-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, pTB2NOFZ/+xNsHmQ9zUvzUY7GBEfDd1mR7hBG9g+y2gtvnuPXrE5vtNzazEClu7l nr++vzDo81EqwD0KzheC7w== 0000732718-94-000020.txt : 19940815 0000732718-94-000020.hdr.sgml : 19940815 ACCESSION NUMBER: 0000732718-94-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: US WEST INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: 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: 94543819 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 2ND QTR 10-Q USW, INC. 1 ------------------------------------------------------------------------ ------------------------------------------------------------------------ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-Q ------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 1994 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 Colorado 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__ At July 31, 1994, 454,427,703 shares were outstanding. - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- 2 U S WEST, Inc. Form 10-Q TABLE OF CONTENTS
Item Page PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Operations - Three and six months ended June 30, 1994 and 1993 . .3 Consolidated Balance Sheets - June 30, 1994 and December 31, 1993 . . . . . . .4 Consolidated Statements of Cash Flows - Six months ended June 30, 1994 and 1993 . . . . . 6 Notes to Consolidated Financial Statements . . . . . 7 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . 11 PART II - OTHER INFORMATION 1. Legal Proceedings . . . . . . . . . . . . . 21 4. Submission of Matters to a Vote of Security Holders . . 21 6. Exhibits and Reports on Form 8-K . . . . . . . . .22
2 3 Form 10-Q - Part I CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) U S WEST, Inc.
- ---------------------------------------------------------------------- Three Months Ended Six Months Ended Dollars in millions June 30, June 30, (except per share amounts) 1994 1993 1994 1993 - ---------------------------------------------------------------------- Sales and other revenues $2,708 $2,541 $5,349 $5,051 Employee-related costs 943 883 1,854 1,753 Other operating expenses 518 495 995 967 Taxes other than income taxes 105 105 213 210 Depreciation and amortization 507 498 1,010 988 Interest expense 110 107 219 213 Other income (expense) - net 84 (17) 73 (35) ------- ------- ------ ------- Income from continuing operations before income taxes and extraordinary item 609 436 1,131 885 Provision for income taxes 234 145 432 298 ------- ------- ------ ------- Income from continuing operations before extraordinary item 375 291 699 587 Discontinued operations: Income to June 1, 1993, net of tax - 18 - 38 Estimated loss from June 1, 1993 through disposal, net of tax - (100) - (100) ------- ------- ------ ------- Income before extraordinary item 375 209 699 525 Extraordinary item: Early extinguishment of debt, net of tax - (50) - (50) ------- ------- ------ ------- NET INCOME $375 $159 $699 $475 ======= ======= ====== ======= Earnings (loss) per share: Continuing operations $0.83 $0.70 $1.56 $1.41 Discontinued operations: Income to June 1, 1993 - 0.04 - 0.09 Estimated loss from June 1, 1993 through disposal - (0.24) - (0.24) ------- ------- ------ ------- Income before extraordinary item 0.83 0.50 1.56 1.26 Extraordinary item: Early extinguishment of debt, net of tax - (0.12) - (0.12) ------- ------- ------ ------- EARNINGS PER SHARE $0.83 $0.38 $1.56 $1.14 ======= ======= ====== ======= DIVIDENDS PER SHARE $0.535 $0.535 $1.07 $1.07 ======= ======= ====== ======= See Notes to Consolidated Financial Statements.
3 4 Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (Unaudited) U S WEST, Inc.
- ---------------------------------------------------------------------- June 30, December 31, Dollars in millions 1994 1993 - ---------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $229 $128 Accounts and notes receivable 1,768 1,570 Inventories and supplies 224 193 Other 671 609 -------- -------- Total current assets 2,892 2,500 -------- -------- Gross property, plant and equipment 29,697 29,161 Accumulated depreciation 16,481 15,929 --------- -------- Property, plant and equipment - net 13,216 13,232 Investment in Time Warner Entertainment 2,535 2,552 Net assets of discontinued operations 336 554 Other assets 2,214 1,842 --------- -------- Total assets $21,193 $20,680 ========= ======== See Notes to Consolidated Financial Statements.
4 5 Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (Unaudited), Continued U S WEST, Inc.
- --------------------------------------------------------------------- June 30, December 31, Dollars in millions 1994 1993 - --------------------------------------------------------------------- LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities Short-term debt $1,981 $1,776 Accounts payable 700 977 Current portion of restructuring charges 428 456 Other 1,933 1,772 -------- -------- Total current liabilities 5,042 4,981 -------- -------- Long-term debt 5,250 5,423 Postretirement and other postemployment benefit obligations 2,464 2,699 Deferred taxes, credits and other 1,840 1,716 Shareowners' equity Common shares - no par, 2,000,000,000 authorized, 454,299,067 and 441,139,829 outstanding, respectively 7,514 6,996 Retained earnings (deficit) (701) (892) LESOP guarantee (216) (243) -------- -------- Total shareowners' equity 6,597 5,861 -------- -------- Total liabilities and shareowners' equity $21,193 $20,680 ======== ======== See Notes to Consolidated Financial Statements.
