-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rqqIzPv5dgpRnJtBpbDDMl9zTKnOfChmVwx/nxAkSeKKpOFFWsgan4m9bFaJvj90 LangGOeIcxeHVMdCdO6nUw== 0000912057-95-003869.txt : 19950516 0000912057-95-003869.hdr.sgml : 19950516 ACCESSION NUMBER: 0000912057-95-003869 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950331 FILED AS OF DATE: 19950515 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: US WEST INC CENTRAL INDEX KEY: 0000732718 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 840926774 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08611 FILM NUMBER: 95539532 BUSINESS ADDRESS: STREET 1: 7800 E ORCHARD RD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037936629 MAIL ADDRESS: STREET 1: 7800 EAST ORCHARD ROAD STREET 2: SUITE 480 CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-Q 1 10-Q ______________________________________________________________________________ ______________________________________________________________________________ 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 March 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission File Number 1-8611 U S WEST, Inc. A Colorado Corporation IRS Employer No. 84-0926774 7800 East Orchard Road, Englewood, Colorado 80111-2526 Telephone Number 303-793-6500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ At April 30, 1995, 470,025,644 shares were outstanding. U S WEST, INC. FORM 10-Q TABLE OF CONTENTS
Item Page - ---- ---- PART I - FINANCIAL INFORMATION 1. Financial Statements Consolidated Statements of Operations - Three months ended March 31, 1995 and 1994 3 Consolidated Balance Sheets - March 31, 1995 and December 31, 1994 4 Consolidated Statements of Cash Flows - Three months ended March 31, 1995 and 1994 6 Consolidated Statements of Shareowners' Equity - Three months ended March 31, 1995 and 1994 7 Notes to Consolidated Financial Statements 8 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II - OTHER INFORMATION 1. Legal Proceedings 22 6. Exhibits and Reports on Form 8-K 22
Form 10-Q - Part I CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) U S WEST, INC. DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
_______________________________________________________________________________ THREE MONTHS ENDED MARCH 31, 1995 1994 _______________________________________________________________________________ Sales and other revenues $2,828 $2,641 Employee-related expenses 978 911 Other operating expenses 510 477 Taxes other than income taxes 114 108 Depreciation and amortization 560 503 Interest expense 128 109 Equity losses in unconsolidated ventures 57 35 Gain on sales of rural telephone exchanges 63 24 Other expense - net 6 - ----------------------- Income before income taxes 538 522 Provision for income taxes 208 198 ----------------------- NET INCOME $ 330 $ 324 ----------------------- ----------------------- EARNINGS PER COMMON SHARE $0.70 $0.73 DIVIDENDS PER COMMON SHARE $0.535 $0.535 AVERAGE COMMON SHARES OUTSTANDING (thousands) 468,557 444,378
See Notes to Consolidated Financial Statements. 3 Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (UNAUDITED) U S WEST, INC. DOLLARS IN MILLIONS
_______________________________________________________________________________ MARCH 31, DECEMBER 31, 1995 1994 _______________________________________________________________________________ ASSETS Current assets Cash and cash equivalents $ 148 $ 209 Accounts and notes receivable 1,664 1,693 Inventories and supplies 199 189 Deferred tax asset 343 352 Other 335 323 -------------------------------- Total current assets 2,689 2,766 -------------------------------- Gross property, plant and equipment 31,248 31,014 Accumulated depreciation 17,318 17,017 -------------------------------- Property, plant and equipment - net 13,930 13,997 Investment in Time Warner Entertainment 2,509 2,522 Intangible assets - net 1,887 1,858 Investment in international ventures 994 881 Net investment in assets held for sale 414 302 Other assets 1,176 878 -------------------------------- Total assets $23,599 $23,204 -------------------------------- --------------------------------
See Notes to Consolidated Financial Statements. 4 Form 10-Q - Part I CONSOLIDATED BALANCE SHEETS (UNAUDITED), CONTINUED U S WEST, INC. DOLLARS IN MILLIONS
_______________________________________________________________________________ MARCH 31, DECEMBER 31, 1995 1994 _______________________________________________________________________________ LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities Short-term debt $3,565 $2,837 Accounts payable 729 944 Employee compensation 316 367 Dividends payable 252 251 Current portion of restructuring charges 359 337 Other 1,364 1,278 -------------------------- Total current liabilities 6,585 6,014 -------------------------- Long-term debt 5,137 5,101 Postretirement and other postemployment benefit obligations 2,281 2,502 Deferred taxes, credits and other 2,013 2,154 Preferred stock subject to mandatory redemption 51 51 Common shareowners' equity Common shares - no par, 2,000,000,000 authorized, 469,934,527 and 469,343,048 outstanding, respectively 8,092 8,056 Cumulative deficit (360) (458) LESOP guarantee (187) (187) Foreign currency translation adjustments (13) (29) -------------------------- Total common shareowners' equity 7,532 7,382 -------------------------- Total liabilities and common shareowners' equity $23,599 $23,204 -------------------------- --------------------------
See Notes to Consolidated Financial Statements. 5 Form 10-Q - Part I CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) U S WEST, INC. IN MILLIONS
