent, to $157, for the three- and nine-month periods, respectively. Proportionate EBITDA remained nearly unchanged* for the same periods. Increases at TeleWest U.K. combined with new investments in the Netherlands, Czech Republic, Malaysia and Indonesia contributed significantly to the increase in proportionate revenues. Proportionate EBITDA gains at TeleWest U.K. were offset by losses related to new investments. Proportionate subscribers to the international cable properties grew to 647,000, a 41 percent increase from a year ago, excluding subscribers related to the Company's cable television interests in Norway, Sweden and Hungary which were sold in the third-quarter 1996. This increase includes the effect of subscriber growth and the fourth-quarter 1995 merger of TeleWest and SBC Cable Comms (UK). Wireless Communications Proportionate revenues for the domestic cellular operations increased 29 percent, to $286, and 36 percent, to $787, for the three- and nine-month periods, respectively. Proportionate EBITDA increased 39 percent, to $106, and 35 percent, to $253, for the same periods. Excluding domestic PCS results, domestic cellular proportionate EBITDA grew 48 percent and provided a cellular service EBITDA margin of 44 percent in third-quarter 1996. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued The increases are due to a 43 percent increase in proportionate subscribers partially offset by an approximate 11 percent decrease, on a comparable basis, in average revenue per subscriber. Proportionate revenues for the international wireless operations increased 48 percent, to $111, and 49 percent, to $298, for the three- and nine-month periods, respectively. Proportionate EBITDA increased significantly* during the nine-month period. Strong results from One 2 One and Westel 900, a Hungarian cellular operation, contributed to the increases in proportionate revenues and EBITDA. Proportionate subscribers to international wireless joint ventures in the United Kingdom, Hungary, the Czech Republic, Slovakia, Russia, Malaysia and Poland grew to 419,000 at September 30, 1996, a 55 percent increase from a year ago. This strong growth was primarily related to Malaysian, Hungarian and Czech and Slovak Republics ventures. Directory and Information Services Proportionate revenues for domestic directory and information services increased 5 percent for the three- and nine-month periods, respectively. EBITDA increased 23 percent, to $133*, and 13 percent, to $374*, respectively. Decreased spending in 1996, primarily related to exited product lines along with a decrease in the amount of Media Group corporate costs allocated to this line of business has contributed to these increases. The Yellow Pages EBITDA margin of 50 percent* in 1996, has remained unchanged from a year ago. Proportionate revenues for international directories businesses almost doubled for both the three- and nine-month periods, respectively. Proportionate EBITDA increased $9* and $13* for the same periods. The increases are a result of a new investment in a Brazilian directories operation. *These results exclude the one-time effects of a third-quarter 1996 charge of $25 to reorganize and reduce headcount in the domestic directories operation and a charge of $10 to reduce headcount at international headquarters. The international charge has been allocated to the international cable, wireless and directories lines of business in the amounts of $6, $3 and $1, respectively. Also excluded is a charge of $14 recorded in the first and second quarters of 1995 to exit certain domestic directories product lines. Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. Legal Proceedings U S WEST and its subsidiaries are subject to claims and proceedings arising in the ordinary course of business. While complete assurance cannot be given as to the outcome of any contingent liabilities, in the opinion of U S WEST, any financial impact to which U S WEST and its subsidiaries are subject is not expected to be material in amount to U S WEST's operating results or its financial position. On April 11, 1996, the Washington State Utilities and Transportation Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995 rate request. In February 1995, U S WEST Communications sought to increase revenues by raising rates for basic residential services over a four-year period. The two major issues in this proceeding involve U S WEST Communications' requests for improved capital recovery and elimination of the imputation of Yellow Pages revenue. Instead of granting U S WEST Communications' request, the Commission ordered approximately $91.5 in annual revenue reductions, effective May 1, 1996. Based on the above ruling, U S WEST Communications filed a lawsuit with the King County Superior Court (the "Court") for an appeal of the order, a temporary stay of the ordered rate reduction and an authorization to implement a revenue increase. On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC. The Court granted the stay pending a decision on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST Communications began collecting revenues subject to refund with interest. U S WEST Communications expects its appeal to be successful and plans not to accrue any of the amounts subject to refund. However, an adverse judgment on the appeal would have a significant impact on U S WEST Communications' future results of operations. The Company expects the Court to rule on the appeal in November 1996. