-----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, GqTsJiVVdYRG3O+yEUj8+G3vO0w/zFP0A9bsMdvD8vzbaxfCqPJ03cD1LyXCBC+D Jjid3D4YwFsS6rOwk9SDIw== 0000732718-97-000028.txt : 19971113 0000732718-97-000028.hdr.sgml : 19971113 ACCESSION NUMBER: 0000732718-97-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: SEC FILE NUMBER: 001-08611 FILM NUMBER: 97716816 BUSINESS ADDRESS: STREET 1: 7800 E ORCHARD RD STREET 2: STE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037936500 MAIL ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-Q 1 3RD QTR 1997 =============================================================================== =============================================================================== 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, 1997 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, 1997, was: U S WEST Communications Group Common Stock - 483,635,464 shares; U S WEST Media Group Common Stock - 607,051,955 shares ================================================================================ U S WEST, INC. FORM 10-Q TABLE OF CONTENTS
Item Page PART I - FINANCIAL INFORMATION 1. U S WEST, Inc. Financial Information Consolidated Statements of Operations - Three and Nine Months Ended September 30, 1997 and 1996 3 Consolidated Balance Sheets - September 30, 1997 and December 31, 1996 5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 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 Operations - Three and Nine Months Ended September 30, 1997 and 1996 26 Combined Balance Sheets - September 30, 1997 and December 31, 1996 28 Combined Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 30 Notes to Combined Financial Statements 31 2. U S WEST Communications Group Management's Discussion and Analysis of Financial Condition and Results of Operations 35 1. U S WEST Media Group Financial Information Combined Statements of Operations - Three and Nine Months Ended September 30, 1997 and 1996 45 Combined Balance Sheets - September 30, 1997 and December 31, 1996 46 Combined Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 48 Notes to Combined Financial Statements 49 2. U S WEST Media Group Management's Discussion and Analysis of Financial Condition and Results of Operations 55 PART II - OTHER INFORMATION 1. Legal Proceedings 70 6. Exhibits and Reports on Form 8-K 70
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS U S WEST, Inc. (Unaudited) - -------------------------------------------- ------------------- ------------------ Three Months Ended Nine Months Ended September 30, September 30, Dollars in millions 1997 1996 1997 1996 - -------------------------------------------- ------------------- ----------------- Sales and other revenues $3,918 $3,179 $11,471 $9,353 Operating expenses: Employee-related expenses 1,269 1,105 3,632 3,246 Other operating expenses 910 623 2,572 1,823 Taxes other than income taxes 120 101 359 319 Depreciation and amortization 835 624 2,495 1,796 ------------------- ----------------- Total operating expenses 3,134 2,453 9,058 7,184 ------------------- ----------------- Income from operations 784 726 2,413 2,169 Interest expense 279 140 823 411 Equity losses in unconsolidated ventures 177 81 495 224 Gains on sales of investments 13 - 108 - Gains on sales of rural telephone exchanges 30 2 77 51 Guaranteed minority interest expense 22 12 66 36 Other expense - net 16 1 66 47 ------------------- ----------------- Income before income taxes, extraordinary item and cumulative effect of change in accounting 333 494 1,148 1,502 principle Provision for income taxes 135 190 485 588 ------------------- ----------------- Income before extraordinary item and cumulative effect of change in accounting principle 198 304 663 914 Extraordinary item: Early extinguishment of debt - net of tax (6) - (3) - ------------------- ----------------- Income before cumulative effect of change in accounting principle 192 304 660 914 Cumulative effect of change in accounting principle - net of tax - - - 34 =================== ================= NET INCOME $ 192 $ 304 $ 660 $ 948 =================== ================= Dividends on preferred stock 14 1 39 3 ------------------- ----------------- EARNINGS AVAILABLE FOR COMMON STOCK $ 178 $ 303 $ 621 $ 945 =================== =================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS U S WEST, Inc. (Unaudited), continued - -------------------------------------------- -------------------- ------------------- Three Months Ended Nine Months Ended September 30, September 30, In thousands (except per share amounts) 1997 1996 1997 1996 - -------------------------------------------- -------------------- ------------------- COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE: Income before extraordinary item and cumulative effect of change in accounting principle $0.70 $0.60 $2.09 $1.90 Extraordinary item: Early extinguishment of debt (0.01) - (0.01) - Cumulative effect of change in accounting principle - - - 0.07 -------------------- ------------------- COMMUNICATIONS GROUP EARNINGS PER COMMON SHARE $0.69 $0.60 $2.08 $1.97 ==================== =================== COMMUNICATIONS GROUP DIVIDENDS PER COMMON SHARE $0.535 $0.535 $1.605 $1.605 ==================== =================== COMMUNICATIONS GROUP AVERAGE COMMON SHARES OUTSTANDING 483,218 478,356 482,374 476,744 ==================== =================== MEDIA GROUP EARNINGS (LOSS) PER COMMON SHARE $(0.26) $0.04 $(0.64) $0.01 ==================== =================== MEDIA GROUP AVERAGE COMMON SHARES OUTSTANDING 606,729 473,902 606,568 473,501 ==================== ===================
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc. (Unaudited) - ------------------------------------------------------------------------------------- September 30, December 31, Dollars in millions 1997 1996 - ------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 259 $ 201 Accounts and notes receivable - net 2,107 2,113 Inventories and supplies 216 159 Deferred directory costs 250 259 Deferred tax asset 206 213 Prepaid and other 95 167 ---------- --------- Total current assets 3,133 3,112 ---------- --------- Gross property, plant and equipment 39,149 37,756 Accumulated depreciation 20,600 19,475 ---------- --------- Property, plant and equipment - net 18,549 18,281 Investment in Time Warner Entertainment 2,483 2,477 Net investment in international ventures 1,370 1,548 Intangible assets - net 12,385 12,595 Net investment in assets held for sale 410 409 Other assets 2,224 2,433 ---------- --------- Total assets $40,554 $40,855 ========== =========
See Notes to Consolidated Financial Statements. Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS U S WEST, Inc. (Unaudited), continued - --------------------------------------------------------------------------------------- September 30, December 31, Dollars in millions 1997 1996 - --------------------------------------------------------------------------------------- LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 2,286 $ 1,051 Accounts payable 1,447 1,316 Due to Continental Cablevision shareowners - 1,150 Employee compensation 455 470 Dividends payable 267 263 Other 2,110 1,824 --------- --------- Total current liabilities 6,565 6,074 --------- --------- Long-term debt 13,422 14,300 Postretirement and other postemployment benefit obligations 2,502 2,479 Deferred income taxes 4,308 4,349 Deferred credits and other 1,055 973 Contingencies (See Note F to the Consolidated Financial Statements) Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures 1,080 1,080 Preferred stock subject to mandatory redemption 100 51 Shareowners' equity: Preferred stock 921 920 Common shares 10,800 10,741 Retained earnings (deficit) (45) 18 LESOP guarantee (72) (91) Foreign currency translation adjustments (82) (39) --------- --------- Total shareowners' equity 11,522 11,549 --------- --------- Total liabilities and shareowners' equity $40,554 $40,855 ========= =========
See Notes to Consolidated Financial Statements. Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS U S WEST, Inc. (Unaudited)
- ------------------------------------------------------------------------------- Nine Months Ended September 30, Dollars in millions 1997 1996 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 660 $ 948 Adjustments to net income: Depreciation and amortization 2,495 1,796 Equity losses in unconsolidated ventures 495 224 Gains on sales of investments (108) - Gains on sales of rural telephone exchanges (77) (51) Cumulative effect of change in accounting principle - (34) Deferred income taxes and amortization of investment tax credits (110) (68) Changes in operating assets and liabilities: Restructuring payments (59) (126) Postretirement medical and life costs, net of cash fundings 21 (20) Accounts and notes receivable (12) (87) Inventories, supplies and other current assets (82) (9) Accounts payable and accrued liabilities 378 171 Other adjustments - net 180 33 --------- -------- Cash provided by operating activities 3,781 2,777 --------- -------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (2,394) (2,252) Payment to Continental Cablevision shareowners (1,150) - Investment in international ventures (315) (227) Proceeds from sales of investments 703 - Proceeds from disposals of property, plant and equipment 80 129 Cash from net investment in assets held for sale 242 176 Other - net (256) (41) --------- -------- Cash (used for) investing activities (3,090) (2,215) --------- -------- FINANCING ACTIVITIES Net (repayments of) proceeds from short-term debt (3,212) 187 Proceeds from issuance of long-term debt 4,123 346 Repayments of long-term debt (787) (561) Dividends paid on common and preferred stock (769) (706) Proceeds from issuance of common stock 65 140 Purchases of treasury stock (53) - --------- -------- Cash (used for) financing activities (633) (594) --------- -------- CASH AND CASH EQUIVALENTS Increase (decrease) 58 (32) Beginning balance 201 192 ========= ======== Ending balance $ 259 $ 160 ========= ========
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, 1997 (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Basis of Presentation. U S WEST, Inc. ("U S WEST" or the "Company") has two classes of common stock that are intended to reflect separately the performance of its communications and multimedia businesses. One class of stock, U S WEST Communications Group ("Communications Group"), reflects the communications businesses of U S WEST and the other class of stock, U S WEST Media Group ("Media Group"), reflects the multimedia businesses of U S WEST. The Consolidated Financial Statements have been prepared by U S WEST 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 1996 U S WEST Consolidated Financial Statements and notes thereto included in U S WEST's proxy statement mailed to all shareowners on April 7, 1997. B. U S WEST Split On October 27, 1997, the Company announced its intention to split Communications Group and Media Group into separate public companies. Communications Group will be renamed U S WEST, Inc. ("new U S WEST") and Media Group will be renamed MediaOne Group, Inc. ("MediaOne Group"). Under the terms of the proposed transaction, new U S WEST will include the telephone, data and wireless operations of the Communications Group, as well as the Yellow Pages and electronic directory businesses of U S WEST Dex, Inc. ("Dex"). Dex is currently part of the Media Group and will be transferred to the Communications Group as part of the proposed transaction (the "Dex Transfer"). MediaOne Group will include the cable/broadband, wireless, and domestic and international investments of the Media Group. Under the terms of the proposed split, Communications Group shareowners will receive one share of new U S WEST common stock for each share of Communications Group common stock. Media Group shareowners will receive one share of MediaOne Group common stock for each share of Media Group common stock. In addition, Media Group shareowners will receive Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) B. U S WEST Split (continued) shares of new U S WEST common stock for each share of Media Group common stock which represents their interest in Dex, totaling approximately $850. Under the terms of the Dex Transfer, Media Group debt will be reduced and Communications Group debt will be increased by $3.9 billion. The transaction is subject to a number of approvals, including approvals by regulators and both shareowner groups, and receipt of a favorable ruling from the Internal Revenue Service. The split is expected to be complete in the second half of 1998. C. AirTouch Transaction During 1994, U S WEST entered into a definitive agreement with AirTouch Communications, Inc. ("AirTouch") to combine their domestic cellular properties into a partnership in a multi-phased transaction (the "AirTouch Joint Venture"). During Phase I, which commenced on November 1, 1995, the cellular properties are owned separately. A wireless management company has been formed and is providing services to both companies, as requested, on a contract basis. In February 1997, the King County Superior Court (the "Court") in Washington state ruled that a subsidiary of Media Group violated the terms of its partnership agreement with its minority partners in the Seattle cellular partnership by entering into the AirTouch Joint Venture. The Company currently is complying with the Court's order which requires the Company to issue a right of first refusal to the minority partners with respect to the subsidiary's limited partnership interest. The Court authorized the limited partners to take legally appropriate steps to secure unanimous agreement for a substitute for the Company as the general partner. A motion is pending before the Court to extend the August 15, 1997 deadline for such agreement. The Company retains its right to appeal unfavorable rulings before transferring any partnership interest in the Seattle cellular partnership. Similar litigation has been filed in other jurisdictions regarding other cellular partnerships by the same minority partner that brought the Seattle litigation. The Company is also seeking declaratory relief from the Delaware Chancery Court. The Company believes it will ultimately be successful in all litigation asserting that the Company's entering into the AirTouch Joint Venture violated its partnership agreements with its minority partners. Media Group and AirTouch have agreed not to proceed to Phase II of the AirTouch Joint Venture before May 5, 1998. In Phase II of the AirTouch Joint Venture, the partners will combine those domestic cellular properties for which authorizations and partnership approvals have been obtained. Media Group has the right under Phase III of the AirTouch Joint Venture agreement to convert its joint venture interest into AirTouch stock. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) D. Asset Sales and Restructurings During the third quarter of 1997, Media Group sold 1,840,000 shares of Teleport Communications Group, Inc. ("TCG") for a pretax gain of $13. In November 1997, Media Group sold its remaining interest in TCG for net proceeds of $433. Pursuant to a settlement agreement, Media Group transferred its investment in Optus Vision, an Australian cable and telecommunications venture, to Optus Communications Pty Ltd., ("Optus Communications"), an Australian telecommunications carrier, in the third quarter of 1997. Media Group received a convertible note which can be converted to shares of Optus Communications upon satisfaction of various conditions, such as a public offering of Optus Communications' shares. The settlement released the Company from litigation and future claims. E. Debt Extinguishment During August 1997, U S WEST redeemed its Liquid Yield Option Notes ("LYONs"). The convertible zero coupon subordinated notes were due June 25, 2011. Upon redemption, the notes had a recorded value of $571. The debt extinguishment resulted in a loss of $6 (net of income tax benefits of $4) primarily related to the write-off of deferred debt issuance costs. This loss is reflected as an extraordinary charge in the accompanying Consolidated Statements of Operations. U S WEST financed the redemption with floating rate commercial paper. 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. On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a stipulation terminating prematurely U S WEST Communications' alternative form of regulation ("AFOR") plan, and it then undertook a review of U S WEST Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications to reduce its annual revenues by $97, effective May 1, 1997, and to issue a one-time refund, including interest, of approximately $102 to reflect the revenue reduction for the period May 1, 1996 through April 30, 1997. The one-time refund is for interim rates which became subject to refund when U S WEST Communications' AFOR plan was terminated on May 1, 1996. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) F. Contingencies (continued) U S WEST Communications filed an appeal of the order and asked for an immediate stay of the refund with the Oregon Circuit Court for the County of Marion ("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court granted U S WEST Communications' request for a stay, pending a full review of the OPUC's order. The Oregon Circuit Court is scheduled to hear arguments on the appeal in December 1997. The one-time refund and cumulative amount of revenues collected subject to refund, including interest, as of September 30, 1997, totals approximately $150. In 1996, the Washington State Utilities and Transportation Commission ("WUTC") acted on U S WEST Communications' 1995 rate request. U S WEST Communications had sought to increase revenues by raising rates primarily for basic residential services over a four-year period. Instead of granting U S WEST Communications' request, the WUTC ordered $91.5 in annual net revenue reductions, effective May 1, 1996. Based on the WUTC 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. The Court declined to change the WUTC order. U S WEST Communications appealed the Court's decision to the Washington State Supreme Court (the "State Supreme Court") which, on January 22, 1997, granted a stay of the order, pending the State Supreme Court's full review of the appeal. Oral arguments were heard in June 1997. U S WEST Communications is waiting a decision by the State Supreme Court. Effective May 1, 1996, U S WEST Communications began collecting revenues subject to refund. The cumulative amount of revenues collected subject to refund as of September 30, 1997, including interest, is approximately $155. In another proceeding, the Utah Supreme Court remanded a Utah Public Service Commission ("PSC") order to the PSC for hearing, 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. The potential exposure, including interest, at September 30, 1997, is approximately $160. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) F. Contingencies (continued) The Communications Group has accrued $125 at September 30, 1997, which represents its estimated liability for state regulatory proceedings. It is possible that the ultimate liability could exceed the recorded liability by an amount up to approximately $340. The Communications Group continues to monitor and evaluate the risks associated with its state regulatory environment, and will adjust estimates as new information becomes available. G. Subsequent Event On October 27, 1997, Media Group sold its 90 percent interest in Fintelco, S.A., ("Fintelco"), a cable and telecommunications venture located in Argentina, for proceeds of approximately $640. Media Group acquired an additional 40 percent interest in Fintelco in August 1997, to bring its total interest in Fintelco to 90 percent. H. Net Investment in Assets Held for Sale The capital assets segment is being accounted for in accordance with Staff Accounting Bulletin No. 93, issued by the SEC, 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 is being evaluated on an ongoing basis with adjustments to the existing reserve, if any, being charged to continuing operations. No such adjustment has been required. 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 (Dollars in millions) (Unaudited) H. Net Investment in Assets Held for Sale (continued)
The components of net investment in assets held for sale follow: - --------------------------------------------------------------------------------------- September 30, December 31, 1997 1996 - --------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 52 $ 21 Finance receivables - net 806 869 Investment in real estate - net of valuation allowance 158 182 Bonds, at market value 118 146 Investment in FSA 351 326 Other assets 179 165 --------- --------- Total assets $1,664 $1,709 ========= ========= LIABILITIES Debt $ 421 $ 481 Deferred income taxes 685 671 Accounts payable, accrued liabilities and other 137 137 Minority interests 11 11 ---------- --------- Total liabilities 1,254 1,300 ---------- --------- Net investment in assets held for sale $ 410 $ 409 =======================================================================================
Building sales and operating evenues of the capital assets segment were $13 and $91 for the three- and nine-month periods ended September 30, 1997, respectively, and $110 and $161 for the three- and nine-month periods ended September 30, 1996, respectively. Form 10-Q - Part I U S WEST, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) H. Net Investment in Assets Held for Sale (continued) Revenues of U S WEST Financial Services, Inc. ("USWFS"), a member of the capital assets segment, were $5 and $16 for the three- and nine-month periods ended September 30, 1997, respectively, and $6 and $20 for the three- and nine-month periods ended September 30, 1996, respectively. Selected financial data for USWFS follows:
- ------------------------------------------------------------------------------- September 30, December 31, 1997 1996 - ------------------------------------------------------------------------------- Net finance receivables $ 850 $ 859 Total assets 1,208 1,058 Total debt 397 236 Total liabilities 1,139 998 Equity 69 60 - -------------------------------------------------------------------------------
In September 1997, USWFS pledged certain finance receivables as collateral for a nonrecourse loan totaling $173. The loan bears interest at an annual rate of 7.2 percent and matures in the year 2009. Form 10-Q - Part I Item 2. Management's Discussio and Analysis of Financial Condition and Results of Operations (Dollars in millions) 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, intraLATA toll, cable, telephone, wireless and directories markets, (ii) changes in demand for the Company's products and services, including optional custom calling features, (iii) different 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 cable and telecommunications industries, 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, telephone, 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, or (xi) delays in the development of anticipated technologies, or the failure of such technologies to perform according to expectations. Results of Operations - Three and Nine Months Ended September 30, 1997 Compare with 1996
Net Income (Loss) - -------------------------------------------------------------------------------------------------- Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) 1997 1996 $ % 1997 1996 $ % - -------------------------------------------------------------------------------------------------- Communications Group $ 336 $286 $ 50 17.5 $1,007 $938 $ 69 7.4 Media Group (144) 18 (162) - (347) 10 (357) - ----------------------------------------------------------------------- Total net income $ 192 $304 $(112) (36.8) $ 660 $948 $ (288) (30.4) ==================================================================================================
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Result of Operations (Dollars in millions, except per share amounts), continued Communications Group Net Income Following are details of the Communications Group's reported net income and earnings per common share ("earnings per share"), normalized to exclude the effects of certain nonoperating items.