5 6 Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) U S WEST, Inc.
- --------------------------------------------------------------------- Six Months Ended June 30, Dollars in millions 1994 1993 - --------------------------------------------------------------------- OPERATING ACTIVITIES Net income $699 $475 Adjustments to net income: Depreciation and amortization 1,010 988 Discontinued operations - 62 Deferred income taxes and amortization of investment tax credits 90 6 Changes in operating assets and liabilities: Accounts and notes receivable (53) (38) Inventories, supplies and other (101) (87) Accounts payable and accrued liabilities (20) 39 Other adjustments - net (87) (124) ------- ------- Cash provided by operating activities 1,538 1,321 ------- ------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,282) (1,185) Proceeds from disposals of property, plant and equipment 47 17 Other - net (241) (93) ------- ------- Cash (used) for investing activities (1,476) (1,261) ------- ------- FINANCING ACTIVITIES Net proceeds from short-term debt 212 201 Proceeds from issuance of long-term debt 251 587 Repayments of long-term debt (327) (232) Dividends paid (440) (404) Proceeds from issuance of common stock 295 42 ------- ------- Cash provided by (used for) financing activities (9) 194 ------- ------- Cash provided by continuing operations 53 254 ------- ------- Cash provided by (used for) discontinued operations 48 (134) ------- ------- CASH AND CASH EQUIVALENTS Increase 101 120 Beginning balance 128 159 ------- ------- Ending balance $229 $279 ======= ======= See Notes to Consolidated Financial Statements.
6 7 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Consolidated Financial Statements The consolidated financial statements have been prepared by U S WEST, Inc. ("U S WEST" or "Company"), pursuant to the rules and regulations of the SEC (Securities and Exchange Commission). Certain information and footnote disclosures normally accompanying financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of the Company's management, the consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial information set forth therein. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report for the year ended December 31, 1993. Certain reclassifications within the consolidated financial statements have been made to conform to the current year presentation. Computer Software The cost of computer software, whether purchased or developed internally, is charged to expense with two exceptions. Initial operating system software is capitalized and amortized over the life of the related hardware, and initial network applications software is capitalized and amortized over three years. Subsequent upgrades to capitalized software are expensed. Research and Development The Company has recognized $47, $61, and $60 for research and development expense in 1993, 1992 and 1991, respectively. Approximately half of this activity was conducted at Bell Communications Research, Inc. ("Bellcore"), one-seventh of which is owned by U S WEST Communications, Inc. ("USWC"). 7 8 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) B. Investment in Time Warner Entertainment On September 15, 1993, U S WEST acquired 25.51 percent pro-rata priority capital and residual equity interests in Time Warner Entertainment Company L.P. ("TWE"). Summarized operating results for TWE follow:
Three Months Ended Six Months Ended June 30, June 30, 1994 1994 ---- ---- Revenues $2,055 $3,974 Operating expenses* 1,828 3,544 Interest and other - net** 159 310 ----- ----- Income before income taxes $68 $120 ===== ===== Net Income $56 $104 ===== ===== * Includes depreciation and amortization of $240 and $453 for the three and six months ended, respectively. ** Includes corporate services of $15 and $30 for the three and six months ended, respectively.