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number 10(a) Amendment to Agreement and Plan of Merger, dated as of October 7, 1996, among U S WEST, Inc., a Delaware corporation, Continental Merger Corporation, a Delaware corporation, and Continental Cablevision, Inc., a Delaware corporation. 10(b) Amendment No. 1 to Stockholders' Agreement, dated as of October 7, 1996, among the stockholders of Continental Cablevision, Inc. named therein and U S WEST, Inc. (Exhibit 10-B to the Registrant's Registration Statement on Form S-4, File No. 333-13901.) 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. 27 Financial Data Schedule (b) Reports on Form 8-K filed during the third quarter (i) Form 8-K report dated July 25, 1996, concerning the releases of earnings issued on July 25, 1996 by U S WEST Communications Group, and on July 26, 1996 by U S WEST Media Group, for the second quarter ended June 30, 1996, (ii) Form 8-K report dated October 7, 1996, concerning the press release regarding the closing date for the merger of U S WEST Media Group and Continental Cablevision, (iii) Form 8-K report dated October 15, 1996, concerning the consolidated financial statements of Continental Cablevision, Inc. and its subsidiaries of December 31, 1995 and 1996 and June 30, 1996 and for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996, and the audited proforma condensed combined financial statements of U S WEST, Inc. as of June 30, 1996 and for the year ended December 31, 1995 and the six months ended June 30, 1996, and (iv) Form 8-K report dated October 23, 1996, concerning the releases of earnings issued on October 23, 1996 by U S WEST Communications Group, and on October 25, 1996 by U S WEST Media Group, for the third quarter ended September 30, 1996. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /S/ Michael P. Glinsky November 13, 1996 U S WEST, Inc. Michael P. Glinsky Executive Vice President and Chief Financial Officer EX-10 2 AMENDMENT TO MERGER AGREEMENT (..continued) AMENDMENT TO AGREEMENT AND PLAN OF MERGER AMENDMENT, dated as of October 7, 1996 (this "Amendment"), to the Agreement and Plan of Merger, dated as of February 27, 1996, as amended and restated as of June 27, 1996 (the "Merger Agreement"), among U S WEST, Inc., a Delaware corporation ("Acquiror"), Continental Merger Corporation, a Delaware corporation ("Company Sub"), and Continental Cablevision, Inc., a Delaware corporation (the "Company"). W I T N E S S E T H: WHEREAS, Acquiror, Company Sub and the Company desire to amend the Merger Agreement in certain respects, as more fully set forth herein; and WHEREAS, Section 9.5 of the Merger Agreement permits amendments to the Merger Agreement by the written agreement of Acquiror, Company Sub and the Company. NOW, THEREFORE, in consideration of the mutual covenants and agreement set forth herein, the parties hereto agree as follows: ARTICLE I AMENDMENTS TO THE MERGER AGREEMENT 1.1. Definitions. (a) The definition of "Class A Preferred Consideration Amount" set forth in Section 1.1 of the Merger Agreement is hereby amended by inserting the clause "but excluding any and all unvested and outstanding shares of Restricted Company Common Stock" at the end thereof. (b) The definition of "Class A Preferred Percentage" set forth in Section 1.1 of the Merger Agreement is hereby amended by deleting the words "Class A" from clause (y) thereof. (c) The definition of "Calculation Price" set forth in Section 1.1 of the Merger Agreement is hereby amended and restated as follows: "Calculation Price" shall mean $21.00. (d) The definition of "Transaction Value" set forth in Section 1.1 of the Merger Agreement is hereby amended by inserting the clause "but excluding any and all unvested and outstanding shares of Restricted Company Common Stock" at the end thereof. (e) Section 1.1 of the Merger Agreement is hereby amended by deleting the definitions of "Cap Price," "Determination Price," "Floor Price," "Intra-Day Closing Prices," "Random Trading Days" and "Trading Day" in their entirety. (f) The following additional definitions are hereby added to Section 1.1 of the Merger Agreement: "Class B Common Stock Election Conversion Number" shall mean the quotient of (x) the product of (A) the Class B Common Percentage multiplied by (B) the Share Price divided by (y) the Calculation Price (rounded to the nearest hundredth, or if there shall not be a nearest hundredth, to the next lowest hundredth). "Conversion Number" shall mean the quotient of (x) the product of (A) the Common Percentage multiplied by (B) the Share Price divided by (y) the Calculation Price (rounded to the nearest hundredth, or if there shall not be a nearest hundredth, to the next lowest hundredth). (g) Section 1.2 of the Merger Agreement is hereby amended by deleting the references therein to the terms "Acquiror Termination Notice," "Cap Top-Up Intent Notice," "Class B Common Stock Election Conversion Number," "Company Termination Notice," "Conversion Number," "Designated Assets," "Designated Asset Fair Market Value," "Floor Top-up Intent Notice," "Put Closing Date," "Put Exercise Notice," "Put Right" and "Put Shares." 