- ---------------------------------------------------------------------------------------------------------------- Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) Net Income: 1997 1996 $ % 1997 1996 $ $ - ---------------------------------------------------------------------------------------------------------------- Reported net income $336 $286 $50 17.5 $1,007 $938 $69 7.4 Adjustments to reported net income: Gains on sales of rural telephone exchanges (19) (1) (18) - (48) (31) (17) 54.8 Early extinguishment of debt 3 - 3 - 3 - 3 - Cumulative effect of change in accounting principle (1) - - - - - (34) 34 - Current year effect of change in accounting principle (1) - (3) 3 - - (13) 13 - --------------------------------------------------------------------------- Normalized income $320 $282 $38 13.5 $962 $860 $102 11.9 ================================================================================================================
- ------------------------------------------------------------------------------------------------------------- Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) Earnings per Share: 1997 1996 $ % 1997 1996 $ % - ------------------------------------------------------------------------------------------------------------- Reported earnings per share $0.69 $0.60 $0.09 15.0 $2.08 $1.97 $0.11 5.6 Adjustments to reported earnings per share: Gains on sales of rural telephone exchanges (0.04) - (0.04) - (0.10) (0.06) (0.04) 66.7 Early extinguishment of debt 0.01 - 0.01 - 0.01 - 0.01 - Cumulative effect of change in accounting principle (1) - - - - - (0.07) 0.07 - Current year effect of change in accounting principle (1) - (0.01) 0.01 - - (0.03) 0.03 - ------------------------------------------------------------------------ Normalized earnings per share $0.66 $0.59 $0.07 11.9 $1.99 $1.81 $0.18 9.9 ============================================================================================================= (1) 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."
The Communications Group's normalized income increased $38, or 13.5 percent, to $320, and $102, or 11.9 percent, to $962, for the three- and nine-month periods ended September 30, 1997, respectively. Normalized earnings per share was $0.66, an increase of $0.07, or 11.9 percent, and $1.99, an increase of $0.18, or 9.9 percent for the three- and nine-month periods, respectively. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Result of Operations (Dollars in millions, except per share amounts), continued The increases are primarily due to higher demand for services and continued cost control efforts in the core business which accelerated in the latter half of 1996. Partially offsetting the increases for both periods were additional expenses related to interconnection. Accruals to recognize U S WEST Communications' estimated state regulatory liability further reduced the nine-month period increase. (See Note F - Contingencies - to the U S WEST Consolidated Financial Statements.) The Communications Group anticipates that spending increases related to interconnection requirements and entry into wireless personal communications services ("PCS") and interLATA long-distance markets, combined with rate reductions resulting from the Federal Communications Commission's (the "FCC") price cap regulation, will partially offset future net income growth. During August 1997, the Communications Group incurred an extraordinary loss of $3 (net of income tax benefits of $2), or $0.01 per share, related to the early extinguishment of debt. See Note E - Debt Extinguishment - to the U S WEST Consolidated Financial Statements. Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," 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 1996 one-time gain of $34 (net of income tax expenses of $22), or $0.07 per share, related to the cumulative effect of change in accounting principle. Media Group Net Loss Media Group net income decreased to a loss of $144 ($0.26 per share) for the three-month period, and to $347 ($0.64 per share) for the nine-month period. Excluding the after tax effects of the gains on sales of investments totaling $7 ($0.01 per share) during the three-month period, and $63 ($0.10 per share) during nine-month period, Media Group net income decreased $169 and $420 for the three- and nine-month periods, respectively. The November 15, 1996, merger of Continental Cablevison, Inc. ("Continental") into a wholly owned subsidiary of U S WEST (the "Continental Merger" or "Merger") contributed approximately $118 of the decrease during the three-month period, and $301 during the nine-month period. The Continental Merger resulted in significant increases in interest and depreciation and amortization charges. The remaining decrease in net income is primarily due to greater losses from unconsolidated ventures, partially offset by increased earnings from domestic cellular and directories operations. During third-quarter 1997, Media Group incurred an extraordinary loss of $3 (net of income tax benefits of $2) related to the early extinguishment of debt. See Note E - Debt Extinguishment - to the U S WEST Consolidated Financial Statements. During second-quarter 1997, Media Group incurred an extraordinary gain of $3 (net of income tax expenses of $2) also related to the early extinguishment of debt. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Sales and Other Revenues
- ---------------------------------- ----------------------------- ------------------ --- ------------- ----------------- Pro forma Three Months Ended Increase Increase September 30, (Decrease) Pro forma (Decrease) 1997 1996 $ % 1996 $ % - ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- --------- Communications Group $2,673 $2,515 $158 6.3 $2,515 $158 6.3 Media Group 1,270 694 576 83.0 1,161 109 9.4 Intergroup eliminations (25) (30) 5 (16.7) (30) 5 (16.7) ============== ============= ========= ========= ============= ========= ======== Total $3,918 $3,179 $739 23.2 $3,646 $272 7.5 ================================== ============== ============= ========= ========= ============= ========= ========
- ---------------------------------- ----------------------------- ------------------ ------------- ----------------- Pro forma Nine Months Ended Increase Increase September 30, (Decrease) Pro forma (Decrease) 1997 1996 $ % 1996 $ % - ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- -------- Communications Group $7,803 $7,480 $323 4.3 $7,480 $323 4.3 Media Group 3,754 1,965 1,789 91.0 3,368 386 11.5 Intergroup eliminations (86) (92) 6 (6.5) (92) 6 (6.5) ============== ============= ========== ======== == ============= ========= ======= Total $11,471 $9,353 $2,118 22.6 $10,756 $715 6.6 ================================== ============== ============= ========== ======== == ============= ========= =======
Communications Group Sales and Other Revenues The Communications Group's operating revenues increased 6.3 percent, to $2,673, and 4.3 percent, to $7,803, during the three- and nine-month periods, respectively, primarily as a result of access line growth and increased demand for new product and service offerings and central office features. Higher demand for private line services and increases in billed interstate and intrastate minutes of use also contributed to the revenue growth. Partially offsetting the increases for both periods were lower long-distance network service revenues primarily due to the effects of competition and the implementation of multiple toll carrier plans. Accruals to recognize U S WEST Communications' estimated state regulatory liability also reduced operating revenues during the nine-month period. (See Note F - Contingencies - to the U S WEST Consolidated Financial Statements.) For a detailed discussion of Communications Group's operating revenues, see U S WEST Communications Group Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Revenues. Media Group Sales and Other Revenues Media Group sales and other revenues increased 83.0 percent, to $1,270, and 91.0 percent, to $3,754, for the three- and nine-month periods, respectively. On a pro forma basis, Media Group sales and other revenues increased 9.4 percent and 11.5 percent, for the three- and nine-month periods, respectively. Growth in domestic cable and broadband revenues and domestic cellular service revenues accounts for the majority of the pro forma increase. The increase in domestic 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 broadband is due to price increases of approximately 6 to 8 percent, the addition of new channels and basic subscriber increases of approximately 2 percent. A 32.1 percent increase in cellular subscribers partially offset by a 10.2 percent decrease in average revenue per subscriber contributed to the increase in domestic cellular service revenue. For a detailed discussion, see U S WEST Media Group - Management's Discussion and Analysis of Financial Condition and Results of Operations - Sales and Other Revenues. Operating Income
- -------------------------------------- -------------------------- ----------------- -- ------------- ----------------- Three Months Ended Pro forma September 30, Increase Pro forma Increase 1997 1996 $ 1996 $ % % - ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- -------- Communications Group $616 $574 $42 7.3 $574 $42 7.3 Media Group 168 152 16 10.5 137 31 22.6 ============== ============= ========= ========= ============= ========= ======= Total operating income $784 $726 $58 8.0 $711 $73 10.3 ================================== ============== ============= ========= ========= == ============= ========= =======
- -------------------------------------- ------------------------ ------------------- -- ------------- ----------------- Nine Months Ended Pro September 30, Increase Pro forma forma Increase 1997 1996 $ % 1996 $ % - ---------------------------------- -------------- ------------- -------- ---------- ------------- -------- -------- Communications Group $1,880 $1,744 $136 7.8 $1,744 $136 7.8 Media Group 533 425 108 25.4 384 149 38.8 ============== ============= ========= ========= ============= ========= ======= Total operating income $2,413 $2,169 $244 11.2 $2,128 $285 13.4 ================================== ============== ============= ========= ========= == ============= ========= =======
Communications Group Operating Income The Communications Group's operating income increased 7.3 percent, to $616, and 7.8 percent, to $1,880, during the three- and nine-month periods, respectively. Revenue increases combined with continued cost control efforts in the core business, which accelerated in the latter half of 1996, contributed to the increase in operating income. The growth in operating income was partially offset in both periods by expenses related to interconnection. Accruals to recognize U S WEST Communications' estimated state regulatory liability further reduced the nine-month period increase (See Note F - Contingencies - to the U S WEST Consolidated Financial Statements). For a detailed discussion of Communications Group's costs and expenses, see U S WEST Communications Group - Management's Discussion and Analysis of Financial Condition and Results of Operations - Costs and Expenses. Media Group Operating Income During the three- and nine-month periods ended September 30, 1997, Media Group operating income increased 10.5 percent and 25.4 percent, to $168 and $533, Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued respectively. On a pro forma basis, operating income increased 22.6 percent and 38.8 percent, for the same periods. The pro forma increases were driven primarily by growth in domestic wireless communications and domestic directory operations. Domestic cellular revenue growth combined with a 19.8 percent decrease in the costs to acquire and support customers contributed to growth in operating income. Revenue increases in the domestic directory operations related to price and volume increases, combined with cost savings as a result of headcount reductions also contributed to growth in operating income. For a detailed discussion, see U S WEST Media Group - Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Income. Interest Expense and Other
- ------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, Increase September 30, Increase 1997 1996 $ % 1997 1996 $ % - ------------------------------------ --------- --------- -------- --------- --------- --------- --------- -------- Interest expense $279 $140 $139 99.3 $823 $411 $412 - Equity losses in unconsolidated ventures 177 81 96 - 495 224 271 - Gains on sales of investments 13 - 13 - 108 - 108 - Gains on sales of rural telephone exchanges 30 2 28 - 77 51 26 51.0 Guaranteed minority interest expense 22 12 10 83.3 66 36 30 83.3 Other expense 16 1 15 - 66 47 19 40.4 - ------------------------------------ --------- --------- -------- --------- --------- ---------- --------- --------
Interest expense increased $139 and $412 during the three- and nine-month periods, respectively, primarily as a result of the Continental Merger. U S WEST assumed Continental debt totaling $6,525 (at market value) and incurred debt of $1,150 to finance the cash portion of the Merger consideration. Equity losses increased $96 and $271 for the three- and nine-month periods, respectively, predominantly due to greater losses generated from international ventures and the domestic investment in PrimeCo Personal Communications L.P. ("PrimeCo"). PrimeCo launched service in November 1996, and losses associated with this venture have increased as a result of start-up and other costs. The increase in international equity losses primarily relates to foreign exchange transaction losses at the Malaysian and Indonesian operations, and amortization of license fees related to a wireless investment in India. In addition, costs associated with the significant increase in customers and network coverage at One 2 One contributed to the increase in losses during the Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued nine-month period. Fluctuations in foreign exchange rates could impact future equity losses. During the third quarter of 1997, Media Group sold 1,840,000 million shares of TCG for a pretax gain of $13. Also during the nine-month period, Media Group sold its shares of Time Warner, Inc. acquired in the Continental Merger and its 5 percent interest in a wireless venture in France. These transactions resulted in pretax gains totaling $108. During the nine-month period, the Communications Group sold selected rural telephone exchanges in Iowa, South Dakota, Nebraska, Idaho, and Minnesota for pretax gains of $77. Certain Minnesota rural telephone exchanges were sold during third-quarter 1997 for a pretax gain of $30. The 1996 gains were a result of sales in Utah, North Dakota and South Dakota. Guaranteed minority interest expense increased $10 and $30 for the three- and nine-month periods, respectively. The increases were a result of the October 1996 issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures ("Preferred Securities") totaling $480. Other expense increased $15, to $16, and $19, to $66, during the three- and nine-month periods, respectively. The three-month period increase is partially due to foreign exchange transaction losses related to receivables denominated in foreign currencies. The nine-month period increase is primarily due to additional interest expense associated with the Communications Group's interstate sharing and state regulatory liabilities partially offset by a second-quarter 1996 pretax charge of $31 associated with the sale of Media Group's cable television interests in Norway, Sweden and Hungary. Provision for Income Taxes
- ------------------------------------------ ------------------------- ---------- ------------------------ ---------- Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 1997 1996 Change 1997 1996 Change - ------------------------------------------ ------------ ----------- ----------- ----------- ----------- ----------- Provision for income taxes $135 $190 (28.9) $485 $588 (17.5) Effective tax rate - - - 42.2% 39.1% - - ------------------------------------------ ------------ ----------- ----------- ----------- ----------- -----------
The increase in the effective tax rate is primarily a result of lower pretax earnings and additional goodwill amortization associated with the Continental Merger. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Liquidity and Capital Resources Operating Activities
- -------------------------------------------------------------------------------- Nine Months Ended September 30, 1997 1996 - -------------------------------------------------------------------------------- Communications Group $2,892 $2,357 Media Group 889 420 ----------------------------- Total cash provided by operating activities $3,781 $2,777 ================================================================================
Cash provided by operating activities increased $1,004 during the first nine months of 1997. The increase is primarily due to growth in both Communications Group and Media Group operations. The increase in the Communications Group's operating cash flow reflects continued cost control efforts, lower restructuring expenditures, and a decrease in the cash funding of postretirement benefits during 1997. Operating cash flow at the Media Group increased primarily due to the Continental Merger and growth in operations from the domestic cellular and directories businesses. Partially offsetting the increase was higher financing costs resulting from greater debt levels associated with the Continental Merger. Investing Activities
- ------------------------------------------------------------------------------- Nine Months Ended September 30, 1997 1996 - ------------------------------------------------------------------------------- Communications Group $(1,286) $(1,762) Media Group (1,804) (453) --------------------------------- Total cash (used for) investing activities $(3,090) $(2,215) ===============================================================================
Investing activities at Communications Group consists primarily of capital expenditures of $1,307, on a cash basis, for the first nine months of 1997. The majority of the 1997 expenditures related to access line growth and continued improvement of the telecommunications network. Also included were interconnection costs and expenditures associated with entering wireless communications markets with the launch of PCS. The Communications Group anticipates capital expenditures will accelerate during fourth quarter and will include expenditures to launch PCS in additional markets and for interconnection requirements related to the Telecommunications Act. Investing activities of the Media Group include capital expenditures of $1,087, on a cash basis, for the first nine months of 1997. The majority of expenditures in 1997 were devoted to Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued upgrading the domestic cable network and expanding the domestic cellular network. Media Group also invested $315 in international ventures during 1997, primarily for an additional 40 percent interest in Fintelco, with the remainder being primarily capital contributions to a wireless venture in India. Other investing activities include an investment in Continental of $1,150 which represents payment of the cash portion of the Merger consideration. During the first nine months of 1997, Media Group received proceeds totaling $945 related to asset sales as follows: (a) $246 from the sale of 7,915,000 shares of TCG stock, (b) $ 242 from asset sales and other proceeds from the capital assets segment, which is held for sale, (c) $220 from the sale of Time Warner, Inc. shares acquired in the Continental Merger, (d) $121 from the sale of Thomson Directories, (e) $81 from the sale of Media Group's 5 percent interest in a wireless venture in France, and (f) $35 from other miscellaneous sales. On October 27, 1997, Media Group sold its 90 percent interest in Fintelco for proceeds of approximately $640. Also in October 1997, Media Group sold U S WEST Polska, its wholly owned directory operation in Poland, for proceeds of approximately $30. In November 1997, Media Group sold its remaining interest in TCG for net proceeds of $433. Financing Activities