The Company accounts for its investment in TWE under the equity method of accounting. U S WEST's recorded share of TWE's operating results is based on (1) TWE allocated net income or loss adjusted for the amortization of the excess of fair market value over the book value of the partnership assets; and (2) special income allocations as defined in the TWE Partnership Agreement. C. Contingencies At USWC, 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 Commission's initial order denied a refund request from interexchange carriers and other parties related to the Tax Reform Act of 1986. If the Commission finds that either of the exceptions apply, the Company could be liable for refunds, although at this time any such amount is not reasonably estimable since the case is still in the discovery process. D. Extraordinary Item - Debt Refinancing In the second quarter of 1993, USWC called for early redemption 11 long-term debt issues totaling $1.5 billion in par value. These early redemptions allowed the Company to take advantage of favorable interest rates. One-time costs associated with the redemptions reduced second quarter 1993 net income by $50, net of income tax benefits of $31. 8 9 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) E. Discontinued Operations During second quarter 1993, the U S WEST Board of Directors approved a plan to dispose of the Capital Assets segment. Discontinued operations includes activities related to real estate, financial services and the financial guarantee insurance operations. The Company's consolidated financial statements reflect the operating results of the Capital Assets segment separately from continuing operations. As a result of the discontinued operations, in second quarter 1993, the Company recorded a provision for estimated loss on disposal of $100, net of $61 in income taxes. Income from discontinued operations to June 1, 1993 was $38, net of $15 in income taxes. On May 6, 1994, Financial Security Assurance ("FSA") sold 7.5 million shares, including 2 million shares sold to Fund American Enterprises Holdings, Inc. ("FFC"), in an initial public offering of its common stock at $20 per share. In June 1994, an additional .6 million shares were issued at $20 per share in connection with an over-allotment option. U S WEST received $154 in proceeds from the offering. Pursuant to the sale and offering, U S WEST reduced its ownership interest in FSA to 60.5 percent. Sales and other revenues of discontinued operations follow:
1994 1993 ----- ----- Sales and other revenues: Second quarter $57 $139 Six months 361 281
Sales and other revenues of discontinued operations include the sale of two properties for approximately $230 during the first quarter of 1994. The sales were in line with Company estimates. Revenues and operating expenses of discontinued operations subsequent to June 1, 1993, are being deferred and charged against the related reserves. 9 10 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (Dollars in millions) (Unaudited) The assets and liabilities of the Capital Assets segment have been separately classified on the balance sheet as net assets of discontinued operations. Following is a summary of the net assets of discontinued operations:
- --------------------------------------------------------------------- June 30, December 31, Dollars in millions 1994 1993 - ---------------------------------------------------------------------- ASSETS Cash and cash equivalents $28 $24 Finance receivables - net 1,103 1,131 Investment in real estate - net 545 711 Bonds, at market value 871 894 Other assets 660 600 ------- ------- Total assets $3,207 $3,360 ======= ======= LIABILITIES Debt $1,423 $1,496 Deferred income taxes 681 681 Unearned premiums 400 346 Accounts payable and accrued liabilities 139 243 Minority interests 228 40 ------- ------- Total liabilities $2,871 $2,806 ======= ======= Net assets of discontinued operations $336 $554 ======= ======= Selected Financial Data Selected financial data for U S WEST Financial Services, Inc., a wholly-owned subsidiary of U S WEST, follows. Three Months Ended Six Months Ended June 30, June 30, 1994 1993 1994 1993 ---- ---- ---- ---- Operating revenues $13 $73 $30 $143 As of June 30, December 31, 1994 1993 ---- ---- Net finance receivables $1,003 $1,020 Total assets 1,521 1,784 Total debt 750 957 Total liabilities 1,472 1,735 Shareowner's equity 49 49
10 11 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts) Results of Operations
Comparative details of continuing operations for the three and six months ended June 30 follow: Three Six Months Ended Months Ended Dollars in millions June 30, % June 30, % (except per share amounts) 1994 1993 Change 1994 1993 Change - ------------------------------------------------------------- ------ Sales and other revenues $2,708 $2,541 6.6 $5,349 $5,051 5.9 Employee-related costs 943 883 6.8 1,854 1,753 5.8 Other operating expenses 518 495 4.6 995 967 2.9 Taxes other than income taxes 105 105 0.0 213 210 1.4 ------ ------ ------ ------ Earnings before interest, taxes, depreciation, amortization and other (EBITDA) $1,142 $1,058 7.9 $2,287 $2,121 7.8 ====== ====== ====== ====== Income from continuing operations $375 $291 28.9 $699 $587 19.1 ====== ====== ====== ====== Earnings per share from continuing operations $0.83 $0.70 18.6 $1.56 $1.41 10.6 ====== ====== ====== ======