1.2. The Merger. The first sentence of Section 2.1 of the Merger Agreement is hereby amended and restated in its entirety as follows: Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, the Company shall be merged with and into Acquiror at the Effective Time (as defined in Section 2.3); provided, however, that if either (a) Acquiror, the Company and The Providence Journal Company shall have received a ruling from the IRS satisfactory to each of them (the "Ruling") by the later of (i) the fifth Business Day after the date on which the last of the conditions set forth in Article VIII is fulfilled or waived, other than conditions requiring deliveries at the Closing and the condition set forth in Section 8.1(f) and (ii) November 15, 1996 or (b) Acquiror, the Company and The Providence Journal Company are otherwise satisfied that the receipt of the Ruling is not necessary, upon the terms and subject to the conditions set forth in this Agreement and in accordance with the DGCL, the Company shall be merged with and into Company Sub at the Effective Time. 1.3. Conversion of Company Common Stock. (a) Section 3.1(c)(i) of the Merger Agreement is hereby amended by deleting the words "(as determined in accordance with Section 3.1(d))" from clause (x) thereof. (b) Section 3.1(c)(ii)(y) of the Merger Agreement is hereby amended by deleting the words "(as determined in accordance with Section 3.1(d))" from clause (1) thereof. (c) Section 3.1(c)(ii)(z) of the Merger Agreement is hereby amended by deleting the words "(as determined in accordance with Section 3.1(d))" from clause (2) thereof. (d) Section 3.1(d)(i) of the Merger Agreement is hereby amended by deleting the reference to "(i)" therefrom. (e) Section 3.1(d)(ii) of the Merger Agreement is hereby deleted in its entirety. 1.4. Company Common Stock Elections; Exchange Fund. (a) Section 3.2 (c) of the Merger Agreement is hereby amended by (i) inserting the clause "without submitting a revised properly completed Election Form" following the words "Election Form" in the last sentence thereof and (ii) amending and restating the penultimate sentence thereof as follows: The Election Form shall include information as to the Share Price, the Cash Consideration Amount, the number of shares of Media Stock and Series D Preferred Stock to be received (subject to proration pursuant to Section 3.3) by a holder of Class B Common Stock making a Stock Election and the number of shares of Media Stock and Series D Preferred Stock and the amount of cash to be received by a holder of Class B Common Stock making a Standard Election and shall state the pricing terms of the Series D Preferred Stock. (b) Section 3.2(e) of the Merger Agreement is hereby amended by deleting the words "this Section 3.3" from the last sentence thereof and inserting in lieu thereof the words "this Section 3.2". 1.5. Share Price Adjustment. Section 3.7 of the Merger Agreement is hereby amended by (i) deleting the words "the condition set forth in Section 8.2(h) or" from the first proviso thereof, (ii) deleting the word "conditions" from the second proviso thereof and inserting in lieu thereof the word "condition" and (iii) deleting the word "either" from the second provisio thereof. 1.6. Conduct of Business of the Company. Section 6.1 of the Merger Agreement is hereby amended by deleting the words ", or take any other action a principal purpose of which is to affect the calculation of the Determination Price" from subsection (xxiii) thereof. 1.7. Conduct of Business of Acquiror and Company Sub. Section 6.2 of the Merger Agreement is hereby amended by (i) deleting the text of subsection (vi) thereof and inserting in lieu thereof the words "purchase or sell (or announce any intention or proposal to purchase or sell) shares of Media Stock for cash at a price less than the Calculation Price (other than pursuant to employee benefit plans in the ordinary course of business or pursuant to the U S WEST Shareowner Investment Plan); provided, however, that if the Closing shall not have occurred on or prior to December 31, 1996, then Acquiror and its Subsidiaries shall have the right to purchase (or announce any intention or proposal to purchase) shares of Media Stock for cash at a price less than the Calculation Price after such date" and (ii) deleting the words "and the purchase of the Put Shares pursuant to Section 9.4" from subsection (viii) thereof. 