- ------------------------------------------------------------------------------ Nine Months Ended September 30, 1997 1996 - ------------------------------------------------------------------------------ Communications Group $(1,490) $ (661) Media Group 857 67 ------------------------------- Total cash (used for) financing activities $ (633) $ (594) ==============================================================================
On October 27, 1997, the Company announced its intention to split Communications Group and Media Group into separate public companies. Under the terms of the proposed transaction, new U S WEST will include the telephone, data and wireless operations of the Communications Group, as well as the Yellow Pages and electronic directory businesses of Dex. Dex is currently part of the Media Group and will be transferred to the Communications Group as part of the proposed transaction. MediaOne Group will include the cable/broadband, wireless and domestic and international investments of the Media Group. Under the terms of the Dex Transfer, Media Group shareowners will receive shares of new U S WEST common stock for each share of Media Group common stock, which represents their interest in Dex, totaling approximately $850. Also, Media Group debt will be reduced and Communications Group debt will be increased by $3.9 billion. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued The transaction is subject to a number of approvals, including approvals by regulators and both shareowner groups, and receipt of a favorable ruling from the Internal Revenue Service. The split is expected to be complete in the second half of 1998 As a result of the proposed split announcement, certain U S WEST credit ratings are under review. Standard & Poor's placed U S WEST Communications' senior unsecured debt rating on credit watch with positive implications and reaffirmed U S WEST Communications' commercial paper ratings. Duffs & Phelps reaffirmed U S WEST Communications' senior unsecured debt and commercial paper ratings. U S WEST Communications' senior unsecured debt rating remains under review by Moody's, which may result in a downgrading. The credit ratings for U S WEST Capital Funding, Inc. and for Preferred Securities are under review by Standard & Poor's (with negative implications), Moody's and Duff & Phelps. Senior debt at MediaOne, Inc., (formerly Continental), was downgraded by Moody's from Baa2 to Baa3 and subordinated debt from Baa3 to Ba1, and is under review by Standard & Poor's, with negative implications. The MediaOne, Inc. debt remains under review for further downgrading by Moody's. For all outstanding debt securities issued or guaranteed by U S WEST, Inc., the Company intends to take appropriate steps to preserve bondholder value. Total debt at September 30, 1997 was $15,708, an increase of $357 compared with December 31, 1996. The Company incurred additional debt in 1997 to finance the cash portion of the Continental Merger consideration which totaled $1,150. In January 1997, the Company issued medium- and long-term debt totaling $4.1 billion, at a weighted average rate of 7.47 percent. The proceeds were used to refinance debt incurred in conjunction with the Continental Merger. Increases in debt at Media Group were partially offset by decreases in debt of $748 at Communications Group. The decrease in debt at Communications Group was driven by increased operating cash flows and lower capital expenditures. During August, 1997, U S WEST redeemed its LYONs with a recorded value of $571. During the second quarter of 1997, MediaOne, Inc. redeemed a 10 5/8 percent senior subordinated note with a recorded value of $110, including a premium of $10. U S WEST financed the redemptions with floating rate commercial paper. During second quarter of 1997, Media Group acquired cable systems serving 40,000 subscribers in the state of Michigan for cash of $25 and approximately $50 of Series E Convertible Preferred Stock (the "Preferred Stock") issued by U S WEST. The Preferred Stock is redeemable at U S WEST's option starting five years from the acquisition date, or upon dissolution of Media Group. The stockholders have the right to elect cash upon redemption, or to convert their Preferred Stock into Media Group common stock based on a predetermined formula. 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, 1997 was 55.3 percent compared with 54.8 percent at December 31, 1996. Including debt associated with the capital assets segment, Preferred Securities and mandatorily redeemable preferred stock, the Company's percentage of debt to total capital was 60.0 percent at September 30, 1997, compared with 59.5 percent at December 31, 1996. The percentage of debt to total capital has increased as a result of higher debt associated with the Continental Merger. U S WEST from time to time engages in preliminary discussions regarding restructurings, 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. There is no assurance that any such discussions will result in the consummation of any such transaction. Contingencies For a discussion of contingencies at Communications Group, see Note D - Contingencies - to the U S WEST Communications Group Combined Financial Statements. Regulatory Environment For a discussion of Communications Group's regulatory environment, see U S WEST Communications Group Management's Discussion and Analysis of Financial Condition and Results of Operations - Regulatory Environment. Form 10-Q - Part I
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP OPERATIONS (Unaudited) - --------------------------------------------- --------------------------- -------------------------- Three Months Ended Nine Months Ended September 30, September 30, Dollars in millions 1997 1996 1997 1996 - --------------------------------------------- -------------- ------------ ------------ ------------- Operating revenues: Local service $1,314 $1,208 $3,739 $3,532 Interstate access service 663 606 2,028 1,854 Intrastate access service 208 192 608 571 Long-distance network services 231 272 721 840 Other services 257 237 707 683 -------------- ------------ ------------ ------------- Total operating revenues 2,673 2,515 7,803 7,480 Operating expenses: Employee-related expenses 951 900 2,719 2,688 Other operating expenses 469 402 1,305 1,177 Taxes other than income taxes 103 94 308 291 Depreciation and amortization 534 545 1,591 1,580 -------------- ------------ ------------ ------------- Total operating expenses 2,057 1,941 5,923 5,736 -------------- ------------ ------------ ------------- Income from operations 616 574 1,880 1,744 Interest expense 100 111 303 332 Gains on sales of rural telephone exchanges 30 2 77 51 Other expense 11 10 52 22 -------------- ------------ ------------ ------------- Income before income taxes, extraordinary item and cumulative effect of change in accounting principle 535 455 1,602 1,441 Provision for income taxes 196 169 592 537 -------------- ------------ ------------ ------------- Income before extraordinary item and cumulative effect of change in accounting principle 339 286 1,010 904 Extraordinary item - early extinguishment of debt - net of tax (3) - (3) - -------------- ------------ ------------ ------------- Income before cumulative effect of change in accounting principle 336 286 1,007 904 Cumulative effect of change in accounting principle - net of tax - - - 34 -------------- ------------ ------------ ------------- NET INCOME $336 $286 $1,007 $938 ============== ============ ============ =============
See Notes to Combined Financial Statements. Form 10-Q - Part I
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP OPERATIONS (Unaudited), continued - ----------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, In thousands (except per share amounts) 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE: Income before extraordinary item and cumulative effect of change in accounting principle $ 0.70 $0.60 $ 2.09 $1.90 Extraordinary item - early extinguishment of debt (0.01) - (0.01) - Cumulative effect of change in accounting principle - - - 0.07 -------------- ---------- ------------- -------------- EARNINGS PER COMMON SHARE $ 0.69 $0.60 $ 2.08 $1.97 ============== ========== ============= ============== DIVIDENDS PER COMMON SHARE $0.535 $0.535 $1.605 $1.605 ============== ========== ============= ============== AVERAGE COMMON SHARES OUTSTANDING 483,218 478,356 482,374 476,744 ============== ========== ============= ==============
See Notes to Combined Financial Statements. Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP (Unaudited) - ------------------------------------------------------------------------------- September 30, December 31, Dollars in millions 1997 1996 - ------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 196 $ 80 Accounts and notes receivable - net 1,587 1,622 Inventories and supplies 195 144 Deferred tax asset 169 171 Prepaid and other 66 65 ---------------- ---------------- Total current assets 2,213 2,082 ---------------- ---------------- Gross property, plant and equipment 33,040 32,645 Less accumulated depreciation 19,253 18,639 ---------------- ---------------- Property, plant and equipment - net 13,787 14,006 Other assets 921 827 ---------------- ---------------- Total assets $16,921 $16,915 ================ ================
See Notes to Combined Financial Statements. Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST COMMUNICATIONS GROUP (Unaudited), continued - ------------------------------------------------------------------------------- September 30, December 31, Dollars in millions 1997 1996 - ------------------------------------------------------------------------------- LIABILITIES AND EQUITY Current liabilities: Short-term debt $ 726 $ 834 Accounts payable 1,193 989 Employee compensation 341 342 Dividends payable 259 257 Advanced billing and customer deposits 286 250 Other 940 795 ---------------- ---------------- Total current liabilities 3,745 3,467 ---------------- ---------------- Long-term debt 5,024 5,664 Postretirement and other postemployment benefit obligations 2,400 2,387 Deferred income taxes 755 749 Deferred credits and other 756 731 Contingencies (See Note D to the Combined Financial Statements) Communications Group equity 4,241 3,917 ---------------- ---------------- Total liabilities and equity $16,921 $16,915 ================ ================
See Notes to Combined Financial Statements. Form 10-Q - Part I
COMBINED STATEMENTS OF U S WEST COMMUNICATIONS GROUP CASH FLOWS (Unaudited) - ------------------------------------------------------------------------------------------- Nine Months Ended September 30, Dollars in millions 1997 1996 - ------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,007 $ 938 Adjustments to net income: Depreciation and amortization 1,591 1,580 Gains on sales of rural telephone exchanges (77) (51) Cumulative effect of change in accounting principle - (34) Deferred income taxes and amortization of investment tax credits (4) (11) Changes in operating assets and liabilities: Restructuring payments (55) (114) Postretirement medical and life costs, net of cash fundings 11 (28) Accounts receivable 35 24 Inventories, supplies and other current assets (69) (14) Accounts payable and accrued liabilities 332 72 Other adjustments - net 121 (5) ----------- ----------------- Cash provided by operating activities 2,892 2,357 ----------- ----------------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,307) (1,891) Purchase of PCS wireless licenses (57) - Proceeds from sales of rural telephone exchanges 51 130 Proceeds from (payments on) disposals of property, plant and equipment 27 (1) ----------- ----------------- Cash (used for) investing activities (1,286) (1,762) ----------- ----------------- FINANCING ACTIVITIES Net (repayments of) proceeds from short-term debt (397) 195 Proceeds from issuance of long-term debt - 16 Repayments of long-term debt (410) (278) Dividends paid on common stock (733) (703) Proceeds from issuance of common stock 50 109 ----------- ----------------- Cash (used for) financing activities (1,490) (661) ----------- ----------------- CASH AND CASH EQUIVALENTS Increase (decrease) 116 (66) Beginning balance 80 172 =========== ================= Ending balance $ 196 $ 106 =========== =================
See Notes to Combined Financial Statements. Form 10-Q - Part I U S WEST COMMUNICATIONS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS For the Three and Nine Months Ended September 30, 1997 and 1996 (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Basis of Presentation. U S WEST, Inc. ("U S WEST" or the "Company") has two classes of common stock that are intended to reflect separately the performance of its communications and multimedia businesses. One class of stock, U S WEST Communications Group ("Communications Group"), reflects the communications businesses of U S WEST and the other class of stock, U S WEST Media Group ("Media Group"), reflects the multimedia businesses of U S WEST. The Combined Financial Statements have been prepared by U S WEST 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 1996 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 7, 1997. B. U S WEST Split On October 27, 1997, the Company announced its intention to split Communications Group and Media Group into separate public companies. Communications Group will be renamed U S WEST, Inc. ("new U S WEST") and Media Group will be renamed MediaOne Group, Inc. ("MediaOne Group"). Under the terms of the proposed transaction, new U S WEST will include the telephone, data and wireless operations of the Communications Group, as well as the Yellow Pages and electronic directory businesses of U S WEST Dex, Inc. ("Dex"). Dex is currently part of the Media Group and will be transferred to the Communications Group as part of the proposed transaction (the "Dex Transfer"). MediaOne Group will include the cable/broadband, wireless, and domestic and international investments of the Media Group. Under the terms of the proposed split, Communications Group shareowners will receive one share of new U S WEST common stock for each share of Communications Group common stock. Media Group shareowners will receive one share of MediaOne Group common stock for each share of Media Group common stock. In addition, Media Group shareowners will receive shares Form 10-Q - Part I U S WEST COMMUNICATIONS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) (Unaudited) B. U S WEST Split (continued) of new U S WEST common stock for each share of Media Group common stock which represents their interest in Dex, totaling approximately $850. Under the terms of the Dex Transfer, Media Group debt will be reduced and Communications Group debt will be increased by $3.9 billion. The transaction is subject to a number of approvals, including approvals by regulators and both shareowner groups, and receipt of a favorable ruling from the Internal Revenue Service. The split is expected to be complete in the second half of 1998. C. Debt Extinguishment During August 1997, U S WEST redeemed its Liquid Yield Option Notes ("LYONs"). The convertible zero coupon subordinated notes were due June 25, 2011. Upon redemption, the recorded value of the notes attributed to the Communications Group was $303. The debt extinguishment resulted in a loss of $3 (net of income tax benefits of $2), or $0.01 per share, primarily related to the write-off of deferred debt issuance costs. This loss is reflected as an extraordinary charge in the accompanying Combined Statements of Operations. U S WEST allocated floating-rate debt, due on demand, to the Communications Group to finance the redemption. D. 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. On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a stipulation terminating prematurely U S WEST Communications' alternative form of regulation ("AFOR") plan, and it then undertook a review of U S WEST Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications to reduce its annual revenues by $97, effective May 1, 1997, and to issue a one-time refund, including interest, of approximately $102 to reflect the revenue reduction for the period May 1, 1996 through April 30, 1997. The one-time refund is for interim rates which became subject to refund when U S WEST Communications' AFOR plan was terminated on May 1, 1996. Form 10-Q - Part I U S WEST COMMUNICATIONS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) D. Contingencies (continued) U S WEST Communications filed an appeal of the order and asked for an immediate stay of the refund with the Oregon Circuit Court for the County of Marion ("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court granted U S WEST Communications' request for a stay, pending a full review of the OPUC's order. The Oregon Circuit Court is scheduled to hear arguments on the appeal in December 1997. The one-time refund and cumulative amount of revenues collected subject to refund, including interest, as of September 30, 1997, totals approximately $150. In 1996, the Washington State Utilities and Transportation Commission ("WUTC") acted on U S WEST Communications' 1995 rate request. U S WEST Communications had sought to increase revenues by raising rates primarily for basic residential services over a four-year period. Instead of granting U S WEST Communications' request, the WUTC ordered $91.5 in annual net revenue reductions, effective May 1, 1996. Based on the WUTC 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. The Court declined to change the WUTC order. U S WEST Communications appealed the Court's decision to the Washington State Supreme Court (the "State Supreme Court") which, on January 22, 1997, granted a stay of the order, pending the State Supreme Court's full review of the appeal. Oral arguments were heard in June 1997. U S WEST Communications is waiting a decision by the State Supreme Court. Effective May 1, 1996, U S WEST Communications began collecting revenues subject to refund. The cumulative amount of revenues collected subject to refund as of September 30, 1997, including interest, is approximately $155. In another proceeding, the Utah Supreme Court remanded a Utah Public Service Commission ("PSC") order to the PSC for hearing, 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. The potential exposure, including interest, at September 30, 1997, is approximately $160. Form 10-Q - Part I U S WEST COMMUNICATIONS GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) D. Contingencies (continued) The Communications Group has accrued $125 at September 30, 1997, which represents its estimated liability for state regulatory proceedings. It is possible that the ultimate liability could exceed the recorded liability by an amount up to approximately $340. The Communications Group continues to monitor and evaluate the risks associated with its state regulatory environment, and will adjust estimates as new information becomes available. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Result of Operations (Dollars in millions, except per share amounts) Results of Operations - Three and Nine Months Ended September 30, 1997 Compared with 1996 Following are details of the Communications Group's reported net income and earnings per common share ("earnings per share"), normalized to exclude the effects of certain nonoperating items.