_______________________________________________________________________________ THREE MONTHS ENDED MARCH 31, 1995 1994 _______________________________________________________________________________ OPERATING ACTIVITIES Net income $330 $324 Adjustments to net income: Depreciation and amortization 560 503 Gain on sales of rural telephone exchanges (63) (24) Equity losses in unconsolidated ventures 57 35 Deferred income taxes and amortization of investment tax credits 20 75 Changes in operating assets and liabilities: Restructuring payments (82) (22) Accounts and notes receivable 32 26 Inventories, supplies and other (43) (59) Accounts payable and accrued liabilities (103) (35) Other adjustments - net (167) (66) ------------------------ Cash provided by operating activities 541 757 ------------------------ INVESTING ACTIVITIES Expenditures for property, plant and equipment (617) (654) Investment in international ventures (182) (70) Proceeds from disposals of property, plant and equipment 92 18 Cash (to) net investment in assets held for sale (60) - Other - net (63) (6) ------------------------ Cash (used) for investing activities (830) (712) ------------------------ FINANCING ACTIVITIES Net proceeds from short-term debt 678 335 Proceeds from issuance of long-term debt - 182 Repayments of long-term debt (168) (116) Dividends paid on common stock (230) (223) Proceeds from issuance of common stock 11 256 Purchases of treasury stock (63) - ------------------------ Cash provided by financing activities 228 434 ------------------------ Cash (used for) provided by continuing operations (61) 479 ------------------------ Cash (to) discontinued operations - (161) ------------------------ CASH AND CASH EQUIVALENTS Increase (decrease) (61) 318 Beginning balance 209 128 ------------------------ Ending balance $ 148 $ 446 ------------------------ ------------------------
See Notes to Consolidated Financial Statements 6 Form 10-Q - Part I CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY (UNAUDITED) U S WEST, INC. DOLLARS IN MILLIONS
_______________________________________________________________________________ THREE MONTHS ENDED MARCH 31, 1995 1994 _______________________________________________________________________________ COMMON SHARES Balance at beginning of period $8,056 $6,996 Issuance of common stock 31 66 Settlement of litigation - 210 Benefit trust contribution (OPEB) 61 185 Purchase of treasury stock (63) - Other 7 - ------------------------ Balance at end of period 8,092 7,457 CUMULATIVE DEFICIT Balance at beginning of period (458) (857) Net income 330 324 Dividends declared (252) (242) Market value adjustment for debt securities 20 (40) ------------------------ Balance at end of period (360) (815) LESOP GUARANTEE Balance (187) (243) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS Balance at beginning of period (29) (35) Activity 16 11 ------------------------ Balance at end of period (13) (24) ------------------------ TOTAL COMMON SHAREOWNERS' EQUITY $7,532 $6,375 ------------------------ ------------------------ COMMON SHARES AUTHORIZED AT MARCH 31, (THOUSANDS) 2,000,000 2,000,000 ------------------------ ------------------------ COMMON SHARES OUTSTANDING (THOUSANDS) Beginning balance 469,343 441,140 Issuance of common stock 794 1,580 Settlement of litigation - 5,506 Benefit trust contribution (OPEB) 1,500 4,600 Purchase of treasury stock (1,702) - ----------------------- Ending balance 469,935 452,826 ----------------------- -----------------------
See Notes to Consolidated Financial Statements. 7 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) (UNAUDITED) A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Financial Statements have been prepared by U S WEST, Inc. ("U S WEST" or "Company"), pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally accompanying financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of the Company's management, the Consolidated Financial Statements include all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial information set forth therein. It is suggested that these Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report for the year ended December 31, 1994. Certain reclassifications within the Consolidated Financial Statements have been made to conform to the current year presentation. B. RECAPITALIZATION PROPOSAL The Board of Directors of U S WEST, a Colorado corporation, has adopted a proposal (the "Recapitalization Proposal") that would change the state of incorporation of U S WEST from Colorado to Delaware and create two classes of common stock that are intended to reflect separately the performance of the Company's communications and multimedia businesses. Under the Recapitalization Proposal, shareholders of the Company will be asked to approve an Agreement and Plan of Merger between the Company and U S WEST, Inc., a Delaware corporation and wholly owned subsidiary of U S WEST ("U S WEST Delaware"), pursuant to which U S WEST would be merged (the "Merger") with and into U S WEST Delaware with U S WEST Delaware continuing as the surviving corporation. In connection with the Merger, the Certificate of Incorporation of U S WEST Delaware would be amended and (as so amended and restated, the "Restated Certificate") to, among other things, designate two classes of common stock of U S WEST Delaware, one class of which would be authorized as U S WEST Communications Group Common Stock ("Communications Stock"), and the other class of which would be authorized as U S WEST Media Group Common Stock ("Media Stock"). Upon consummation of the Merger, each share of existing common stock of the Company would be automatically converted into one share of Communications Stock and one share of Media Stock. 