1.8. Antitrust Notification. (a) Section 7.6(c) of the Merger Agreement is hereby amended by deleting the words "except as provided in Section 7.6(d)," and inserting in lieu thereof the words "except with the mutual agreement of Acquiror and the Company,". (b) Section 7.6(d) of the Merger Agreement is hereby deleted in its entirety. 1.9. Certain Actions. (a) Section 7.7(a) of the Merger Agreement is hereby amended by deleting the reference to "(a)" therefrom. (b) Sections 7.7(b) and 7.7(c) of the Merger Agreement are hereby deleted in their entirety. 1.10. Conditions Precedent. (a) Section 8.1(b) is hereby amended by inserting the word "and" immediately before clause (iii) and deleting clause (iv) in its entirety. (b) Section 8.2(h) of the Merger Agreement is hereby deleted in its entirety and replaced with the words "[Intentionally Omitted.]". (c) Section 8.3(c) of the Merger Agreement is hereby amended and restated as follows: (c) Tax Opinion. The Company shall have received an opinion of Sullivan & Worcester LLP, dated the Closing Date, to the effect that (i) the Merger should be treated for Federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; (ii) each of the Acquiror, the Company and, in the case of the Subsidiary Merger, Company Sub should be a party to the reorganization within the meaning of Section 368(b) of the Code; and (iii) no gain or loss will be recognized by a stockholder of the Company as a result of the Merger except (x) with respect to cash received by such stockholder in lieu of fractional shares or pursuant to the exercise of appraisal rights and (y) if a stockholder of the Company receives cash, gain, if any, realized by such stockholder will be recognized, but only to the extent of the cash received. In rendering such opinion, Sullivan & Worcester LLP, may receive and rely upon representa-tions contained in certificates of Acquiror, the Company, certain stockholders of the Company and, in the case of the Subsidiary Merger, Company Sub. 1.11. Termination. (a) Section 9.1 of the Merger Agreement is hereby amended by (i) deleting the words "8.2(h)," from subsection (d) thereof, (ii) deleting subsections (h) and (i) thereof, (iii) inserting the word "or" at the end of subsection (f) thereof and (iv) deleting the semi-colon from the end of subsection (g) thereof and inserting a period in lieu thereof. (b) The text of Section 9.4 of the Merger Agreement is hereby deleted in its entirety and replaced with the words "[Intentionally Omitted.]". 1.12. Effectiveness of Representations, Warranties and Agreements. Section 10.2 of the Merger Agreement is hereby amended by deleting the word "9.4" therefrom. 1.13. Exhibits. (a) Exhibits A and D of the Merger Agreement are hereby amended and restated in their entirety in the forms attached hereto. (b) Exhibits E and F of the Merger Agreement are hereby deleted in their entirety. ARTICLE II MISCELLANEOUS 2.1. Definitions. Capitalized terms used in this Amendment and not defined herein shall have the meanings ascribed thereto in the Merger Agreement. 2.2. Effect of Amendment; Restatement. Except as amended by this Amendment, the Merger Agreement shall be unamended and remain in full force and effect. The Merger Agreement, as amended by this Amendment, is hereinafter referred to as the "Agreement", and the parties hereto hereby agree that the Agreement may be restated to reflect the amendments provided for in this Amendment. 2.3. Applicable Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of Delaware without reference to choice of law principles, including all matters of construction, validity and performance. 2.4. Counterparts. This Amendment may be executed in one or more counterparts and each counterpart shall be deemed to be an original, but all of which shall constitute one and the same original. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the day and year first above written. U S WEST, INC. By:/s/ Charles M. Lillis Name: Charles M. Lillis Title: Executive Vice President; President and Chief Executive Officer of the U S WEST Media Group CONTINENTAL MERGER CORPORATION By:/s/ Charles M. Lillis Name: Charles M. Lillis Title: President CONTINENTAL CABLEVISION, INC. By:/s/ Amos B. Hostetter, Jr. Name: Amos B. Hostetter, Jr. Title: Chairman of the Board and Chief Executive Officer EX-11 3 EXHIBIT 11 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, 1996 1995 EARNINGS PER COMMON SHARE: (1) ---------- ---------- Income before extraordinary item $ - $324,765 Extraordinary item: Early extinguishment of debt - net of tax - (8,650) ---------- ---------- Net income - 316,115 Less preferred dividends - 855 ---------- ---------- Net income available for common share calculation $ - $315,260 ========== ========== Weighted average common shares outstanding - 471,229 ========== ========== Income available for common before extraordinary item $ - $0.69 Extraordinary item: Early extinguishment of debt - net of tax - (0.02) ---------- ---------- Earnings per common share $ - $0.67 ========== ========== (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock.