- ------------------------------------------------------------------------------------------------------------------- Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) Net Income: 1997 1996 $ % 1997 1996 $ % - ------------------------------------------------------------------------------------------------------------------- Reported net income $336 $286 $50 17.5 $1,007 $938 $69 7.4 Adjustments to reported net income: Gains on sales of rural telephone exchanges (19) (1) (18) - (48) (31) (17) 54.8 Early extinguishment of debt 3 - 3 - 3 - 3 - Cumulative effect of change in accounting principle (1) - - - - - (34) 34 - Current year effect of change in accounting principle (1) - (3) 3 - - (13) 13 - --------- --------- -------- --------- --------- --------- -------- ---------- Normalized income $320 $282 $38 13.5 $962 $860 $102 11.9 ==================================== ========= ========= ======== ========= ========== ========= ======== ==========
- --------------------------------------------------------------------------------------------------------------- Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) Earnings per Share: 1997 1996 $ % 1997 1996 $ % - --------------------------------------------------------------------------------------------------------------- Reported earnings per share $0.69 $0.60 $0.09 15.0 $2.08 $1.97 $0.11 5.6 Adjustments to reported earnings per share: Gains on sales of rural telephone exchanges (0.04) - (0.04) - (0.10) (0.06) (0.04) 66.7 Early extinguishment of debt 0.01 - 0.01 - 0.01 - 0.01 - Cumulative effect of change in accounting principle (1) - - - - - (0.07) 0.07 - Current year effect of change in accounting principle (1) - (0.01) 0.01 - - (0.03) 0.03 - --------- --------- -------- -------- -------- ---------- -------- ------ Normalized earnings per share $0.66 $0.59 $0.07 11.9 $1.99 $1.81 $0.18 9.9 =============================================================================================================== (1) 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."
The Communications Group's normalized income increased $38, or 13.5 percent, to $320, and $102, or 11.9 percent, to $962, for the three- and nine-month periods ended September 30, 1997, respectively. Normalized earnings per share was $0.66, an increase of $0.07, or 11.9 percent, and $1.99, an increase of $0.18, or 9.9 percent for the three- and nine-month periods, respectively. 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 increases are primarily due to higher demand for services and continued cost control efforts in the core business which accelerated in the latter half of 1996. Partially offsetting the increases for both periods were additional expenses related to interconnection. Accruals to recognize U S WEST Communications' estimated state regulatory liability further reduced the nine-month period increase. (See Note D - Contingencies - to the U S WEST Communications Group Combined Financial Statements.) The Communications Group anticipates that spending increases related to interconnection requirements and entry into wireless personal communications services ("PCS") and interLATA long-distance markets, combined with rate reductions resulting from the Federal Communications Commission's (the "FCC") price cap regulation, will partially offset future net income growth. During August 1997, the Communications Group incurred an extraordinary loss of $3 (net of income tax benefits of $2), or $0.01 per share, related to the early extinguishment of debt. See Note C - Debt Extinguishment - to the U S WEST Communications Group Combined Financial Statements. Effective January 1, 1996, U S WEST adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," 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 1996 one-time gain of $34 (net of income tax expenses of $22), or $0.07 per share, related to the cumulative effect of change in accounting principle.
Operating Revenues - ----- --------------------------------------------------------------------------------------------------------------- Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) 1997 1996 $ % 1997 1996 $ % - --------------------------------------------------------------------------------------------------------------------- Local service $1,314 $1,208 $106 8.8 $3,739 $3,532 $207 5.9 Interstate access service 663 606 57 9.4 2,028 1,854 174 9.4 Intrastate access service 208 192 16 8.3 608 571 37 6.5 Long-distance network services 231 272 (41) (15.1) 721 840 (119) (14.2) Other services 257 237 20 8.4 707 683 24 3.5 --------- --------- -------- -------- --------- ---------- -------- --------- Total $2,673 $2,515 $158 6.3 $7,803 $7,480 $323 4.3 ==================================== ========= ========= ======== ======== == ========= ========== ======== =========
Local Service Revenues. Local service revenues increased during the three- and nine-month periods predominately as a result of access line growth, and increased demand for new product and service offerings and existing central office features. Total reported access lines increased 576,000, or 3.8 percent, during the past 12 months, of which 274,000 was attributable to second lines. Second-line installations increased 28 percent during the past 12 months. Access lines grew 663,000, or 4.3 percent, when adjusted for sales of approximately 87,000 rural telephone access lines during the past 12 months. Also contributing to the revenue increase for both periods were rate increases in various states and interim compensation revenue from interexchange carriers as a result of the FCC's payphone orders which took effect in April 1997. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Partially offsetting the increases were lower wireless interconnection access prices mandated by the Telecommunications Act of 1996 (the "Telecommunications Act"). Local service revenue growth was also partially offset during the nine-month period by accruals of approximately $100 to recognize U S WEST Communications' estimated state regulatory liabilities. (See Note D - Contingencies - to the U S WEST Communications Group Combined Financial Statements.) Interstate Access Service Revenues. Higher interstate access service revenues resulted from increased demand for private line services, access line growth and increases of 6.0 and 6.2 percent in billed interstate access minutes of use for the three- and nine-month periods, respectively. Also contributing to the increases were the effects of sharing-related accruals for refunds to interexchange carriers recorded in 1996. These increases were partially offset by 1997 price reductions. Beginning July 1, 1997, the Communications Group reduced prices for interstate services as a result of the FCC's current price cap plan. The access rate reductions have an on-going annual revenue impact of approximately $165 which is reflected in lower interstate rates over twelve months beginning July 1, 1997. Intrastate Access Service Revenues. Intrastate access service revenues increased largely as a result of increases of 13.3 and 11.4 percent in billed intrastate minutes of use for the three- and nine-month periods, respectively, and increased demand for private line services. Long-Distance Network Service Revenues. Long-distance network service revenues decreased 15.1 and 14.2 percent for the three- and nine-month periods, respectively, primarily due to the effects of competition and the implementation of multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in 1996, and in several states in 1997. The MTCPs essentially allow independent telephone companies to act as toll carriers and are net income neutral with the reduction in toll revenues largely offset by increased intrastate access revenues and lower access expense. Excluding the effects of the MTCPs, long-distance network service revenues decreased by 11.0 and 9.4 percent for the three- and nine-month periods, respectively. The Communications Group believes that erosion of long-distance network service revenues will continue due to the loss of exclusivity of 1+ dialing in Minnesota and Arizona, effective in February and April 1996, respectively, and continued competitive dial-around activity in other states within the Communications Group's 14 state region. The Communications Group is responding to competition through competitive pricing of intraLATA long-distance services and increased promotional efforts to retain customers. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Other Services Revenues. Other services revenues increased primarily as a result of continued market penetration of voice messaging services and greater sales of inside wire maintenance and other unregulated products and services. Partially offsetting these increases was a reduction in contract revenues due to the completion of a large federal government telephony project in 1996. Revenue growth at U S WEST Communications may be affected by pending regulatory actions in federal and local regulatory jurisdictions.
Costs and Expenses - ---------------------------------------------------------------------------------------------------------------- Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) 1997 1996 $ % 1997 1996 $ % - ---------------------------------------------------------------------------------------------------------------- Employee-related expenses $951 $900 $51 5.7 $2,719 $2,688 $31 1.2 Other operating expenses 469 402 67 16.7 1,305 1,177 128 10.9 Taxes other than income taxes 103 94 9 9.6 308 291 17 5.8 Depreciation and amortization 534 545 (11) (2.0) 1,591 1,580 11 0.7 Interest expense 100 111 (11) (9.9) 303 332 (29) (8.7) Gains on sales of rural telephone exchanges 30 2 28 - 77 51 26 51.0 Other expense 11 10 1 10.0 52 22 30 - - -----------------------------------------------------------------------------------------------------------------
Employee-Related Expenses. Employee-related expenses increased $51, or 5.7 percent, and $31, or 1.2 percent, during the three- and nine-month periods, respectively. The increases are primarily a result of higher contract labor costs. The contract labor increase reflects increased marketing and sales efforts, systems development work (which include expenses related to interconnection), and the launch of new products and services. Higher overtime costs also contributed to the employee-related expense increase during the three-month period; however, for the nine-month period, overtime costs decreased compared to the prior year. Additionally, during both periods lower salaries and wages related to employee reductions, which totaled 3,134 during the last 12 months, and lower conference and travel expenses were offset by increases in certain employee-related benefit costs. Other Operating Expenses. Other operating expenses increased $67, or 16.7 percent, and $128, or 10.9 percent, during the three- and nine-month periods, respectively. The increases are predominantly a result of increased network software purchases (which include expenses related to interconnection), advertising costs and professional fees. Additionally, for the nine-month period, operating expenses increased as a result of a reserve adjustment associated with billing and collection activities performed for interexchange carriers and repair costs associated with flooding in North Dakota. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Partially offsetting the increases were reduced access expenses (primarily related to the implementation of the MTCPs in 1996 and 1997), completion of a large federal government telephony project in 1996 and a 1996 charge to discontinue the Omaha broadband video service trial. Lower materials and supplies expense also reduced other operating expenses during the nine-month period. Taxes Other Than Income Taxes. Taxes other than income taxes increased $9, or 9.6 percent, and $17, or 5.8 percent, for the three- and nine-month periods, respectively. The increase for the three-month period is a result of property tax true-ups in 1996. In addition to the property tax true-ups, the nine-month period increase was largely attributed to increased 1997 use taxes. Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"). EBITDA increased 2.8 percent, to $1,150, and 4.4 percent, to $3,471, for the three- and nine-month periods, respectively. The increases are primarily due to higher demand for services and continued cost control efforts in the core business which accelerated in the latter half of 1996. Partially offsetting the increases for both periods were additional expenses related to interconnection. Accruals to recognize U S WEST Communications' estimated state regulatory liability further reduced the nine-month period increase. (See Note D - Contingencies - to the U S WEST Communications Group Combined Financial Statements.) EBITDA excludes gains on sales of certain rural telephone exchanges. The Communications Group believes EBITDA is an important indicator of the operational 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 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. Depreciation and Amortization. Depreciation expense decreased for the three-month period and increased during the nine-month period. During the three-month period, the effects of a higher depreciable asset base were offset by a third-quarter 1996 depreciation adjustment. Interest Expense. Interest expense decreased $11, or 9.9 percent, and $29, or 8.7 percent, for the three- and nine-month periods, respectively, due to lower average debt levels as compared to 1996. Partially offsetting the decrease for the nine-month period was a reduction in the amount of interest capitalized resulting from a lower average balance of telecommunications plant under construction. Gains on Sales of Rural Telephone Exchanges. During the nine-month period, the Communications Group sold selected rural telephone exchanges in Iowa, South Dakota, Nebraska, Idaho, and Minnesota for pretax gains of $77. Certain Minnesota rural telephone exchanges were sold during third-quarter 1997 for a pretax gain of $30. The 1996 gains were a result of sales in Utah, North Dakota and South Dakota. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Other Expense. Other expense for the nine-month period increased primarily due to additional interest expense associated with the Communications Group's interstate sharing and state regulatory liabilities.