U S WEST's second quarter income from continuing operations increased by $84, or 28.9 percent, compared to the same period last year. Excluding the sale of certain rural telephone exchanges by USWC and the sale of U S WEST's paging unit, resulting in gains of $17 and $41, respectively, income from continuing operations increased by $26, or 8.9 percent. Income from continuing operations excludes results from U S WEST's Capital Assets segment, which is a discontinued operation as discussed in Note E to the Consolidated Financial Statements. During the second quarter of 1993, U S WEST recorded an after-tax charge of $100 or $.24 per share, to cover the estimated loss on disposition of the Capital Assets segment. The extraordinary item of $50 or $.12 per share in second quarter 1993 related to the refinancing of debt at USWC. For the six months ended June 30, income from continuing operations increased by $39, or 6.6 percent, excluding the one-time items mentioned above and an additional first quarter 1994 gain of $15 on the sale of certain rural telephone exchanges. Increased demand for the Company's services resulted in growth in earnings before interest, taxes, depreciation, amortization and other ("EBITDA") of 7.9 and 7.8 percent for the second quarter and six months, respectively. 11 12 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 Sales and Other Revenues
An analysis of the change in revenues follows: Lower Price (Higher) Inc(Dec) Decreases Refunds Demand Other $ % - --------------------------------------------------------------------- USWC: Local service Second quarter ($ 4) $5 $ 52 - $ 53 5.5 Six months ( 3) - 104 - 101 5.3 Interstate access Second quarter ( 7) 6 32 (2) 29 5.5 Six months ( 22) 4 75 (4) 53 5.0 Intrastate access Second quarter - (2) 11 - 9 5.3 Six months ( 3) (4) 20 - 13 3.8 Long distance Second quarter ( 2) 0 (8) - (10) (2.8) Six months ( 3) 1 (13) - (15) (2.1) Other services Second quarter 11 11 8.1 Six months 17 17 6.2 - --------------------------------------------------------------------- USWC Total Second quarter ($13) $9 $ 87 $ 9 $ 92 4.3 Six months ( 31) 1 186 13 169 3.9 Cellular Second quarter 63 46.9 Six months 114 45.4 Publishing Second quarter 8 3.2 Six months 17 3.7 Other Second quarter 4 - Six months (2) - - --------------------------------------------------------------------- U S WEST Consolidated Second quarter $167 6.6 Six months 298 5.9 - ---------------------------------------------------------------------
The increase in revenues for the second quarter and six months was largely due to increased demand for services at USWC. Continued subscriber growth in the Company's cellular business also contributed to revenue growth. The Company increased its cellular subscriber base by 55 percent, to approximately 738,000, during the last 12 months. Local service revenues at USWC increased principally as a result of higher demand for services, as evidenced by an increase of 478,000 access lines, or 3.5 percent, during the last 12 months. Access line growth was 3.8 percent as adjusted for the sale of approximately 38,000 rural telephone access lines. 12 13 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), Continued Increased demand for access services more than offset the effects of rate reductions. Billed access minutes of use increased by 8.3 and 8.7 percent over the second quarter and six months of last year, respectively. Long distance network revenues decreased principally due to the continuing effects of competition. Revenues from other services increased primarily as a result of continued market penetration in voice messaging services. Costs and Expenses Consolidated employee-related costs increased by $60, or 6.8 percent, for the second quarter and $101, or 5.8 percent, for the six months as compared to the same periods last year. The increases are primarily the result of a reduction in the pension credit (due to changes in actuarial assumptions) and additional costs associated with customer service initiatives in the current year. Partially offsetting these increases was a reduction in postretirement benefits expense. Consolidated other operating expenses increased by $23, or 4.6 percent, for the second quarter and $28, or 2.9 percent, for the six months as compared to the same periods last year. Selling costs related to growth in the cellular subscriber base largely contributed to the increase. Increased depreciation and amortization expense was attributable to the aggregrate effects of a higher depreciable asset base and the discontinuance of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation." Interest expense increased, primarily as a result of the financing costs associated with the TWE investment. This increase was largely offset by USWC's refinancing of debt in the prior year to take advantage of lower interest rates, in addition to the effects of this year's reclassification of capitalized interest from other income. Pursuant to the discontinuance of SFAS No. 71, interest capitalized as a component of plant construction is being offset against interest expense. Other income increased during the second quarter and six months primarily due to pretax gains of $26 and $50, respectively, on the sale of certain rural telephone exchanges by USWC. Second quarter results also include a pretax gain of $68 for the sale of U S WEST's paging unit. Partially offseting these gains was the reclassifica- tion of capitalized interest and higher losses associated with developing businesses. The effective tax rate was 38.2 percent for the six months ended June 30, 1994 compared to 33.7 percent in the same period last year. This increase is primarily a result of the effects of discontinuing SFAS No. 71, the 1993 federally-mandated increase in income tax rates, and an increase in income before income taxes. 13 14 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), Continued Restructuring Charges The Company's 1993 third-quarter results included a $1 billion restructuring charge (pretax). The related restructuring plan is designed to provide faster, more responsive customer services while reducing the costs of providing these services. As part of the plan, the Company is developing new systems that will enable it to monitor networks to reduce the risk of service interruptions, activate telephone service on demand, provide automated inventory systems and centralize its service centers so that customers can have their telecommunications needs resolved with one phone call. The Company will also reduce its work force by approximately 9,000 employees (including the remaining employee reductions pursuant to the restructuring plan announced in 1991) by the end of 1996. Following is a schedule of the costs included in the restructuring charge:
Employee separation $230 Real estate 130 Relocation 110 Retraining and other 65 Systems development 400 Asset write-downs 65 ---------- Total $1,000 ==========
Employee separation costs include severance payments, health care coverage and postemployment education benefits. Real estate costs include preparation costs for the new service centers. The relocation and retraining costs are related to moving employees to the sites of the new service centers and retraining employees on the new methods and systems required in the new, restructured mode of operation. Systems development costs include the replacement of existing, single-purpose systems with new systems designed to provide integrated, end-to-end customer service. The work-force reductions would not be possible without the development and installation of the new systems, which will eliminate the current, labor-intensive interfaces between existing systems. The estimated annual cash expenditures related to the restructuring plan are approximately $390, $315 and $230 in 1994, 1995 and 1996, respectively. In addition to these expenditures, the Company anticipates incremental capital expenditures related to the restructuring plan of approximately $490 over the three year life of the plan. 14 15 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), Continued Employee Separation:
The restructuring plan provides for annual employee reductions and separation amounts as follows: Employee Reductions: 1994* 1995 1996 Total ----- ---- ---- ----- Network - managerial 602 1,095 977 2,674 Network - occupational 865 1,227 978 3,070 All other - managerial 459 335 323 1,117 All other - occupational 1,022 812 322 2,156 ----- ----- ----- ----- Total 2,948 3,469 2,600 9,017 ===== ===== ===== ===== Employee Separation Amounts: 1994* 1995 1996 Total ----- ---- ---- ----- Network - managerial $22 $42 $40 $104 Network - occupational 14 28 25 67 All other - managerial 3 14 14 31 All other - occupational 1 19 8 28 ----- ----- ----- ------ Subtotal 40 103 87 230 ----- ----- ----- ------ Remaining 1991 reserve 56 - - 56 ----- ----- ----- ------ Total $96 $103 $87 $286 ===== ===== ===== ====== * 1994 includes the remaining employees and the separation amounts associated with the balance of the 1991 restructuring reserve at 12/31/93.
Systems Development: USWC's existing information management systems were largely developed with analog technology for a monopoly environment. These systems are increasingly inadequate due to the effects of increased competition, new forms of regulation and changing technology which has driven consumer demand for new services which can be delivered quickly, reliably and economically. The sequential systems currently in place are slow, labor intensive and costly to maintain, and often cannot be adapted to support new product and service offerings, including future multimedia services envisioned by U S WEST. The systems rengineering program in place involves development of new systems around the following core processes: Service Delivery- to support faster and more accurate delivery of all products and services, including repair. These systems will permit one customer service representative to handle all facets of a customer's requirements as contrasted to the numerous points of customer interface required today. Service Assurance- for automation and centralization of the network, including earlier identification and more rapid resolution of network problems. Capacity Provisioning- for integrated planning of future network capacity, including the installation of software-controllable service components. 15 16 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), Continued The direct, incremental and nonrecurring systems development costs contained in the restructuring plan are comprised of the following amounts:
1994 1995 1996 Total ---- ---- ---- ----- Service delivery systems $35 $45 $20 $100 Service assurance systems 45 40 30 115 All other 45 65 75 185 ---- ---- ---- ---- Total $125 $150 $125 $400 ==== ==== ==== ====
The majority of systems development labor will be supplied through the use of temporary employees and/or contractors. Additionally, the Company estimates that up to 100 employees with special skills will be hired in order to develop the software applications contemplated in the current plan. The labor cost for these employees included in the restructuring plan is approximately $16 to $18 over the life of the plan. While it is likely that a number of these employees will be retained after 1996 due to their specialized skills, it is planned that any related increase in headcount will be offset through other employee reductions. Systems expenses charged to current operations at USWC consist of all costs associated with the information management function, including planning, developing, testing and maintaining data bases for general purpose computers, in addition to systems costs related to maintenance of telephone network applications. Key related administrative (i.e. general purpose) systems include customer service, order entry, billing and collection, accounts payable, payroll, human resources and property records. On-going systems costs comprised approximately six, six and five percent of total operating expenses at USWC in 1993, 1992 and 1991, respectively. USWC expects systems costs charged to current operations as a percent of total operating expenses to approximate the current level throughout the life of the restructuring plan. However, systems costs could increase relative to other operating costs as USWC becomes more technology-dependent. 16 17 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), Continued Progress Under the Plan:
For the second quarter and six months ended June 30, 1994, the following amounts have been charged against the restructuring reserve: Second Quarter Six-Months Employee Separations: Number Amount Number Amount ------ ------ ------ ------ Network - managerial 35 $1 55 $2 Network - occupational 212 4 255 5 All other - managerial 63 2 133 6 All other - occupational 155 4 245 9 --- --- --- --- Total 465 $11 688 $22 === === === === Second Quarter Six-Months ------- ------- Systems Development Costs: Service delivery systems $5 $5 Service assurance systems 5 9 All other 5 9 ------- ------- Total $15 $23 ======= =======
Other charges to the reserve were $14, $2 and $2 for real estate, relocation, and retraining and other, respectively, for the six months ended June 30, 1994. During the first half of the year, the Company was in the start-up phase of the restructuring plan. The Company expects that charges will accelerate over the remainder of 1994 as the Company continues consolidation of the customer service centers and development of the new systems. The rate of spending for the first six months of 1994 was slower than anticipated. While the original estimates for 1994 might not be fully realized, there are no significant changes to the plan in total. If the original estimates for 1994 are not fully realized, the impact on the financial statements will not be material. The Company's 1991 restructuring plan included a pretax charge of $364 for planned work-force reductions and the write-off of certain intangible and other assets. The plan reflected a work-force reduction of approximately 6,000 employees. The portion of the restructuring charge related to work-force reductions was $240, of which approximately $34 was unused at June 30, 1994, as compared to $56 remaining at December 31, 1993. The remaining balance of this reserve will be expended in 1994. 17 18 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 Liquidity and Capital Resources Cash provided by operations increased by $217, or 16 percent, over the first six months of 1993, primarily due to increased demand for the Company's services and a decrease in cash funding related to postretirement benefits during the first quarter of 1994. In the first quarter of 1994, the funding for postretirement benefits was $288, of which approximately $185 was in the form of a stock contribution, compared to cash funding of $246 in the first quarter last year. Details of cash provided by operating activities are provided in the Consolidated Statements of Cash Flows. In March 1994 approximately 5.5 million shares of common stock were issued in connection with the settlement of shareholder litigation ("Rosenbaum v. U S WEST Inc. et al.") for proceeds of approximately $210. Acquisitions On July 15, 1994 U S WEST signed an agreement to acquire Wometco Corp. and the assets of Georgia Cable Television (the "Cable Properties") for $1.2 billion, of which approximately $490 will be in newly issued U S WEST common stock and the remainder will be in cash and assumed debt. The Company's 1995 earnings per share will be diluted by approximately 5 to 6 percent as a result of this transaction. The purchase includes Access Telecommunications Interconnect, which provides competitive telephone services to business customers in the Atlanta area. The Cable Properties serve about 65 percent of the cable customers in the Atlanta metropolitan statistical area. The acquisition of the Cable Properties will help the Company to achieve its goal of becoming a leading provider of integrated communications, entertainment and information services in selected local markets worldwide. The transaction is expected to close in the fourth quarter of this year. Joint Venture On July 25, 1994, AirTouch Communications ("AirTouch") and U S WEST announced an agreement to combine their domestic cellular operations. The initial equity ownership of the cellular joint venture will be approximately 70 percent AirTouch and approximately 30 percent U S WEST. To allow AirTouch to continue providing interLATA wireless services free of Modification of Final Judgment ("MFJ") constraints, each Company's cellular operations initially will continue operating as separate entities owned by the individual partners, but will report to a joint Wireless Management Company, which will provide support services. U S WEST remains subject to MFJ restrictions and cannot offer wireless interLATA services. A merger of the two companies' cellular operations will take place upon the earlier of four years from July 25, 1994, the lifting of certain MFJ restrictions, or at AirTouch's option. The agreement gives U S WEST strategic flexibility, including the right to exchange its interest in the joint venture for up to 19.9 percent of AirTouch's common stock, with any excess amounts to be received in the form of AirTouch non-voting preferred stock. 