1 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, 1996 1995 EARNINGS PER COMMON SHARE: (1) ---------- ---------- Income before extraordinary item $ - $972,441 Extraordinary item: Early extinguishment of debt - net of tax - (8,650) ---------- ---------- Net income - 963,791 Less preferred dividends - 2,536 ---------- ---------- Net income available for common share calculation $ - $961,255 ========== ========== Weighted average common shares outstanding - 470,076 ========== ========== Income available for common before extraordinary item $ - $2.06 Extraordinary item: Early extinguishment of debt - net of tax - (0.02) ---------- ---------- Earnings per common share $ - $2.04 ========== ========== (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock.
2 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, EARNINGS PER COMMON AND COMMON 1996 1995 EQUIVALENT SHARE: (1) ---------- ---------- Income before extraordinary item $ - $324,765 Extraordinary item: Early extinguishment of debt - net of tax - (8,650) ---------- ---------- Net income - 316,115 Less preferred dividends - 855 ---------- ---------- Net income available for common share calculation $ - $315,260 ========== ========== Weighted average common shares outstanding - 471,229 Incremental shares from assumed exercise of stock options - 806 ---------- ---------- Total common shares - 472,035 ========== ========== Income available for common before extraordinary item $ - $0.69 Extraordinary item: Early extinguishment of debt - net of tax - (0.02) ---------- ---------- Earnings per common share and common equivalent share $ - $0.67 ========== ========== (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock.
3 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, EARNINGS PER COMMON AND COMMON 1996 1995 EQUIVALENT SHARE: (1) ---------- ---------- Income before extraordinary item $ - $972,441 Extraordinary item: Early extinguishment of debt - net of tax - (8,650) ---------- ---------- Net income - 963,791 Less preferred dividends - 2,536 ---------- ---------- Net income available for common share calculation $ - $961,255 ========== ========== Weighted average common shares outstanding - 470,076 Incremental shares from assumed exercise of stock options - 616 ---------- ---------- Total common shares - 470,692 ========== ========== Income available for common before extraordinary item $ - $2.06 Extraordinary item: Early extinguishment of debt - net of tax - (0.02) ---------- ---------- Earnings per common share and common equivalent share $ - $2.04 ========== ========== (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock.
4 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, EARNINGS PER COMMON SHARE - ASSUMING 1996 1995 FULL DILUTION: (1) ---------- ---------- Income before extraordinary item $ - $324,765 Interest on Covertible Liquid Yield Option Notes (LYONS) - 5,545 ---------- ---------- Adjusted income before extraordinary item - 330,310 Extraordinary item: Early extinguishment of debt - net of tax - (8,650) ---------- ---------- Adjusted net income - 321,660 Less preferred dividends - 855 ---------- ---------- Adjusted net income available for common share calculation $ - $320,805 ========== ========== Weighted average common shares outstanding - 471,229 Incremental shares from assumed exercise of stock options - 1,057 Shares issued upon conversion of LYONS - 9,634 ---------- ---------- Total common shares - 481,920 ========== ========== Adjusted income available for common before extraordinary item $ - $0.68 Extraordinary item: Early extinguishment of debt - net of tax - (0.02) ---------- ---------- Earnings per common share - assuming full dilution $ - $0.66 ========== ========== (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock.
5 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, EARNINGS PER COMMON SHARE - ASSUMING 1996 1995 FULL DILUTION: (1) ---------- ---------- Income before extraordinary item $ - $972,441 Interest on Covertible Liquid Yield Option Notes (LYONS) - 16,707 ---------- ---------- Adjusted income before extraordinary item - 989,148 Extraordinary item: Early extinguishment of debt - net of tax - (8,650) ---------- ---------- Adjusted net income - 980,498 Less preferred dividends - 2,536 ---------- ---------- Adjusted net income available for common share calculation $ - $977,962 ========== ========== Weighted average common shares outstanding - 470,076 Incremental shares from assumed exercise of stock options - 1,042 Shares issued upon conversion of LYONS - 9,800 ---------- ---------- Total common shares - 480,918 ========== ========== Adjusted income available for common before extraordinary item $ - $2.05 Extraordinary item: Early extinguishment of debt - net of tax - (0.02) ---------- ---------- Earnings per common share - assuming full dilution $ - $2.03 ========== ========== (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock.