Provision for Income Taxes - ------------------------------------------------------------------------------------------------ Three Months Ended Nine Months Ended September 30, Percent September 30, Percent 1997 1996 Change 1997 1996 Change - ------------------------------------------------------------------------------------------------ Provision for income taxes $196 $169 16.0 $592 $537 10.2 Effective tax rate - - - 37.0% 37.3% - - ------------------------------------------------------------------------------------------------
The increase in the provision for income taxes resulted primarily from higher pretax earnings and lower amortization of investment tax credits. Restructuring Charge During the nine-month period ended September 30, 1997, the restructuring reserve decreased $55 to a balance of $68. Reserve usage is primarily a result of expenditures for 492 employee separations during the first nine months of 1997 and systems development costs. The restructuring plan is expected to be substantially complete by the end of 1997. Management continues to evaluate the remaining reserve balance and employee separations. Liquidity and Capital Resources Operating Activities Cash provided by operations increased $535, to $2,892, for the nine-month period ended September 30, 1997, compared with the same period in 1996. The increase in operating cash flow is primarily due to business growth and continued cost control efforts in the core business, including efforts to manage working capital. Lower restructuring expenditures along with a decrease in the cash funding of postretirement benefits also contributed to the increase. Higher tax payments partially offset these increases. Investing Activities The Communications Group's capital expenditures were $1,307, on a cash basis, during the first nine months of 1997. The majority of the 1997 expenditures related to access line growth and continued improvement of the telecommunications network. Also included were interconnection costs and expenditures associated with entering wireless communications markets with the launch of PCS. The Communications Group anticipates capital expenditures will accelerate during fourth quarter and will include expenditures to launch PCS in additional markets and for interconnection requirements related to the Telecommunications Act. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in, millions), continued Financing Activities On October 27, 1997, the Company announced its intention to split Communications Group and Media Group into separate public companies. Under the terms of the proposed transaction, new U S WEST will include the telephone, data and wireless operations of the Communications Group, as well as the Yellow Pages and electronic directory businesses of Dex. Dex is currently part of the Media Group and will be transferred to the Communications Group as part of the proposed transaction. MediaOne Group will include the cable/broadband, wireless, and domestic and international investments of the Media Group. Under the terms of the Dex Transfer, Media Group shareowners will receive shares of new U S WEST common stock for each share of Media Group common stock which represents their interest in Dex, totaling approximately $850. Also, Media Group debt will be reduced and Communications Group debt will be increased by $3.9 billion. The transaction is subject to a number of approvals, including approvals by regulators and both shareowner groups, and receipt of a favorable ruling from the Internal Revenue Service. The split is expected to be complete in the second half of 1998. In connection with the Company's announcement of its intention to split the Communications Group and the Media Group into separate public companies, Standard & Poor's placed U S WEST Communications' senior unsecured debt rating on credit watch with positive implications and reaffirmed U S WEST Communications' commercial paper ratings. Duffs & Phelps reaffirmed U S WEST Communications' senior unsecured debt and commercial paper ratings. U S WEST Communications' senior unsecured debt rating remains under review by Moody's, which may result in a downgrading. During the first nine months of 1997, debt decreased $748 and the percentage of debt to total capital decreased from 62.4 percent at December 31, 1996, to 57.6 percent, at September 30, 1997. The decrease in the percentage of debt to total capital is primarily a result of increased equity balances and lower debt levels. The lower debt levels have been partially driven by increased operating cash flows and lower capital expenditures. During August 1997, U S WEST redeemed its LYONs. The convertible zero coupon subordinated notes had a recorded value of $303 attributed to the Communications Group. U S WEST allocated floating-rate debt, due on demand, to the Communications Group to finance the redemption. 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 from time to time engages in preliminary discussions regarding restructurings, dispositions and other similar transactions. Any such transaction may include, among other things, the transfer of certain assets, businesses or interest, 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 Communications Group. There is no assurance that any such discussion will result in the consummation of any such transaction. Contingencies At U S WEST Communications there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. For a discussion of the specific pending regulatory items, see Note D Contingencies - to the U S WEST Communications Group Combined Financial Statements. The Communications Group has accrued $125 at September 30, 1997, which represents its estimated liability for state regulatory proceedings. It is possible that the ultimate liability could exceed the recorded liability by an amount up to approximately $340. The Communications Group continues to monitor and evaluate the risks associated with its state regulatory environment, and will adjust estimates as new information becomes available. Regulatory Environment Interconnection In August 1996, the FCC issued an order (the "FCC Order") establishing a framework of mandatory national rules that would enable the states and the FCC to begin implementing the local competition provisions of the Telecommunications Act. Among other things, the FCC Order established rigid costing and pricing rules which, from U S WEST's perspective, significantly impeded negotiations with new entrants to the local exchange market, state public utility commission ("PUC") interconnection rulemakings, and interconnection arbitration proceedings. On July 18, 1997, the Eighth Circuit Court of Appeals (the "Eighth Circuit") vacated significant portions of the FCC Order. Most significantly, the Eighth Circuit ruled that jurisdiction over local interconnection prices rests with the states, not the FCC. The effect of the Eighth Circuit's decision is to have interconnection and unbundled network element pricing be resolved through negotiations or state PUC arbitration proceedings. Some of the FCC's unbundling rules, as well as its "pick and choose" provision, were also vacated by the Eighth Circuit. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued On October 14, 1997, the Eighth Circuit clarified that incumbent telecommunications providers are not required to make rebundled service offerings available to competitors at unbundled element pricing. This decision substantially reduces new entrants' ability to arbitrage between resale of finished services and the pricing of unbundled network elements. The Eighth Circuit is reviewing the FCC's August 1997 order that required shared transport be made available in combination with local switching as an unbundled element. This review is pending. Number Portability Among other things, the Telecommunications Act requires all local exchange carriers ("LECs") to provide permanent number portability to facilitate local exchange competition. The FCC has established a schedule for deployment of number portability during 1998. This schedule includes 10 markets in U S WEST Communications' 14 state region. The FCC, however, has not issued cost recovery rules as required by the Telecommunications Act. On October 23, 1997, U S WEST filed a petition in the Tenth Circuit Court of Appeals (the "Tenth Circuit"), seeking an order which would require the FCC to issue its cost recovery rules. U S WEST Communications will also seek cost recovery through state ratemaking proceedings and interconnection cost recovery dockets. U S WEST Communications expects its estimated costs to deploy number portability will be significant over the next few years. Due to legal and regulatory uncertainties, U S WEST Communications cannot provide assurance the one-time costs of deploying number portability will ultimately be recovered. Universal Service, Access Reform and Price Cap On May 7, 1997, the FCC announced three decisions that will establish rules to implement the Universal Service provision of the Telecommunications Act (the "Universal Service Order"), as well as rules to restructure the access charge system (the "Access Reform Order") and the FCC's current price cap plan (the "Price Cap Order"). Universal Service On July 17, 1997, U S WEST filed a petition with the FCC for reconsideration and clarification of certain issues in the Universal Service Order. Among other things, the Company requested the FCC to reconsider: 1) establishing a national fund to ensure high-cost support is sufficient, and 2) assessing contributions as explicit end-user surcharges. Appeals of other issues addressed by the Universal Service Order have been filed by various other companies. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Federal Access Reform The FCC has ordered a substantial restructuring of interstate access pricing. A significant portion of the services that have been charged using minutes-of-use pricing will now be charged using a combination of minutes-of-use rates, presubscribed interexchange carrier charges ("PICCs") and subscriber line charges ("SLCs"). Although an increase in the SLC to multi-line business users occurred on July 1, 1997, the bulk of the mandated pricing changes will occur on January 1, 1999. Additional mandated pricing changes will also occur on January 1, 1999 through 2001. The net effect of these changes will be to decrease minutes-of-use charges up to 60 percent and increase flat-rate charges (i.e. PICCs and SLCs). Although the effects of the mandated pricing changes beginning January 1, 1998 will initially be revenue neutral, the Access Reform Order coupled with the Price Cap Order, will over time reduce the revenues the Company derives from interstate access charges. Competition from competitive LECs will also affect the Company's access revenues. U S WEST and other incumbent LECs have appealed the Access Reform Order. U S WEST's primary challenge is that the FCC acted unlawfully by exempting purchasers of unbundled network elements from payment of interstate access charges, while not providing for the immediate replacement of subsidies contained within those same access charges. This case is pending in the Eighth Circuit and will be heard in January 1998. Price Cap Order The FCC's Price Cap Order requires LECs that are subject to price cap regulation to increase their price cap index productivity factor to 6.5 percent. The order eliminated the lower productivity factor options (i.e. 4.0 percent and 4.7 percent) that required sharing of earnings above a specified level and required LECs to set their 1997 price cap index assuming that the 6.5 percent factor had been in effect at the time of the 1996 tariff filing. As mandated by the Price Cap Order, the price cap index in U S WEST Communications' 1997 interstate access tariff filing was established assuming that the 6.5 percent productivity factor had been in effect at the time of the 1996 tariff filing. The access rate reductions have an on-going annual revenue impact of approximately $165 which are being reflected through lower interstate rates over twelve months beginning July 1, 1997. On June 23, 1997, U S WEST petitioned the Tenth Circuit for a review of the Price Cap Order. The Tenth Circuit has transferred review of the Price Cap Order to the District of Columbia Court of Appeals. Among other things, U S WEST and other appellants are requesting the District of Columbia Court of Appeals to review the use of a 6.5 percent productivity factor and the retroactive application of the 6.5 percent productivity factor to July 1, 1996 when determining the price cap index for the 1997 price cap filing. This case will be heard in 1998. Form 10-Q - Part I
COMBINED STATEMENTS OF OPERATIONS U S WEST MEDIA GROUP (Unaudited) - --------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, Dollars in millions (except per share amounts) 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------- -------------- Sales and other revenues: Cable and broadband $590 $ 60 $1,735 $176 Wireless communications 373 315 1,071 869 Directory and information services 299 316 927 908 Other 8 3 21 12 --------- ----------- --------------- -------------- Total sales and other revenues 1,270 694 3,754 1,965 Operating expenses: Cost of sales and other revenues 416 221 1,252 626 Selling, general and administrative expenses 385 242 1,065 698 Depreciation and amortization 301 79 904 216 --------- ----------- --------------- -------------- Total operating expenses 1,102 542 3,221 1,540 --------- ----------- --------------- -------------- Income from operations 168 152 533 425 Interest expense 179 30 520 80 Equity losses in unconsolidated ventures 177 81 495 224 Gains on sales of investments 13 - 108 - Guaranteed minority interest expense 22 12 66 36 Other income (expense) - net (5) 10 (14) (24) --------- ----------- --------------- -------------- Income (loss) before income taxes and extraordinary item (202) 39 (454) 61 Provision (benefit) for income taxes (61) 21 (107) 51 --------- ----------- --------------- -------------- Income (loss) before extraordinary item (141) 18 (347) 10 Extraordinary item: Early extinguishment of debt, net of tax (3) - - - --------- ----------- --------------- -------------- NET INCOME (LOSS) $(144) $18 $(347) $10 ========= =========== =============== ============== Dividends on preferred stock 14 1 39 3 --------- ----------- --------------- -------------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $(158) $17 $(386) $7 ========= =========== =============== ============== EARNINGS (LOSS) PER COMMON SHARE $(0.26) $0.04 $(0.64) $0.01 ========= =========== =============== ============== AVERAGE COMMON SHARES OUTSTANDING (thousands) 606,729 473,902 606,568 473,501
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 1997 1996 - ------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 63 $ 121 Accounts and notes receivable - net 533 508 Deferred directory costs 250 259 Receivable from Communications Group 90 92 Marketable securities - 58 Other 87 101 ---------------- ---------------- Total current assets 1,023 1,139 ---------------- ---------------- Gross property, plant and equipment 6,109 5,111 Accumulated depreciation 1,347 836 ---------------- ---------------- Property, plant and equipment - net 4,762 4,275 Investment in Time Warner Entertainment 2,483 2,477 Net investment in international ventures 1,370 1,548 Intangible assets - net 12,327 12,595 Net investment in assets held for sale 410 409 Other assets 1,372 1,618 ---------------- ---------------- Total assets $23,747 $24,061 ================ ================
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 1997 1996 - --------------------------------------------------------------------------------------------- LIABILITIES AND EQUITY Current liabilities: Short-term debt $ 1,560 $ 217 Due to Continental Cablevision shareowners - 1,150 Accounts payable 347 425 Deferred revenue and customer deposits 126 129 Other 890 795 ------------ ----------------- Total current liabilities 2,923 2,716 ---------------- ----------------- Long-term debt 8,398 8,636 Deferred income taxes 3,553 3,600 Deferred credits and other 412 346 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company- guaranteed debentures 1,080 1,080 Preferred stock subject to mandatory redemption 100 51 Media Group equity 7,281 7,632 ---------------- ----------------- Total liabilities and equity $23,747 $24,061 ================ =================
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, Dollars in millions 1997 1996 - -------------------------------------------------------- ---------- --------- OPERATING ACTIVITIES Net income (loss) $ (347) $ 10 Adjustments to net income (loss): Depreciation and amortization 904 216 Equity losses in unconsolidated ventures 495 224 Gains on sales of investments (108) - Deferred income taxes (106) (57) Provision for uncollectibles 70 46 Changes in operating assets and liabilities: Accounts and notes receivable (111) (115) Deferred directory costs and other (14) 5 Accounts payable and accrued liabilities 41 45 Other adjustments - net 65 46 ---------- --------- Cash provided by operating activities 889 420 ---------- --------- INVESTING ACTIVITIES Expenditures for property, plant and equipment (1,087) (361) Payment to Continental Cablevision shareowners (1,150) - Investment in international ventures (315) (227) Proceeds from sales of investments 703 - Cash from net investment in assets held for sale 242 176 Other - net (197) (41) ---------- --------- Cash (used for) investing activities (1,804) (453) ---------- --------- FINANCING ACTIVITIES Repayments of short-term debt - net (2,815) (8) Proceeds from issuance of long-term debt 4,123 330 Repayments of long-term debt (377) (283) Dividends paid on preferred stock (36) (3) Proceeds from issuance of common stock 15 31 Purchases of treasury stock (53) - ---------- --------- Cash provided by financing activities 857 67 ---------- --------- CASH AND CASH EQUIVALENTS Increase (decrease) (58) 34 Beginning balance 121 20 ========== ========= Ending balance $ 63 $ 54 ========== =========
See Notes to Combined Financial Statements. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS For the Three and Nine Months Ended September 30, 1997 and 1996 (Dollars in millions) (Unaudited) A. Summary of Significant Accounting Policies Basis of Presentation. U S WEST, Inc. ("U S WEST" or the "Company") has two classes of common stock that are intended to reflect separately the performance of its communications and multimedia businesses. One class of stock, U S WEST Communications Group ("Communications Group"), reflects the communications businesses of U S WEST and the other class of stock, U S WEST Media Group ("Media Group"), reflects the multimedia businesses of U S WEST. The Combined Financial Statements have been prepared by U S WEST 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 1996 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 7, 1997. B. U S WEST Split On October 27, 1997, the Company announced its intention to split Communications Group and Media Group into separate public companies. Communications Group will be renamed U S WEST, Inc. ("new U S WEST") and Media Group will be renamed MediaOne Group, Inc. ("MediaOne Group"). Under the terms of the proposed transaction, new U S WEST will include the telephone, data and wireless operations of Communications Group, as well as the Yellow Pages and electronic directory businesses of U S WEST Dex, Inc. ("Dex"). Dex is currently part of Media Group and will be transferred to Communications Group as part of the proposed transaction (the "Dex Transfer"). MediaOne Group will include the cable/broadband, wireless, and domestic and international investments of Media Group. Under the terms of the proposed split, Communications Group shareowners will receive one share of new U S WEST common stock for each share of Communications Group common stock. Media Group shareowners will receive one share of MediaOne Group common stock for each share of Media Group common stock. In addition, Media Group shareowners will receive shares of new U S WEST common stock for each share of Media Group common stock which represents their interest in Dex, totaling approximately $850. Under the terms of the Dex Transfer, Media Group debt will be reduced and Communications Group debt will be increased by $3.9 billion. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) B. U S WEST Split (continued) The transaction is subject to a number of approvals, including approvals by regulators and both shareowner groups, and receipt of a favorable ruling from the Internal Revenue Service. The split is expected to be complete in the second half of 1998. C. AirTouch Transaction During 1994, U S WEST entered into a definitive agreement with AirTouch Communications, Inc. ("AirTouch") to combine their domestic cellular properties into a partnership in a multi-phased transaction (the "AirTouch Joint Venture"). During Phase I, which commenced on November 1, 1995, the cellular properties are owned separately. A wireless management company has been formed and is providing services to both companies, as requested, on a contract basis. In February 1997, the King County Superior Court (the "Court") in Washington state ruled that a subsidiary of Media Group violated the terms of its partnership agreement with its minority partners in the Seattle cellular partnership by entering into the AirTouch Joint Venture. The Company currently is complying with the Court's order which requires the Company to issue a right of first refusal to the minority partners with respect to the subsidiary's limited partnership interest. The Court authorized the limited partners to take legally appropriate steps to secure unanimous agreement for a substitute for the Company as the general partner. A motion is pending before the Court to extend the August 15, 1997 deadline for such agreement. The Company retains its right to appeal unfavorable rulings before transferring any partnership interest in the Seattle cellular partnership. Similar litigation has been filed in other jurisdictions regarding other cellular partnerships by the same minority partner that brought the Seattle litigation. The Company is also seeking declaratory relief from the Delaware Chancery Court. The Company believes it will ultimately be successful in all litigation asserting that the Company's entering into the AirTouch Joint Venture violated its partnership agreements with its minority partners. Media Group and AirTouch have agreed not to proceed to Phase II of the AirTouch Joint Venture before May 5, 1998. In Phase II of the AirTouch Joint Venture, the partners will combine those domestic cellular properties for which authorizations and partnership approvals have been obtained. Media Group has the right under Phase III of the AirTouch Joint Venture agreement to convert its joint venture interest into AirTouch stock. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) D. Asset Sales and Restructurings Marketable Securities and Investments. During the third quarter of 1997, Media Group sold 1,840,000 shares of Teleport Communications Group, Inc. ("TCG") for a pretax gain of $13. In November 1997, Media Group sold its remaining interest in TCG for net proceeds of $433. Pursuant to a settlement agreement, Media Group transferred its investment in Optus Vision, an Australian cable and telecommunications venture, to Optus Communications Pty Ltd., ("Optus Communications"), an Australian telecommunications carrier, in the third quarter of 1997. Media Group received a convertible note which can be converted to shares of Optus Communications upon satisfaction of various conditions, such as a public offering of Optus Communications' shares. The settlement released the Company from litigation and future claims. Cable Systems. During the second quarter of 1997, Media Group reached definitive agreements to sell its cable systems in Minnesota and Idaho. The system sales are subject to federal and local regulatory approvals, including the transfer of franchises, and are scheduled to close in early 1998. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company has stopped depreciating the systems held for sale. These cable systems contributed $12 and $19 of operating income during the three- and nine-month periods ended September 30, 1997, respectively. E. Debt Extinguishment During August 1997, U S WEST redeemed its Liquid Yield Option Notes ("LYONs"). The convertible zero coupon subordinated notes were due June 25, 2011. Upon redemption, the recorded value of the notes attributed to Media Group was $268. The debt extinguishment resulted in a loss of $3 (net of income tax benefits of $2) primarily related to the write-off of deferred debt issuance costs. This loss is reflected as an extraordinary charge in the accompanying Combined Statements of Operations. U S WEST financed the redemption with floating rate commercial paper. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) F. Media Group Equity
Following is a reconciliation of Media Group equity: Beginning balance, January 1, 1997 $7,632 Net loss (347) Market value adjustment for debt and equity securities 88 Treasury stock purchases (53) Foreign currency translation (43) Preferred dividends (39) Company LESOP guarantee 19 Common stock issuances 15 Other 9 --------- Ending balance, September 30, 1997 $7,281 =========
Market value adjustments of $88 (net of income tax expenses of $69) result primarily from recording TCG equity securities at market value. The foreign currency translation adjustment of $43 (net of income tax benefits of $28) is primarily related to investments in Malaysia and Hungary. G. MediaOne, Inc. Relocation On August 6, 1997, Media Group announced it will relocate the corporate offices of its domestic cable operations, MediaOne, Inc., from Boston to Denver. The move is designed to improve operations through better alignment and focus, and will occur in phases through mid-1998. Media Group incurred a pretax charge of $30 ($18 after tax) in third-quarter 1997 for costs related to the move and management changes. H. Subsequent Events Fintelco, S.A. On October 27, 1997, Media Group sold its 90 percent interest in Fintelco, S.A., ("Fintelco"), a cable and telecommunications venture located in Argentina, for proceeds of approximately $640. Media Group acquired an additional 40 percent interest in Fintelco in August 1997, to bring its total interest in Fintelco to 90 percent. International Directories. On October 1, 1997, Media Group sold U S WEST Polska, its wholly owned directory operation in Poland, for proceeds of approximately $30. This sale combined with the second-quarter 1997 sale of Thomson Directories has resulted in the disposition of Media Group's wholly owned international directory operations. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) I. Net Investment in Assets Held for Sale The capital assets segment is being accounted for in accordance with Staff Accounting Bulletin No. 93, issued by the SEC, 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 is being evaluated on an ongoing basis with adjustments to the existing reserve, if any, being charged to continuing operations. No such adjustment has been required. 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.