18 19 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 A Partnership Committee, led by the president and chief operating officer of AirTouch and three other AirTouch representatives, three U S WEST representatives and one mutually agreed upon independent representative will oversee the Companies' combined domestic cellular operations. The initial joint venture requires certain federal and state regulatory approvals. The transaction is tax-free and is expected to close in second quarter 1995. Between closing and the actual merger, an agreement exists which allows the companies to effectively share operations based on their relative ownership. Regulatory Issues On June 10, 1994, the U.S. Court of Appeals in Washington D.C. overturned the Federal Communications Commission's ("FCC") requirement that local telephone companies allow physical collocation by third parties (competitive access providers), within their central offices, for the installation and operation of equipment that connects to the local telephone network. The court also ordered the FCC to reconsider its requirement that allows competitors to interconnect equipment to the local network from a point outside a central office. The Company is evaluating its options with respect to the provision of interconnection. On June 15, 1994, a Seattle Federal District Court Judge ruled in favor of U S WEST's challenge to the constitutionality of the cable cross-ownership restriction in the 1984 Cable Act. The Act prevents telephone companies from providing cable TV service within their regions. U S WEST argued, and the court agreed, that the cable cross-ownership restriction violates its First Amendment right to free speech. The Company is evaluating its options in light of this ruling. On June 20, 1994, the seven regional Bell operating companies ("RBOC's") asked the divestiture court for a waiver of the Court's restriction on the RBOC's provision of wireless long-distance services. The consent decree restricts the RBOCs from providing long-distance services as well as manufacturing. The request for a waiver closely follows a recommendation by the Justice Department that the RBOCs be allowed to provide wireless long-distance services. On June 30, 1994, the House of Representatives passed two landmark bills that together would substantially rewrite the 1934 Communications Act and replace the 1982 consent decree that broke up the "Bell System." The Senate is expected to consider pending telecommunications legislation, but it is not clear whether it will act on a bill before the current session of Congress ends. 19 20 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions, except per share amounts), Continued Contingencies At USWC, 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 Commission's initial order denied a refund request from interexchange carriers and other parties related to the Tax Reform Act of 1986. If the commission finds that either of the exceptions apply, the Company could be liable for refunds, although at this time any such amount is not reasonably estimable since the case is still in the discovery process. 20 21 Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders on May 6, 1994, shareholders voted their shares as follows for the purpose of electing six individuals as directors of the Company:
Director Shares Voted For Shares Withheld -------- ---------------- --------------- Marilyn Carlson Nelson 361,698,642 11,343,937 Allan D. Gilmour 361,940,334 11,102,245 Frank Popoff 361,865,885 11,176,694 Glen L. Ryland 361,111,632 11,930,947 Jerry O. Williams 361,936,985 11,105,594 Daniel Yankelovich 361,509,328 11,533,252
Coopers & Lybrand was confirmed as the Company's independent auditors with 362,778,355 shares voting for, 7,064,167 shares voting against and 3,200,055 abstaining. The shareholders approved the following three plans for the compensation of employees:
Broker For Against Abstain No Vote 1994 Stock Plan 265,628,057 59,924,559 8,263,797 39,226,165 Executive Long- Term Incentive Plan 273,745,036 52,342,383 7,728,994 39,226,165 Executive Short- Term Incentive Plan 286,430,708 78,751,185 7,860,685 - The shareholders also considered and rejected three shareholder proposals at the annual meeting as follows: Broker For Against Abstain No Vote Proposal 1 95,413,844 231,374,189 7,713,121 38,541,424 Proposal 2 71,080,974 255,773,889 7,646,291 38,541,424 Proposal 3 49,398,127 276,422,886 8,680,141 38,541,424
Proposal 1 was to eliminate the classified board of directors; proposal 2 was to initiate cumulative voting for the election of directors; and proposal 3 was to limit executive compensation to ten times the average compensation of all employees. 21 22 Form 10-Q - Part II PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference as exhibits hereto. Exhibit No. 11 Statement regarding computation of earnings per share of U S WEST, Inc. 12 Statement regarding computation of earnings to fixed charges ratio of U S WEST, Inc. (b) Reports on Form 8-K filed during the second quarter (i) report dated April 1, 1994, concerning U S WEST's announcement with respect to its contribution of 4.6 million shares of its common stock to an employee benefit trust; (ii) report dated April 18, 1994, concerning the release of earnings for the first quarter ended March 31, 1993, and related exhibits; and (iii) report dated June 24, 1994, filing a Termination Agreement and Guarantee, made and entered into June 24, 1994, among U S WEST, Inc., U S WEST Capital Corporation, and U S WEST Financial Services, Inc. and a Second Supplemental Indenture dated as of June 24, 1994, among U S WEST Financial Services, Inc., U S WEST, Inc., and The Chase Manhattan Bank, N.A. 22 23 Form 10-Q U S WEST, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ James M. Osterhoff ------------------------- August 12, 1994 U S WEST, Inc. James M. Osterhoff Executive Vice President and Chief Financial Officer 23 EX-11 2 EXHIBIT 11 EARNINGS PER SHARE 1 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Share (In Thousands, Except Per Share Amounts)