6 EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, 1996 1995* EARNINGS PER COMMON SHARE (1) ---------- ---------- Income before extraordinary item $285,730 $292,044 Extraordinary item: Early extinguishment of debt - net of tax - (4,909) ---------- ---------- Net income for per share calculation $285,730 $287,135 ========== ========== Weighted average common shares outstanding 478,356 471,229 ========== ========== Income before extraordinary item $0.60 $0.62 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common share $0.60 $0.61 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
7 EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, 1996 1995* EARNINGS PER COMMON SHARE (1) ---------- ---------- Income before extraordinary item and cumulative effect of change in accounting principle $903,983 $899,896 Extraordinary item: Early extinguishment of debt - net of tax - (4,909) Cumulative effect of change in accounting principle - net of tax 34,158 - ---------- ---------- Net income for per share calculation $938,141 $894,987 ========== ========== Weighted average common shares outstanding 476,744 470,076 ========== ========== Income before extraordinary item and cumulative effect of change in accounting principle $1.90 $1.91 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) Cumulative effect of change in accounting principle - net of tax 0.07 - ---------- ---------- Earnings per common share $1.97 $1.90 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
8 EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, EARNINGS PER COMMON AND COMMON 1996 1995* EQUIVALENT SHARE: (1) ---------- ---------- Income before extraordinary item $285,730 $292,044 Extraordinary item: Early extinguishment of debt - net of tax - (4,909) ---------- ---------- Net income for per share calculation $285,730 $287,135 ========== ========== Weighted average common shares outstanding 478,356 471,229 Incremental shares from assumed exercise of stock options 1,320 806 ---------- ---------- Total common shares 479,676 472,035 ========== ========== Income before extraordinary item $0.60 $0.62 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common and common $0.60 $0.61 equivalent share ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
9 EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, EARNINGS PER COMMON AND COMMON 1996 1995* EQUIVALENT SHARE: (1) ---------- ---------- Income before extraordinary item and cumulative effect of change in accounting principle $903,983 $899,896 Extraordinary item: Early extinguishment of debt - net of tax - (4,909) Cumulative effect of change in accounting principle - net of tax 34,158 - ---------- ---------- Net income for per share calculation $938,141 $894,987 ========== ========== Weighted average common shares outstanding 476,744 470,076 Incremental shares from assumed exercise of stock options 1,615 616 ---------- ---------- Total common shares 478,359 470,692 ========== ========== Income before extraordinary item and cumulative effect of change in accounting principle $1.89 $1.91 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) Cumulative effect of change in accounting principle - net of tax 0.07 - ---------- ---------- Earnings per common and common $1.96 $1.90 equivalent share ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
10 EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, EARNINGS PER COMMON SHARE - ASSUMING 1996 1995* FULL DILUTION: (1) ---------- ---------- Income before extraordinary item $285,730 $292,044 Interest on Convertible Liquid Yield Option Notes (LYONS) 3,202 3,131 ---------- ---------- Adjusted income before extraordinary item 288,932 295,175 Extraordinary item: Early extinguishment of debt - net of tax - (4,909) ---------- ---------- Adjusted net income for per share calculation $288,932 $290,266 ========== ========== Weighted average common shares outstanding 478,356 471,229 Incremental shares from assumed exercise of stock options 1,320 1,057 Shares issued upon conversion of LYONS 9,386 9,634 ---------- ---------- Total common shares 489,062 481,920 ========== ========== Adjusted income before extraordinary item $0.59 $0.61 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common share - assuming full dilution $0.59 $0.60 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