The components of net investment in assets held for sale follow: - ------------------------------------------------------- --------------- --------------- September 30, December 31, 1997 1996 - ------------------------------------------------------- --------------- --------------- ASSETS Cash and cash equivalents $ 52 $ 21 Finance receivables - net 806 869 Investment in real estate - net of valuation allowance 158 182 Bonds, at market value 118 146 Investment in FSA 351 326 Other assets 179 165 --------------- --------------- Total assets $1,664 $1,709 =============== =============== LIABILITIES Debt $ 421 $ 481 Deferred income taxes 685 671 Accounts payable, accrued liabilities and other 137 137 Minority interests 11 11 --------------- --------------- Total liabilities 1,254 1,300 --------------- --------------- Net investment in assets held for sale $ 410 $ 409 ======================================================= =============== ===============
Building sales and operating revenues of the capital assets segment were $13 and $91 for the three- and nine-month periods ended September 30, 1997, respectively, and $110 and $161 for the three- and nine-month periods ended September 30, 1996, respectively. Form 10-Q - Part I U S WEST MEDIA GROUP NOTES TO COMBINED FINANCIAL STATEMENTS (Dollars in millions) (Unaudited) I. Net Investment in Assets Held for Sale (continued) Revenues of U S WEST Financial Services, Inc. ("USWFS"), a member of the capital assets segment, were $5 and $16 for the three- and nine-month periods ended September 30, 1997, respectively, and $6 and $20 for the three- and nine-month periods ended September 30, 1996, respectively. Selected financial data for USWFS follows:
- ------------------------------------------------------------------------------- September 30, December 31, 1997 1996 - ------------------------------------------------------------------------------- Net finance receivables $ 850 $ 859 Total assets 1,208 1,058 Total debt 397 236 Total liabilities 1,139 998 Equity 69 60 - ---------------------------------------------------------- ---------------------
In September 1997, USWFS pledged certain finance receivables as collateral for a nonrecourse loan totaling $173. The loan bears interest at an annual rate of 7.2 percent and matures in the year 2009. 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 GAAP. The discussion should be read in conjunction with the U S WEST, Inc. Consolidated Financial Statements. On November 15, 1996, Continental Cablevision, Inc. ("Continental") was merged into a wholly owned subsidiary of U S WEST (the "Continental Merger"). Pro forma discussions give effect to the Continental Merger as though it had occurred as of January 1, 1996. A discussion of Media Group's operations on a proportionate basis follows the GAAP discussion. Results of Operations - Three and Nine Months Ended September 30, 1997 Compared with 1996
Sales and Other Revenues - ----------------------------------------------------------------------------------------- Pro forma Percent Pro forma Percent Three Months Ended September 30, 1997 1996 Change 1996 Change - -------------------------------------- -------- --------- -------- ---------- --------- Cable and broadband: Domestic $ 584 $ 60 - $ 527 10.8 International 6 - - - - -------- --------- -------- ---------- --------- 590 60 - 527 12.0 Wireless communications: Domestic: Cellular service 331 286 15.7 286 15.7 Cellular equipment 42 29 44.8 29 44.8 -------- --------- -------- ---------- --------- 373 315 18.4 315 18.4 Directory and information services: Domestic 296 276 7.2 276 7.2 International 3 40 (92.5) 40 (92.5) -------- --------- -------- ---------- --------- 299 316 (5.4) 316 (5.4) Other 8 3 - 3 - -------- --------- -------- ---------- --------- Sales and other revenues $1,270 $694 83.0 $1,161 9.4 ====================================== ======== ========= ======== ========== =========
- ----------------------------------------------------------------------------------------- Pro forma Percent Pro forma Percent Nine Months Ended September 30, 1997 1996 Change 1996 Change - ----------------------------------------------------------------------------------------- Cable and broadband: Domestic $1,721 $ 176 - $1,579 9.0 International 14 - - - - -------- --------- -------- ---------- --------- 1,735 176 - 1,579 9.9 Wireless communications: Domestic: Cellular service 961 792 21.3 792 21.3 Cellular equipment 110 77 42.9 77 42.9 -------- --------- -------- ---------- --------- 1,071 869 23.2 869 23.2 Directory and information services: Domestic 879 826 6.4 826 6.4 International 48 82 (41.5) 82 (41.5) -------- --------- -------- ---------- --------- 927 908 2.1 908 2.1 Other 21 12 75.0 12 75.0 -------- --------- -------- ---------- --------- Sales and other revenues $3,754 $1,965 91.0 $3,368 11.5 =======================================================================================
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 increased 83.0 percent, to $1,270, and 91.0 percent, to $3,754, for the three- and nine-month periods ended September 30, 1997, respectively. On a pro forma basis, Media Group sales and other revenues increased 9.4 percent and 11.5 percent, for the three- and nine-month periods, respectively. The pro forma increases were primarily a result of growth in domestic cable and broadband revenues, and domestic cellular service revenues. Cable and Broadband. On a pro forma basis, domestic cable and broadband revenues increased 10.8 percent, to $584, and 9.0 percent, to $1,721, for the three- and nine-month periods ended September 30, 1997, respectively. The increases resulted primarily from price increases of approximately 6 to 8 percent, the addition of new channels and basic subscriber increases of approximately 2 percent. Increases in direct broadcast satellite ("DBS") service, and equipment and installation revenues also contributed to the increases in revenue. DBS service revenues increased primarily as a result of a 41.9 percent increase in DBS customers in 1997. During the nine-month period, pay-per-view revenues also contributed to the revenue increase. Results for 1997 international cable and broadband revenues reflect the fourth-quarter 1996 consolidation of Kabel Plus a.s. ("Kabel Plus"), Media Group's cable operation in the Czech Republic. Wireless Communications. Cellular service revenues increased 15.7 percent, to $331, and 21.3 percent, to $961, for the three- and nine-month periods ended September 30, 1997, respectively. These increases are a result of a 32.1 percent increase in subscribers during the last twelve months, partially offset by a 10.2 percent decrease (12.7 percent decrease in the three-month period) in average revenue per subscriber to $47.99 per month. The increase in subscribers relates to continued growth in demand for wireless services, as well as the 1997 introduction of digital wireless services in several major markets. Media Group believes that increasing competition in Media Group wireless markets, including new market entrants offering personal communication services ("PCS") technology, will contribute to continued decreases in revenue per subscriber and slowing subscriber growth. Cellular equipment revenues increased 44.8 percent, to $42, and 42.9 percent, to $110, for the three- and nine-month periods ended September 30, 1997, respectively. These increases are primarily a result of an increase in unit sales associated with increased gross customer additions during 1997 and the introduction of digital handsets. These volume increases were partially offset by a decrease in selling price per analog unit. In Phase II of the AirTouch Joint Venture, Media Group and AirTouch will combine those domestic cellular properties for which authorizations and partnership approvals have been obtained. Media Group has the right under Phase III of the AirTouch Joint Venture agreement to convert its joint venture interest into AirTouch stock. See Note C - AirTouch Transaction - to the U S WEST Media Group Combined Financial Statements. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued Directory and Information Services. Revenues related to Yellow Pages directory advertising represent 99 percent of domestic directory and information services. Yellow Pages directory advertising revenues increased 6.9 percent, to $293 and $868, during the three-and nine-month periods ended September 30, 1997, respectively. The increases are largely a result of a 7.2 percent increase in revenue per local advertiser, on a comparable basis, primarily resulting from price increases of 4.6 percent and an increase in volume and complexity of advertisements sold. These increases are offset slightly by decreased revenue associated with exited product lines which were nonstrategic to the directory business. Revenues related to interactive and other services comprise the remaining domestic directory and information services revenues and totaled $3 and $11 for the three- and nine-month periods, respectively. In October 1997, U S WEST announced its intention to split Media Group and Communications Group into separate public companies. Concurrently, the Yellow Pages and electronic directory businesses of Dex will be transferred from Media Group to Communications Group. See Note B - U S WEST Split - to the U S WEST Media Group Combined Financial Statements. In October 1997, Media Group sold U S WEST Polska, its directory operation in Poland. In June 1997, Media Group sold Thomson Directories, its directory operation in the United Kingdom. These transactions have resulted in the disposition of Media Group's wholly owned international directory operations. See Note H - Subsequent Events - to the U S WEST Media Group Combined Financial Statements.
Operating Income - ----------------------------------------------------------------------------------------- Pro forma Percent Pro forma Percent Three Months Ended September 30, 1997 1996 Change 1996 Change - ----------------------------------------------------------------------------------------- Cable and broadband: Domestic $(16) $ (5) - $(20) (20.0) International (2) - - - - -------- -------- --------- ---------- ---------- (18) (5) - (20) (10.0) Wireless communications: Domestic 107 90 18.9 90 18.9 International (3) - - - - -------- -------- ---------- --------- ---------- 104 90 15.6 90 15.6 Directory and information services: Domestic 135 101 33.7 101 33.7 International (2) 3 - 3 - -------- -------- ---------- --------- ---------- 133 104 27.9 104 27.9 Other (see Note 1) (51) (37) 37.8 (37) 37.8 -------- -------- ---------- --------- ---------- Operating income $168 $152 10.5 $137 22.6 ============================================== ======== ========== ========= ========== Note 1 - Primarily includes headquarters expenses for shared services and divisional expenses associated with international equity investments.
Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued
Operating Income (continued) - --------------------------------------- --------------------------- ---------- ------------- ------------ Pro forma Percent Pro forma Percent Nine Months Ended September 30, 1997 1996 Change 1996 Change - --------------------------------------- ------------- ------------- ---------- ------------- ------------ Cable and broadband: Domestic $(35) $ 3 - $(38) (7.9) International (9) - - - - ------------- ------------- ---------- ------------- ------------ (44) 3 - (38) 15.8 Wireless communications: Domestic 302 200 51.0 200 51.0 International (12) - - - - ------------- ------------- ---------- ------------- ------------ 290 200 45.0 200 45.0 Directory and information services: Domestic 397 326 21.8 326 21.8 International (11) (8) 37.5 (8) 37.5 ------------- ------------- ---------- ------------- ------------ 386 318 21.4 318 21.4 Other (see Note 1) (99) (96) 3.1 (96) 3.1 ------------- ------------- ---------- ------------- ------------ Operating income $533 $425 25.4 $384 38.8 ======================================= ============= ============= ========== ============= ============ Note 1 - Primarily includes headquarters expenses for shared services and divisional expenses associated with international equity investments.
During the three- and nine-month periods ended September 30, 1997, Media Group operating income increased 10.5 percent and 25.4 percent, to $168 and $533, respectively. On a pro forma basis, operating income increased 22.6 percent and 38.8 percent, for the same periods. The pro forma increases were due primarily to growth in domestic wireless and domestic directory operations. Media Group EBITDA more than doubled in 1997, to $469 and $1,437, for the three- and nine-month periods ended September 30, 1997, respectively, due primarily to the Continental Merger. On a pro forma basis, Media Group EBITDA increased 9.1 percent and 15.8 percent, for the same periods, due primarily to growth in domestic wireless and domestic directory operations. Media Group considers EBITDA an important indicator of the operational strength and performance of its businesses. EBITDA, however, should not be considered an alternative to operating or net income as an indicator of the performance of Media Group's businesses, nor as an alternative to cash flows from operating activities as a measure of liquidity, in each case determined in accordance with GAAP. Cable and Broadband. On a pro forma basis, cable and broadband operating losses decreased $2, to $18, and increased $6, to $44, for the three- and nine-month periods ended September 30, 1997, respectively. International cable and broadband results contributed operating losses of $2 and $9, for the three- and nine-month periods, respectively. Consolidated results for Kabel Plus are reflected in Media Group's results beginning in fourth-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 Domestic cable and broadband operating losses decreased $4 for the three-month period compared with pro forma 1996. The decrease was a result of a $3 increase in EBITDA, to $227, and a $1 decrease in depreciation and amortization expense. An increase of $12, or 5.1 percent, in core cable EBITDA was partially offset by increased costs of $9, primarily related to the deployment of high-speed data services and change in brand name to "MediaOne". The core cable EBITDA increase is primarily a result of increased revenues, partially offset by higher programming fees resulting from rate increases and subscriber growth. Increased personnel costs related to customer service initiatives also offset the growth in EBITDA. During the nine-month period, domestic cable and broadband operating losses decreased $3, to $35, compared with pro forma 1996. The decrease was a result of a $15 increase in EBITDA, to $687, offset by a $12 increase in depreciation and amortization expense. Increases of $42, or 6.1 percent, in core cable EBITDA and $5 in DBS service EBITDA were partially offset by increased costs of $32. Deployment of high-speed data services and the brand name change contributed to cost increases. Core cable EBITDA growth is primarily a result of increased revenues, partially offset by higher programming fees resulting from rate increases and subscriber growth. Increased personnel costs related to customer service initiatives also offset the growth in EBITDA. Media Group expects to incur additional costs related to the brand name change during the remainder of 1997, as well as for the deployment of high-speed data. Wireless Communications. Domestic wireless communications operating income increased 18.9 percent, to $107, and 51.0 percent, to $302, for the three- and nine-month periods, respectively. These increases are a result of revenue increases associated with 32.1 percent subscriber growth, combined with efficiency gains. These increases were somewhat offset by decreased revenue per subscriber, caused primarily by promotional pricing to retain subscribers and remain competitive with other wireless service providers. On a per subscriber basis, the 1997 decline in revenue of 10.2 percent has been more than offset by a 19.8 percent decrease in the costs to acquire and support customers. During third-quarter 1997, marketing and related costs to launch digital services in three markets combined with the promotional pricing contributed to slowing growth in operating income and EBITDA. Domestic cellular EBITDA increased 20.5 percent, to $153, and 41.7 percent, to $435, for the three- and nine-month periods, respectively. Efficiencies have contributed to an increase in 1997 domestic cellular EBITDA margins to 46.2 percent and 45.3 percent for the three- and nine-month periods, respectively, compared with 44.4 percent and 38.8 percent in 1996. Media Group believes that increasing competition in Media Group wireless markets, including new market entrants offering PCS technology, will contribute to continued decreases in revenue per subscriber and slowing subscriber growth. Domestic cellular depreciation increased 18.9 percent, to $44, and 22.4 percent, to $131, respectively, for the three- and nine-month periods. These increases are largely a result of network upgrades. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued International wireless communications operating losses of $3 and $12 for the three- and nine-month periods, respectively, reflect the fourth-quarter 1996 consolidation of Russian Telecommunications Development Corporation, ("RTDC"), a Russian venture, which holds wireless investments. Directory and Information Services. During the three- and nine-month periods ended September 30, 1997, operating income related to domestic Yellow Pages directory advertising increased 9.0 percent, to $145, and 6.8 percent, to $422, respectively, excluding the one-time effect of a third-quarter 1996 charge of $25 to reorganize and reduce headcount. Revenue increases and cost savings associated with headcount reductions (primarily in the nine-month period) were partially offset by increased printing, paper and sales support costs. These cost increases were associated with an increase in the volume and complexity of advertisements sold. Operating losses associated with ongoing product development activities, which include development costs for internet content services, are included in domestic directory and information services operating income. For the three-month period, the operating losses increased $3, to $10, partially a result of developing internet content services in 1997. For the nine-month period operating losses decreased $18, to $25, primarily the result of discontinuing various product development activities in 1996. EBITDA related to domestic Yellow Pages directory advertising service increased 10.2 percent, to $151, and 9.6 percent, to $446, for the three- and nine-month periods, respectively, excluding the one-time effect of the third-quarter 1996 charge of $25 to reorganize and reduce headcount. The EBITDA margin for both the three- and nine-month periods ended September 30, 1997 was 51 percent compared to 50 percent for the same periods in 1996, on a comparable basis. Other. During the three- and nine-month periods, other operating losses increased $14, to $51, and $3, to $99, respectively. The increases were due primarily to a third-quarter 1997 charge of $30 for management changes and moving costs related to the MediaOne, Inc. move from Boston to Denver. This charge was partially offset by savings associated with lower international staff levels in 1997, combined with a third-quarter 1996 charge of $10 related to the staff reductions.