EARNINGS PER SHARE: 1994 1993 2nd Quarter YTD 2nd Quarter YTD ---------- ---------- ---------- --------- Income from continuing operations $374,832 $698,555 $291,177 $586,890 Discontinued operations Income to June 1, 1993, net of tax - - 18,131 38,526 Estimated loss from June 1, 1993 through disposal, net of tax - - (100,000) (100,000) -------- -------- --------- --------- Income before extraordinary item 374,832 698,555 209,308 525,416 Extraordinary item - early extinguishment of debt, net of tax - - (50,222) (50,222) -------- -------- --------- --------- Net income for per share calculation $374,832 $698,555 $159,086 $475,194 ======== ======== ======== ========= Weighted average shares outstanding 453,618 449,024 415,971 415,529 ======== ======== ======== ========= Income from continuing operations $0.83 $1.56 $0.70 $1.41 Discontinued operations Income to June 1, 1993, net of tax - - 0.04 0.09 Estimated loss from June 1, 1993 through disposal, net of tax - - (0.24) (0.24) -------- -------- --------- --------- Income before extraordinary item 0.83 1.56 0.50 1.26 Extraordinary item - early extinguishment of debt, net of tax - - (0.12) (0.12) -------- -------- --------- --------- Net income for per share calculation $0.83 $1.56 $0.38 $1.14 ======== ======== ========= =========
2 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Share (In Thousands, Except Per Share Amounts)
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: 1994 1993 2nd Quarter YTD 2nd Quarter YTD -------- -------- --------- --------- Income from continuing operations $374,832 $698,555 $291,177 $586,890 Discontinued operations Income to June 1, 1993, net of tax - - 18,131 38,526 Estimated loss from June 1, 1993 through disposal, net of tax - - (100,000) (100,000) -------- -------- --------- --------- Income before extraordinary item $374,832 $698,555 209,308 525,416 Extraordinary item - early extinguishment of debt, net of tax - - (50,222) (50,222) -------- -------- ---------- --------- Net income for per share calculation $374,832 $698,555 $159,086 $475,194 ======== ======== ========= ======== Weighted average shares outstanding 453,618 449,024 415,971 415,529 Incremental shares from assumed exercise of stock options 482 490 380 341 -------- -------- --------- -------- Total shares 454,100 449,514 416,351 415,870 ======== ======== ========= ======== Income from continuing operations $0.83 $1.55 $0.70 $1.41 Discontinued operations Income to June 1, 1993, net of tax - - 0.04 0.09 Estimated loss from June 1, 1993 through disposal, net of tax - - (0.24) (0.24) -------- -------- --------- -------- Income before extraordinary item 0.83 1.55 0.50 1.26 Extraordinary item - early extinguishment of debt, net of tax - - (0.12) (0.12) -------- -------- --------- -------- Earnings per common and common $0.83 $1.55 $0.38 $1.14 equivalent share ======== ======== ======== ========
3 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Share (In Thousands, Except Per Share Amounts)
EARNINGS PER SHARE - ASSUMING FULL DILUTION: 1994 1993 2nd Quarter YTD 2nd Quarter YTD ---------- -------- ---------- --------- Income from continuing operations $374,832 $698,555 $291,177 $586,890 Interest on Convertible Liquid Yield Option Notes (LYONS) 5,342 10,779 5,066 10,133 -------- -------- -------- --------- Adjusted income from continuing 380,174 709,334 296,243 597,023 operations for per share calculations Discontinued operations Income to June 1, 1993, net of tax - - 18,131 38,526 Estimated loss from June 1, 1993 through disposal, net of tax - - (100,000) (100,000) -------- -------- --------- --------- Adjusted income before 380,174 709,334 214,374 535,549 extraordinary item Extraordinary item - early extinguishment of debt, net of tax - - (50,222) (50,222) -------- -------- --------- --------- Adjusted net income for per share $380,174 $709,334 $164,152 $485,327 calculation ======== ======== ======== ========= Weighted average shares outstanding 453,618 449,024 415,971 415,529 Incremental shares from assumed exercise of stock options 562 534 481 472 Shares issued upon conversion of LYONS 10,216 10,223 10,237 10,238 -------- -------- --------- --------- Total shares 464,396 459,781 426,689 426,239 ======== ======== ========= ========= Adjusted income from continuing operations $0.82 $1.54 $0.69 $1.40 Discontinued operations Income to June 1, 1993, net of tax - - 0.04 0.09 Estimated loss from June 1, 1993 through disposal, net of tax - - (0.23) (0.23) Adjusted income before extraordinary -------- -------- --------- --------- item 0.82 1.54 0.50 1.26 Extraordinary item - early extinguishment of debt, net of tax - - (0.12) (0.12) Earnings per share - assuming -------- ------- -------- --------- full dilution $0.82 $1.54 $0.38 $1.14 ======== ======= ======== =========
EX-12 3 EXHIBIT 12 - EARNINGS TO FIXED CHARGES EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended 6/30/94 6/30/93 - ------------------------------------------- --------- --------- Income from continuing operations before income taxes and extraordinary item $609 $436 Interest expense (net of amounts capitalized) 110 107 Interest factor on rentals (1/3) 25 26 --------- ------- Earnings $744 $569 Interest expense 117 107 Interest factor on rentals (1/3) 25 26 --------- ------- Fixed charges $142 $133 Ratio of earnings to fixed charges 5.24 4.28 - ----------------------------------------------------------- ------- Year-to-Date 6/30/94 6/30/93 - ------------------------------------------- --------- -------- Income from continuing operations before income taxes and extraordinary item $1,131 $885 Interest expense (net of amounts capitalized) 219 213 Interest factor on rentals (1/3) 48 52 --------- --------- Earnings $1,398 $1,150 Interest expense 233 213 Interest factor on rentals (1/3) 48 52 --------- --------- Fixed charges $281 $265 Ratio of earnings to fixed charges 4.98 4.34 - ----------------------------------------------------------- ---------
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