11 EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, EARNINGS PER COMMON SHARE - ASSUMING 1996 1995* FULL DILUTION: (1) ---------- ---------- Income before extraordinary item $903,983 $899,896 Interest on Convertible Liquid Yield Option Notes (LYONS) 9,501 9,217 ---------- ---------- Adjusted income before extraordinary item and cumulative effect of change in accounting principle 913,484 909,113 Extraordinary item: Early extinguishment of debt - net of tax - (4,909) Cumulative effect of change in accounting principle - net of tax 34,158 - ---------- ---------- Adjusted net income for per share calculation $947,642 $904,204 ========== ========== Weighted average common shares outstanding 476,744 470,076 Incremental shares from assumed exercise of stock options 1,615 1,042 Shares issued upon conversion of LYONS 9,633 9,800 ---------- ---------- Total common shares 487,992 480,918 ========== ========== Adjusted income before extraordinary item and cumulative effect of change in accounting principle $1.87 $1.89 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) Cumulative effect of change in accounting principle - net of tax 0.07 - ---------- ---------- Earnings per common share - assuming full dilution $1.94 $1.88 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
12 EXHIBIT 11 U S WEST MEDIA GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, 1996 1995* EARNINGS PER COMMON SHARE (1) ---------- ---------- Income before extraordinary item $18,531 $32,721 Extraordinary item: Early extinguishment of debt - net of tax - (3,741) ---------- ---------- Net income 18,531 28,980 Less preferred dividends 854 855 ---------- ---------- Earnings available for common share calculation $17,677 $28,125 ========== ========== Weighted average common shares outstanding 473,902 471,229 ========== ========== Income before extraordinary item $0.04 $0.07 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common share $0.04 $0.06 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
13 EXHIBIT 11 U S WEST MEDIA GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, 1996 1995* EARNINGS PER COMMON SHARE (1) ---------- ---------- Income before extraordinary item $10,456 $72,545 Extraordinary item: Early extinguishment of debt - net of tax - (3,741) ---------- ---------- Net income 10,456 68,804 Less preferred dividends 2,563 2,536 ---------- ---------- Earnings available for common share calculation $7,893 $66,268 ========== ========== Weighted average common shares outstanding 473,501 470,076 ========== ========== Income before extraordinary item $0.01 $0.15 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common share $0.01 $0.14 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
14 EXHIBIT 11 U S WEST MEDIA GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, EARNINGS PER COMMON AND COMMON 1996 1995* EQUIVALENT SHARE: (1) ---------- ---------- Income before extraordinary item $18,531 $32,721 Extraordinary item: Early extinguishment of debt - net of tax - (3,741) ---------- ---------- Net income 18,531 28,980 Less preferred dividends 854 855 ---------- ---------- Earnings available for common share calculation $17,677 $28,125 ========== ========== Weighted average common shares outstanding 473,902 471,229 Incremental shares from assumed exercise of stock options 923 806 ---------- ---------- Total common shares 474,825 472,035 ========== ========== Income before extraordinary item $0.04 $0.07 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common and common equivalent share $0.04 $0.06 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
15 EXHIBIT 11 U S WEST MEDIA GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, EARNINGS PER COMMON AND COMMON 1996 1995* EQUIVALENT SHARE: (1) ---------- ---------- Income before extraordinary item $10,456 $72,545 Extraordinary item: Early extinguishment of debt - net of tax - (3,741) ---------- ---------- Net income 10,456 68,804 Less preferred dividends 2,563 2,536 ---------- ---------- Earnings available for common share calculation $7,893 $66,268 ========== ========== Weighted average common shares outstanding 473,501 470,076 Incremental shares from assumed exercise of stock options 1,192 616 ---------- ---------- Total common shares 474,693 470,692 ========== ========== Income before extraordinary item $0.01 $0.15 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common and common equivalent share $0.01 $0.14 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc.
16 EXHIBIT 11 U S WEST MEDIA GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, EARNINGS PER COMMON SHARE - ASSUMING 1996 1995* FULL DILUTION: (1)(2) ---------- ---------- Income before extraordinary item $18,531 $32,721 Extraordinary item: Early extinguishment of debt - net of tax - (3,741) ---------- ---------- Net income $18,531 $28,980 Less preferred dividends 854 855 ---------- ---------- Earnings available for common share calculation $17,677 $28,125 ========== ========== Weighted average common shares outstanding 473,902 471,229 Incremental shares from assumed exercise of stock options 923 1,057 ---------- ---------- Total common shares 474,825 472,286 ========== ========== Income before extraordinary item $0.04 $0.07 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common share - assuming full dilution $0.04 $0.06 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc. (2) The effects of converting the Liquid Yield Option Notes (LYONS) are excluded from the fully diluted earnings per common share calculation due to their anti-dilutive effect.