Interest Expense and Other - ---------------------------------------------------------------------------------------------------------- Pro forma Percent Pro forma Percent Three Months Ended September 30, 1997 1996 Change 1996 Change - ------------------------------------------- --------- ----------- ------------ ---------- ---------- Interest expense $ 179 $ 30 - $176 1.7 Equity losses in unconsolidated ventures 177 81 - 94 88.3 Gains on sales of investments 13 - - - - Guaranteed minority interest expense 22 12 83.3 12 83.3 Other income (expense) - net (5) 10 - 8 - - ------------------------------------------- --------- ----------- ------------ ---------- ----------
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 (continued)
- -------------------------------------------------------------------------------------------------- Pro forma Percent Pro forma Percent Nine Months Ended September 30, 1997 1996 Change 1996 Change - ------------------------------------------ --------- --------- ---------- ----------- ---------- Interest expense $ 520 $ 80 - $516 0.8 Equity losses in unconsolidated ventures 495 224 - 260 90.4 Gains on sales of investments 108 - - - - Guaranteed minority interest expense 66 36 83.3 36 83.3 Other expense - net 14 24 (41.7) 32 (56.3) - ------------------------------------------ --------- --------- ---------- ----------- ----------
Interest expense increased $149 and $440 during the three- and nine-month periods, respectively, primarily as a result of the Continental Merger. U S WEST assumed Continental debt totaling $6,525 (at market value) and incurred debt of $1,150 to finance the cash portion of the Continental Merger consideration. Equity losses increased $96 and $271 for the three- and nine-month periods, respectively, predominantly due to greater losses generated from international ventures and the domestic investment in PrimeCo Personal Communications L.P. ("PrimeCo"). PrimeCo launched service in November 1996, and losses associated with this venture have increased as a result of start-up and other costs. The increase in international equity losses primarily relates to foreign exchange transaction losses at the Malaysian and Indonesian operations, and amortization of license fees related to a wireless investment in India. In addition, costs associated with the significant increase in customers and network coverage at One 2 One contributed to the increase in losses during the nine-month period. Fluctuations in foreign exchange rates could impact future equity losses. During the third quarter of 1997, Media Group sold 1,840,000 million shares of Teleport Communications Group for a pretax gain of $13. Also during the nine-month period, Media Group sold its shares of Time Warner, Inc. and its 5 percent interest in a wireless venture in France. These transactions resulted in pretax gains totaling $108. Guaranteed minority interest expense increased $10 and $30 for the three- and nine-month periods, respectively. The increases were a result of the October 1996 issuance of Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company-guaranteed debentures ("Preferred Securities") totaling $480. Other income decreased $15, to a loss of $5, and other expense decreased $10, to $14, during the three- and nine-month periods, respectively. The three-month period decrease is due partially to foreign exchange transaction losses. The nine-month period decrease is due primarily to a second-quarter 1996 pretax charge of $31 associated with the sale of Media Group's cable television interests in Norway, Sweden and Hungary, partially offset by the increased foreign exchange transaction losses in 1997. 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
Income Tax Provision (Benefit) - ----------------------------------------------------------------------------------------------- Pro forma Pro forma Three Months Ended September 30, 1997 1996 (Decrease) 1996 Increase - ----------------------------------------------------------------------------------------------- Income tax provision (benefit) $ (61) $ 21 $ (82) $ (28) $ 33 - ----------------------------------- --------- --------- ------------- ------------ ------------
- ----------------------------------- ------------------- ------------- ------------ ------------ Pro forma Pro forma Nine Months Ended September 30, 1997 1996 (Decrease) 1996 (Decrease) - ----------------------------------- --------- --------- ------------- ------------ ------------ Income tax provision (benefit) $ (107) $ 51 $ (158) $(121) $ (14) Effective tax rate 23.6% 83.6% - 26.3% - - ----------------------------------- --------- --------- ------------- ------------ ------------
The decrease in the effective tax rate is primarily a result of a shift from pretax earnings to pretax losses and additional goodwill amortization associated with the Continental Merger. Net Income (Loss) Media Group net income decreased to a loss of $144 ($0.26 per share) for the three-month period, and to $347 ($0.64 per share) for the nine-month period. Excluding the after tax effects of the gains on sales of investments totaling $7 ($0.01 per share) during the three-month period, and $63 ($0.10 per share) during the nine-month period, Media Group net income decreased $169 and $420 for the three- and nine-month periods, respectively. The Continental Merger contributed approximately $118 of the decrease during the three-month period, and $301 during the nine-month period. The Continental Merger resulted in significant increases in interest and depreciation and amortization charges. The remaining decrease in net income is primarily due to greater losses from unconsolidated ventures, partially offset by increased earnings from domestic cellular and directories operations. During third-quarter 1997, Media Group incurred an extraordinary loss of $3 (net of income tax benefits of $2) related to the early extinguishment of debt. See Note E - Debt Extinguishment - to the U S WEST Media Group Combined Financial Statements. During second-quarter 1997, Media Group incurred an extraordinary gain of $3 (net of income tax expenses of $2) also related to the early extinguishment of debt. Liquidity and Capital Resources Operating Activities Cash provided by operating activities of the Media Group increased $469 in the first nine months of 1997, compared with 1996. The Continental Merger and growth in operations from the domestic cellular and directories businesses contributed to the increase. Also contributing were decreased tax payments during 1997. Partially offsetting the increase were higher financing costs resulting from greater debt levels associated with the Continental Merger. 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 Media Group capital expenditures were $1,087 for the first nine months of 1997. The majority of expenditures in 1997 were devoted to upgrading the domestic cable network and expanding the domestic cellular network. Media Group also invested $315 in international ventures during 1997, primarily for an additional 40 percent interest in Fintelco, and capital contributions to a wireless venture in India. Other investing activities include an investment in Continental of $1,150 which represents payment of the cash portion of the Continental Merger consideration. During the first nine months of 1997, Media Group received proceeds totaling $945 related to asset sales as follows: (a) $246 from the sale of 7,915,000 shares of Teleport Communications Group stock, (b) $242 from asset sales and other proceeds from the capital assets segment, which is held for sale, (c) $220 from the sale of Time Warner, Inc. shares acquired in the Continental Merger, (d) $121 from the sale of Thomson Directories, (e) $81 from the sale of Media Group's 5 percent interest in a wireless venture in France, and (f) $35 from other miscellaneous sales. On October 27, 1997, Media Group sold its 90 percent interest in Fintelco for proceeds of approximately $640. Also in October 1997, Media Group sold U S WEST Polska, its wholly owned directory operation in Poland, for proceeds of approximately $30. In November 1997, Media Group sold its remaining interest in TCG for net proceeds of $433. Financing Activities On October 27, 1997, the Company announced its intention to split Communications Group and Media Group into separate public companies. Under the terms of the proposed transaction, new U S WEST will include the telephone, data and wireless operations of Communications Group, as well as the Yellow Pages and electronic directory businesses of Dex. Dex is currently part of Media Group and will be transferred to Communications Group as part of the proposed transaction. MediaOne Group will include the cable/broadband, wireless, and domestic and international investments of Media Group. Under the terms of the Dex Transfer, Media Group shareowners will receive shares of new U S WEST common stock for each share of Media Group common stock, which represents their interest in Dex, totaling approximately $850. Also, Media Group debt will be reduced and Communications Group debt will be increased by $3.9 billion. The transaction is subject to a number of approvals, including approvals by regulators and both shareowner groups, and receipt of a favorable ruling from the Internal Revenue Service. The split is expected to be complete in the second half of 1998. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (Dollars in millions), continued As a result of the proposed split announcement, credit ratings for U S WEST Capital Funding, Inc. and for Preferred Securities are under review by Standard & Poor's (with negative implications), Moody's, and Duff & Phelps. Senior debt at MediaOne, Inc. (formerly Continental) was downgraded by Moody's from Baa2 to Baa3 and subordinated debt from Baa3 to Ba1, and is under review by Standard & Poor's, with negative implications. The MediaOne, Inc. debt remains under review for further downgrading by Moody's. For all outstanding debt securities issued or guaranteed by U S WEST, Inc., the Company intends to take appropriate steps to preserve bondholder value. Media Group debt at September 30, 1997 was $9,958, an increase of $1,105 compared with December 31, 1996. In 1997, Media Group incurred additional debt to finance the cash portion of the Continental Merger consideration which totaled $1,150. In January 1997, the Company issued medium- and long-term debt totaling $4.1 billion, at a weighted average rate of 7.47 percent. The proceeds were used to refinance debt incurred in conjunction with the Continental Merger. During August 1997, U S WEST redeemed its Liquid Yield Option Notes. The convertible zero coupon subordinated notes had a recorded value of $268 attributed to Media Group. During the second quarter of 1997, MediaOne, Inc. redeemed a 10 5/8 percent senior subordinated note with a recorded value of $110, including a premium of $10. U S WEST financed the redemptions with floating rate commercial paper. During second quarter of 1997, Media Group acquired cable systems serving 40,000 subscribers in the state of Michigan for cash of $25 and approximately $50 of Series E Convertible Preferred Stock (the "Preferred Stock") issued by U S WEST. The Preferred Stock is redeemable at U S WEST's option starting five years from the acquisition date, or upon dissolution of Media Group. The stockholders have the right to elect cash upon redemption, or to convert their Preferred Stock into Media Group common stock based on a predetermined formula. Excluding debt associated with the capital assets segment, the Media Group's percentage of debt to total capital at September 30, 1997, was 54.1 percent compared with 50.3 percent at December 31, 1996. Including debt associated with the capital assets segment, Preferred Securities and mandatorily redeemable preferred stock, the Media Group's percentage of debt to total capital was 61.4 percent at September 30, 1997, compared with 57.8 percent at December 31, 1996. The percentage of debt to total capital has increased as a result of higher debt associated with the Continental Merger. Due to the significant capital requirements associated with the domestic cable upgrade, Media Group expects that cash from operations will not be adequate to fund expected cash requirements in the next several years. Additional financing will come primarily from new debt. Media Group from time to time engages in preliminary discussions regarding restructurings, 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 Media Group. There is no assurance that any such discussions will result in the consummation of any such transaction. 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 and discussion is not required by GAAP or intended to replace the Combined Financial Statements prepared in accordance with GAAP. It is presented supplementally because Media Group believes that proportionate financial and operating data facilitate 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 $410 and $409 at September 30, 1997 and December 31, 1996, respectively. The financial information included below departs materially from GAAP because it aggregates the revenues and operating income of entities not controlled by Media Group with those of the consolidated operations of Media Group.
- -------------------------------------------------------------------------------- Pro forma Percent Nine Months Ended September 30, 1997 1996 (1) Change - -------------------------------------------------------------------------------- Revenues Cable and broadband: Domestic (2) $3,808 $3,571 6.6 International 365 256 42.6 Wireless communications: Domestic 1,009 787 28.2 International 522 298 75.2 Directory and information services: Domestic 881 826 6.7 International 91 131 (30.5) Corporate and other 12 9 33.3 --------------- --------- ----------- Total revenues $6,688 $5,878 13.8 ======================================= =============== ========= =========== EBITDA (3) Cable and broadband: Domestic (2) $1,196 $1,116 7.2 International 38 (13) - Wireless communications: Domestic 330 253 30.4 International 20 1 - Directory and information services: Domestic 419 349 20.1 International 1 5 (80.0) Corporate and other (60) (30) - --------------- --------- ----------- Total EBITDA $1,944 $1,681 15.6 ======================================= =============== ========= ===========
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
- --------------------------------------- ---------- -------------- ------------- Pro forma Percent Nine Months Ended September 30, 1997 1996 (1) Change - --------------------------------------- ---------- -------------- ------------- Operating Income Cable and broadband: Domestic (2) $ 172 $ 131 31.3 International (117) (106) 10.4 Wireless communications: Domestic 183 154 18.8 International (122) (63) 93.7 Directory and information services: Domestic 386 327 18.0 International (8) (7) 14.3 Corporate and other (68) (37) 83.8 ---------- -------------- ------------ Total operating income $ 426 $ 399 6.8 ============================================================================== Net Income (Loss) Cable and broadband: Domestic (2) $ (344) $ (375) (8.3) International (198) (157) 26.1 Wireless communications: Domestic 76 88 (13.6) International (108) (70) 54.3 Directory and information services: Domestic 229 193 18.7 International (9) (9) - Corporate and other 7 (9) - ---------- -------------- ------------ Total net loss $(347) $(339) 2.4 ==============================================================================
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 - ------------------------------------- --------- ------------- ------------- Nine Months Ended September 30, Pro forma Percent (in thousands) 1997 1996 (1) Change - ------------------------------------- --------- ------------- ------------- Subscribers/advertisers: Cable and broadband: Domestic (2) 7,696 7,462 3.1 International 1,483 961 54.3 Wireless communications: Domestic 2,263 1,664 36.0 International 871 419 107.9 Directory and information services: Domestic 481 482 (0.2) International 42 264 (84.1) --------- ----------- ----------- Total subscribers/advertisers 12,836 11,252 14.1 ===================================== ========= =========== =========== (1) 1996 pro forma proportionate results reflect the following for the nine months: (i) Media Group historical proportionate results; (ii) the Continental Merger; (iii) Continental's acquisition of the remaining interest in Meredith/New Heritage; (iv) the reclassification of the Teleport Communications Group investment to equity method; and (v) Continental's cable investments in Argentina and Singapore. (2) The proportionate results are based on the Media Group's 25.51 percent pro rata priority and residual equity interests in reported Time Warner Entertainment Company L.P. ("TWE") results. The reported TWE results are prepared in accordance with GAAP and have not been adjusted to report TWE results on a proportionate basis. (3) 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.
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 - Nine Months Ended September 30, 1997 Compared with Pro Forma 1996 For the first nine months of 1997, proportionate Media Group revenues increased 13.8 percent, to $6.7 billion, EBITDA increased 15.6 percent, to $1.9 billion, and subscribers/advertisers increased 14.1 percent, to $12.8 million. Strong growth in domestic and international wireless and cable and broadband operations contributed to the increase in proportionate revenue and growth in subscribers. Strong growth in domestic wireless and cable contributed to the increase in proportionate EBITDA. Cable and Broadband. During the first nine months of 1997, proportionate revenues for the domestic cable and broadband operations increased 6.6 percent, to $3.8 billion. This is a result of increases in subscribers and revenue per subscriber mainly due to price increases. Proportionate EBITDA increased 7.2 percent, to $1.2 billion. Proportionate EBITDA related to the domestic cable and broadband operations of MediaOne, increased 2.2 percent to $687, primarily as a result of higher revenues, partially offset by higher programming fees, increased personnel costs related to customer service initiatives, costs associated with deployment of high speed data services, and to change the domestic cable brand name to "MediaOne". Proportionate EBITDA related to TWE operations increased 14.6 percent to $509. TWE's results benefited from improved cable and programming operations and gains realized by asset sales. During the first nine months of 1997, international cable and broadband proportionate revenues increased 42.6 percent, to $365, and proportionate EBITDA increased $51, to $38. Customer growth at Telewest Communications, Inc. ("Telewest") and new investments in Malaysia and Indonesia contributed to the increase in proportionate revenue. A reduction in Media Group international staff costs as well as improved operations at Telewest and Malaysia contributed to the increase in proportionate EBITDA. Proportionate international cable subscribers totaled approximately 1.5 million at September 30, 1997, a 9 percent increase, on a comparable basis. Telewest's cable television subscribers increased 27 percent compared with last year. Wireless Communications. During the first nine months of 1997, domestic wireless proportionate revenues increased 28.2 percent, to $1.0 billion, and proportionate EBITDA increased 30.4 percent, to $330. Excluding revenue and losses generated by the start-up of PrimeCo, domestic cellular proportionate revenue increased 24.3 percent and proportionate EBITDA increased 41.8 percent. The increase in proportionate revenue is a result of revenue increases associated with strong domestic cellular subscriber growth. The increase in proportionate EBITDA is a result of revenue increases combined with efficiency gains. Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Result of Operations (Dollars in millions), continued During the first nine months of 1997, proportionate revenues for the international wireless operations increased 75.2 percent, to $522, and proportionate EBITDA increased $19 to $20. The increase in proportionate revenue and EBITDA is the result of the international wireless subscriber base more than doubling to 871,000. The digital wireless operations in Hungary, Czech Republic, Slovakia, Malaysia and Poland contributed significantly to the increase. The personal communications services venture in the United Kingdom, One 2 One, added 174,000 proportionate customers, a 76 percent increase, from a year ago. Directory and Information Services. Proportionate revenues for domestic directory and information services increased 6.7 percent, to $881, and proportionate EBITDA increased 20.1 percent, to $419. The increases are due to price and volume increases, reduction in new product development activities and employee reductions. Media Group sold its wholly owned international directory operations in the United Kingdom and Poland on June 4, 1997, and October 1, 1997, respectively. These two operations comprise the majority of proportionate international directories results. 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. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number 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. and U S WEST Financial Services, Inc. 27 Financial Data Schedule (b) Reports on Form 8-K filed during the Third Quarter of 1997 (i) Form 8-K report dated July 25, 1997 concerning the releases of earnings issued on July 25, 1997 by U S WEST Communications Group and on July 29, 1997 by U S WEST Media Group, for the second quarter ended June 30, 1997. (ii) Form 8-K report dated August 7, 1997 concerning the press release issued August 7, 1997 entitled "Jan Peters Named MediaOne CEO; Corporate Offices Moving to Denver." 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, 1997 U S WEST, Inc. Michael P. Glinsky Executive Vice President and Chief Financial Officer EX-11 2 EARNINGS PER COMMON SHARE EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, 1997 1996 EARNINGS PER COMMON SHARE --------- ---------- Income before extraordinary item $ 338,550 $ 285,730 Extraordinary item: Early extinguishment of debt - net of tax (3,238) - ---------- ---------- Net income for per share calculation $ 335,312 $ 285,730 ========== ========== Weighted average common shares outstanding 483,218 478,356 ========== ========== Income before extraordinary item $ 0.70 $ 0.60 Extraordinary item: Early extinguishment of debt - net of tax (0.01) - ---------- ---------- Earnings per common share $ 0.69 $ 0.60 ========== ==========
EXHIBIT 11 U S WEST COMMUNICATIONS GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Nine Months Ended September 30, 1997 1996 EARNINGS PER COMMON SHARE --------- ---------- Income before extraordinary item and cumulative effect of change in accounting principle $1,010,155 $ 903,983 Extraordinary item: Early extinguishment of debt - net of tax (3,238) - Cumulative effect of change in accounting principle - net of tax - 34,158 ---------- ---------- Net income for per share calculation $1,006,917 $ 938,141 ========== ========== Weighted average common shares outstanding 482,374 476,744 ========== ========== Income before extraordinary item and cumulative effect of change in accounting principle $ 2.09 $ 1.90 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 $ 2.08 $ 1.97 ========== ==========
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 1997 1996 EQUIVALENT SHARE: --------- ---------- Income before extraordinary item $ 338,550 $ 285,730 Extraordinary item: Early extinguishment of debt - net of tax (3,238) - ---------- ---------- Net income for per share calculation $ 335,312 $ 285,730 ========== ========== Weighted average common shares outstanding 483,218 478,356 Incremental shares from assumed exercise of stock options 2,474 1,320 ---------- ---------- Total common shares 485,692 479,676 ========== ========== Income before extraordinary item $ 0.70 $ 0.60 Extraordinary item: Early extinguishment of debt - net of tax (0.01) - ---------- ---------- Earnings per common and common $ 0.69 $ 0.60 equivalent share ========== ==========
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 1997 1996 EQUIVALENT SHARE: --------- ---------- Income before extraordinary item and cumulative effect of change in accounting principle $1,010,155 $ 903,983 Extraordinary item: Early extinguishment of debt - net of tax (3,238) - Cumulative effect of change in accounting principle - net of tax - 34,158 ---------- ---------- Net income for per share calculation $1,006,917 $ 938,141 ========== ========== Weighted average common shares outstanding 482,374 476,744 Incremental shares from assumed exercise of stock options 2,006 1,615 ---------- ---------- Total common shares 484,380 478,359 ========== ========== Income before extraordinary item and cumulative effect of change in accounting principle $ 2.09 $ 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 and common $ 2.08 $ 1.96 equivalent share ========== ==========
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 1997 1996 FULL DILUTION: --------- ---------- Income before extraordinary item $ 338,550 $ 285,730 Interest on Convertible Liquid Yield Option Notes (LYONS) 2,308 3,202 ---------- ---------- Adjusted income before extraordinary item 340,858 288,932 Extraordinary item: Early extinguishment of debt - net of tax (3,238) - ---------- ---------- Adjusted net income for per share calculation $ 337,620 $ 288,932 ========== ========== Weighted average common shares outstanding 483,218 478,356 Incremental shares from assumed exercise of stock options 2,744 1,320 Shares issued upon conversion of LYONS 5,715 9,386 ---------- ---------- Total common shares 491,677 489,062 ========== ========== Adjusted income before extraordinary item $ 0.69 $ 0.59 Extraordinary item: Early extinguishment of debt - net of tax (0.01) - ---------- ---------- Earnings per common share - assuming full dilution $ 0.68 $ 0.59 ========== ==========
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 1997 1996 FULL DILUTION: --------- ---------- Income before extraordinary item $1,010,155 $ 903,983 Interest on Convertible Liquid Yield Option Notes (LYONS) 8,954 9,501 ---------- ---------- Adjusted income before extraordinary item and cumulative effect of change in accounting principle 1,019,109 913,484 Extraordinary item: Early extinguishment of debt - net of tax (3,238) - Cumulative effect of change in accounting principle - net of tax - 34,158 ---------- ---------- Adjusted net income for per share calculation $1,015,871 $ 947,642 ========== ========== Weighted average common shares outstanding 482,374 476,744 Incremental shares from assumed exercise of stock options 2,580 1,615 Shares issued upon conversion of LYONS 8,149 9,633 ---------- ---------- Total common shares 493,103 487,992 ========== ========== Adjusted income before extraordinary item and cumulative effect of change in accounting principle $ 2.07 $ 1.87 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 $ 2.06 $ 1.94 ========== ==========
EXHIBIT 11 U S WEST MEDIA GROUP Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended September 30, 1997 1996 EARNINGS (LOSS) PER COMMON SHARE ---------- ---------- Income (loss) before extraordinary item $ (141,422) $ 18,531 Extraordinary item: Early extinguishment of debt - net of tax (2,872) - ---------- ---------- Net income (loss) (144,294) 18,531 Less preferred dividends 13,440 854 ---------- ---------- Earnings (loss) available for common share calculation $ (157,734)$ 17,677 ========== ========== Weighted average common shares outstanding 606,729 473,902 ========== ========== Earnings (loss) per common share $ (0.26)$ 0.04 ========== ========== Nine Months Ended September 30, 1997 1996 EARNINGS (LOSS) PER COMMON SHARE --------- ---------- Net income (loss) $ (347,595) $ 10,456 Less preferred dividends 38,785 2,563 ---------- ---------- Earnings (loss) available for common share calculation $ (386,380) $ 7,893 ========== ========== Weighted average common shares outstanding 606,568 473,501 ========== ========== Earnings (loss) per common share $ (0.64) $ 0.01 ========== ==========
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 (LOSS) PER COMMON AND COMMON 1997 1996 EQUIVALENT SHARE: (1) --------- ---------- Income (loss) before extraordinary item $ (141,422) $ 18,531 Extraordinary item: Early extinguishment of debt - net of tax (2,872) - ---------- ---------- Net income (loss) (144,294) 18,531 Less preferred dividends 13,440 854 ---------- ---------- Earnings (loss) available for common share calculation $ (157,734) $ 17,677 ========== ========== Weighted average common shares outstanding 606,729 473,902 Incremental shares from assumed exercise of stock options - 923 ---------- ---------- Total common shares 606,729 474,825 ========== ========== Earnings (loss) per common and common equivalent share $ (0.26) $ 0.04 ========== ========== (1) The effects of converting stock options are excluded from the 1997 earnings per common share calculation due to their anti-dilutive effect.
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 (LOSS) PER COMMON AND COMMON 1997 1996 EQUIVALENT SHARE: (1) --------- ---------- Net income (loss) $ (347,595) $ 10,456 Less preferred dividends 38,785 2,563 ---------- ---------- Earnings (loss) available for common share calculation $ (386,380) $ 7,893 ========== ========== Weighted average common shares outstanding 606,568 473,501 Incremental shares from assumed exercise of stock options - 1,192 ---------- ---------- Total common shares 606,568 474,693 ========== ========== Earnings (loss) per common and common equivalent share $ (0.64) $ 0.01 ========== ========== (1) The effects of converting stock options are excluded from the 1997 earnings per common share calculation due to their anti-dilutive effect.
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 (LOSS) PER COMMON SHARE - ASSUMING 1997 1996 FULL DILUTION: (1) (2) --------- ---------- Income (loss) before extraordinary item $ (141,422) $ 18,531 Extraordinary item: Early extinguishment of debt - net of tax (2,872) - ---------- ---------- Net income (loss) (144,294) 18,531 Less preferred dividends 13,440 854 ---------- ---------- Earnings (loss) available for common share calculation $ (157,734) $ 17,677 ========== ========== Weighted average common shares outstanding 606,729 473,902 Incremental shares from assumed exercise of stock options - 923 ---------- ---------- Total common shares 606,729 474,825 ========== ========== Earnings (loss) per common share - assuming full dilution $ (0.26) $ 0.04 ========== ========== (1) The effects of converting the Liquid Yield Option Notes (LYONS) are excluded from the 1997 and 1996 fully diluted earnings per common share calculations due to their anti-dilutive effect. (2) The effects of converting stock options are excluded from the 1997 fully diluted earnings per common share calculation due to their anti-dilutive effect.
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 (LOSS) PER COMMON SHARE - ASSUMING 1997 1996 FULL DILUTION: (1) (2) --------- ---------- Net income (loss) $ (347,595) $ 10,456 Less preferred dividends 38,785 2,563 ---------- ---------- Earnings (loss) available for common share calculation $ (386,380)$ 7,893 ========== ========== Weighted average common shares outstanding 606,568 473,501 Incremental shares from assumed exercise of stock options - 1,191 ---------- ---------- Total common shares 606,568 474,692 ========== ========== Earnings (loss) per common share - assuming full dilution $ (0.64)$ 0.01 ========== ========== (1) The effects of converting the Liquid Yield Option Notes (LYONS) are excluded from the 1997 and 1996 fully diluted earnings per common share calculations due to their anti-dilutive effect. (2) The effects of converting stock options are excluded from the 1997 fully diluted earnings per common share calculation due to their anti-dilutive effect.
EX-12 3 EARNINGS TO FIXED CHARGES EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended 9/30/97 9/30/96 - ------------------------------------------ -------- -------- Income before income taxes and extraordinary item $ 333 $ 494 Interest expense (net of amounts capitalized) 279 140 Interest factor on rentals (1/3) 26 22 Equity losses in unconsolidated ventures (less than 50% owned) 132 41 Guaranteed minority interest expense 22 12 -------- -------- Earnings $ 792 $ 709 Interest expense $ 285 $ 156 Interest factor on rentals (1/3) 26 22 Guaranteed minority interest expense 22 12 -------- -------- Fixed charges $ 333 $ 190 Ratio of earnings to fixed charges 2.38 3.73 - ------------------------------------------ -------- --------
EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Year-to-Date 9/30/97 9/30/96 - ------------------------------------------ -------- -------- Income before income taxes, extra- ordinary item and cumulative effect of change in accounting principle $ 1,148 $ 1,502 Interest expense (net of amounts capitalized) 823 411 Interest factor on rentals (1/3) 75 69 Equity losses in unconsolidated ventures (less than 50% owned) 349 111 Guaranteed minority interest expense 66 36 -------- -------- Earnings $ 2,461 $ 2,129 Interest expense $ 848 $ 471 Interest factor on rentals (1/3) 75 69 Guaranteed minority interest expense 66 36 -------- -------- Fixed charges $ 989 $ 576 Ratio of earnings to fixed charges 2.49 3.70 - ------------------------------------------ -------- --------
EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions)
Quarter Ended 9/30/97 9/30/96 - ------------------------------------------ -------- -------- Income before income taxes and extraordinary item $ 333 $ 494 Interest expense (net of amounts capitalized) 279 140 Interest factor on rentals (1/3) 26 22 Equity losses in unconsolidated ventures (less than 50% owned) 132 41 Guaranteed minority interest expense 22 12 -------- -------- Earnings $ 792 $ 709 Interest expense $ 285 $ 156 Interest factor on rentals (1/3) 26 22 Guaranteed minority interest expense 22 12 Preferred stock dividends (pre-tax equivalent) 23 1 -------- -------- Fixed charges $ 356 $ 191 Ratio of earnings to combined fixed charges and preferred stock dividends 2.22 3.71 - ------------------------------------------ -------- --------
EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Dollars in Millions)
Year-to-Date 9/30/97 9/30/96 - ------------------------------------------ -------- -------- Income before income taxes, extra- ordinary item and cumulative effect of change in accounting principle $ 1,148 $ 1,502 Interest expense (net of amounts capitalized) 823 411 Interest factor on rentals (1/3) 75 69 Equity losses in unconsolidated ventures (less than 50% owned) 349 111 Guaranteed minority interest expense 66 36 -------- -------- Earnings $ 2,461 $ 2,129 Interest expense $ 848 $ 471 Interest factor on rentals (1/3) 75 69 Guaranteed minority interest expense 66 36 Preferred stock dividends (pre-tax equivalent) 67 4 -------- -------- Fixed charges $ 1,056 $ 580 Ratio of earnings to combined fixed charges and preferred stock dividends 2.33 3.67 - ------------------------------------------ -------- --------
EXHIBIT 12 U S WEST Financial Services, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Thousands)
Quarter Ended 9/30/97 9/30/96 - ------------------------------------------ -------- -------- Income before income taxes $ 147 $ 9,368 Interest expense 5,739 5,447 Interest factor on rentals (1/3) 9 13 -------- -------- Earnings $ 5,895 $ 14,828 Interest expense $ 5,739 $ 5,447 Interest factor on rentals (1/3) 9 13 -------- -------- Fixed charges $ 5,748 $ 5,460 Ratio of earnings to fixed charges 1.03 2.72 - ------------------------------------------ -------- -------- Year-to-Date 9/30/97 9/30/96 - ------------------------------------------ -------- -------- Income before income taxes $ 9,609 $ 18,091 Interest expense 16,679 16,158 Interest factor on rentals (1/3) 52 44 -------- -------- Earnings $ 26,340 $ 34,293 Interest expense $ 16,679 $ 16,158 Interest factor on rentals (1/3) 52 44 -------- -------- Fixed charges $ 16,731 $ 16,202 Ratio of earnings to fixed charges 1.57 2.12 - ------------------------------------------ -------- --------
A Termination Agreement and Guarantee was entered into on June 24, 1994 between U S WEST, Inc. and U S WEST Capital Corporation and U S WEST Financial Services, Inc. (USWFS). The Agreement terminates the Support Agreement dated January 5, 1990 whereby U S WEST, Inc. agreed to provide financial support to USWFS. The Agreement provides replacement financial support in the form of a direct guarantee by U S WEST of all outstanding indebtedness of USWFS. EX-27 4 FINANCIAL DATA SCHEDULE
5 0000732718 U S WEST, Inc. 1,000,000 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 SEP-30-1997 SEP-30-1997 259 259 0 0 2,107 2,107 0 0 216 216 3,133 3,133 39,149 39,149 20,600 20,600 40,554 40,554 6,565 6,565 13,422 13,422 1,180 1,180 921 921 10,800 10,800 (199) (199) 40,554 40,554 3,918 11,471 3,918 11,471 0 0 0 0 3,134 9,058 0 0 279 823 333 1,148 135 485 198 663 0 0 (6) (3) 0 0 192 660 0.69 2.08 0.69 2.06
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