17 EXHIBIT 11 U S WEST MEDIA GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, EARNINGS PER COMMON SHARE - ASSUMING 1996 1995* FULL DILUTION: (1)(2) ---------- ---------- Income before extraordinary item $10,456 $72,545 Extraordinary item: Early extinguishment of debt - net of tax - (3,741) ---------- ---------- Net income 10,456 68,804 Less preferred dividends 2,563 2,536 ---------- ---------- Earnings available for common share calculation $7,893 $66,268 ========== ========== Weighted average common shares outstanding 473,501 470,076 Incremental shares from assumed exercise of stock options 1,191 1,042 ---------- ---------- Total common shares 474,692 471,118 ========== ========== Income before extraordinary item $0.01 $0.15 Extraordinary item: Early extinguishment of debt - net of tax - (0.01) ---------- ---------- Earnings per common share - assuming full dilution $0.01 $0.14 ========== ========== * Pro forma (1) Effective November 1, 1995, each share of U S WEST, Inc. common stock was converted into one share each of U S WEST Communica- tions Group common stock and U S WEST Media Group common stock. Earnings per common share for 1995 has been presented on a pro forma basis to reflect the two classes of stock as if they had been outstanding since January 1, 1995. For periods prior to the recapitalization, the average common shares outstanding are assumed to be equal to the average common shares outstanding for U S WEST, Inc. (2) The effects of converting the Liquid Yield Option Notes (LYONS) are excluded from the fully diluted earnings per common share calculation due to their anti-dilutive effect.
18 EX-12 4 EXHIBIT 12 EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended 9/30/96 9/30/95 - ------------------------------------------------ --------- --------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle $494 $538 Interest expense (net of amounts capitalized) 140 137 Interest factor on rentals (1/3) 22 22 Equity losses in unconsolidated ventures (less than 50% owned) 41 2 Guaranteed minority interest expense 12 2 --------- --------- Earnings $709 $701 Interest expense 156 156 Interest factor on rentals (1/3) 22 22 Guaranteed minority interest expense 12 2 Preferred stock dividends (pre-tax equivalent) 1 2 --------- --------- Fixed charges $191 $182 Ratio of earnings to fixed charges 3.71 3.85 - ------------------------------------------------ --------- --------- Year-to-Date 9/30/96 9/30/95 - ------------------------------------------------ --------- --------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle $1,502 $1,590 Interest expense (net of amounts capitalized) 411 404 Interest factor on rentals (1/3) 69 71 Equity losses in unconsolidated ventures (less than 50% owned) 111 28 Guaranteed minority interest expense 36 2 --------- --------- Earnings $2,129 $2,095 Interest expense 471 448 Interest factor on rentals (1/3) 69 71 Guaranteed minority interest expense 36 2 Preferred stock dividends (pre-tax equivalent) 4 5 --------- --------- Fixed charges $580 $526 Ratio of earnings to fixed charges 3.67 3.98 - ------------------------------------------------ --------- ---------
EXHIBIT 12 U S WEST Financial Services, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Thousands)
Quarter Ended 9/30/96 9/30/95 - ------------------------------------------------- --------- --------- Income before income taxes $9,368 $2,297 Interest expense 5,447 7,113 Interest factor on rentals (1/3) 13 5 --------- --------- Earnings $14,828 $9,415 Interest expense 5,447 7,113 Interest factor on rentals (1/3) 13 5 --------- --------- Fixed charges $5,460 $7,118 Ratio of earnings to fixed charges 2.72 1.32 - --------------------------------------------------------------------- Year-to-Date 9/30/96 9/30/95 - ----------------------------------------------------------- --------- Income before income taxes $18,091 $7,677 Interest expense 16,158 23,682 Interest factor on rentals (1/3) 44 36 --------- --------- Earnings $34,293 $31,395 Interest expense 16,158 23,682 Interest factor on rentals (1/3) 44 36 --------- --------- Fixed charges $16,202 $23,718 Ratio of earnings to fixed charges 2.12 1.32 - ---------------------------------------------------------------------
EX-27 5 FINANCIAL DATA SCHEDULE
5 0000732718 U S WEST, INC. 1,000,000 3-MOS 9-MOS DEC-31-1996 DEC-31-1996 SEP-30-1996 SEP-30-1996 160 160 0 0 1,973 1,973 0 0 198 198 2,936 2,936 34,265 34,265 19,038 19,038 25,583 25,583 4,866 4,866 7,402 7,402 651 651 0 0 8,396 8,396 (114) (114) 25,583 25,583 3,179 9,353 3,179 9,353 0 0 0 0 2,453 7,184 0 0 140 411 494 1,502 190 588 304 914 0 0 0 0 0 34 304 948 .60 1.97 .59 1.94
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