8 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (DOLLARS IN MILLIONS) (UNAUDITED) The Communications Stock and Media Stock are designed to provide shareholders with separate securities that are intended to reflect separately the communications businesses of U S WEST Communications and certain other subsidiaries of the Company (the "Communications Group") and the Company's multimedia businesses (the "Media Group" and, together with the Communications Group, the "Groups"). The Communications Group is comprised of U S WEST Communications, Inc. ("U S WEST Communications"), U S WEST Communications Services, Inc., U S WEST Federal Services, Inc., U S WEST Advanced Technologies, Inc. and U S WEST Business Resources, Inc. The Media Group is comprised of U S WEST Marketing Resources Group, Inc., a publisher of White and Yellow Pages telephone directories, and provider of multimedia content and services, U S WEST New Vector Group, Inc., which provides communications and information products and services over wireless networks, U S WEST Multimedia Communications, Inc., which owns domestic cable television operations and investments and U S WEST International Holdings, Inc., which primarily owns investments in international cable and telecommunications, wireless communications and directory publishing operations. Under the Recapitalization Proposal, dividends to be paid to the holders of Communications Stock will initially be at a quarterly rate of $0.535 per share. Dividends on the Communications Stock will be paid at the discretion of the Board of Directors of U S WEST, based primarily upon the financial condition, results of operations and business requirements of the Communications Group and the Company as a whole. With regard to the Media Stock, the Board of Directors of U S WEST currently intends to retain future earnings, if any, for the development of the Media Group's businesses and does not anticipate paying dividends on the Media Stock in the foreseeable future. A preliminary proxy statement on the Recapitalization Proposal was filed with the Securities and Exchange Commission on May 12, 1995. 9 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (DOLLARS IN MILLIONS) (UNAUDITED) C. INVESTMENT IN TIME WARNER ENTERTAINMENT On September 15, 1993, U S WEST acquired 25.51 percent pro rata priority capital and residual equity interests in Time Warner Entertainment Company L.P. ("TWE"). Summarized operating results for TWE follow:
- ----------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, 1995 1994 - ----------------------------------------------------------------------------- Revenues $2,046 $1,919 Operating expenses* 1,855 1,716 Interest and other - net** 176 151 ------------------ Income before income taxes $ 15 $ 52 ------------------ ------------------ Net income $ 4 $ 48 ------------------ ------------------ * Includes 1995 and 1994 depreciation and amortization of $226 and $213, respectively. ** Includes 1995 and 1994 corporate services of $15.
The Company accounts for its investment in TWE under the equity method of accounting. U S WEST's recorded share of TWE operating results represents allocated TWE net income or loss adjusted for the amortization of the excess of fair market value over the book value of the partnership net assets. The Companys recorded shares of TWE operating results was $(13) and $(12) for the three months ended March 31, 1995 and 1994, respectively. 10 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (DOLLARS IN MILLIONS) (UNAUDITED) D. CONTINGENCIES At U S WEST Communications there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. In one such instance, the Utah Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the PSC for reconsideration, thereby establishing two exceptions to the rule against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2) misconduct. The PSC's initial order denied a refund request from interexchange carriers and other parties related to the Tax Reform Act of 1986. This action is still in the discovery process. If a formal filing - made in accordance with the remand from the Supreme Court - alleges that the exceptions apply, the range of possible risk to U S WEST Communications is $0 to $140. E. NET INVESTMENT IN ASSETS HELD FOR SALE Effective January 1, 1995, the capital assets segment has been accounted for in accordance with Staff Accounting Bulletin No. 93, issued by the Securities Exchange Commission, which requires discontinued operations not disposed of within one year of the measurement date to be accounted for prospectively in continuing operations as net investment in assets held for sale. The net realizable value of the assets will be reevaluated on an ongoing basis with adjustments to the existing reserve, if any, being charged to continuing operations. Prior to January 1, 1995, the entire capital assets segment was accounted for as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. Sales and other revenues of net investment in assets held for sale were $75 and $305 for the three months ended March 31, 1995 and 1994, respectively. Included in sales and other revenues are the sale of properties for approximately $47 and $230 during the first quarter of 1995 and 1994, respectively. The sales were in line with Company estimates. 11 Form 10-Q - Part I NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued (DOLLARS IN MILLIONS) (UNAUDITED) The components of "net investment in assets held for sale" follow:
- ------------------------------------------------------------------------------ MARCH 31, DECEMBER 31, DOLLARS IN MILLIONS 1995 1994 - ------------------------------------------------------------------------------ ASSETS Cash $ 47 $ 7 Finance receivables - net 1,070 1,073 Investment in real estate - net 421 465 Bonds, at market value 138 155 Investment in FSA 349 329 Other assets 264 362 --------------------- Total assets 2,289 2,391 --------------------- LIABILITIES Debt 1,032 1,283 Deferred income taxes 713 693 Accounts payable and accrued liabilities 120 103 Minority interests 10 10 --------------------- Total liabilities 1,875 2,089 --------------------- Net investment in assets held for sale $ 414 $ 302 --------------------- ---------------------
Selected financial data for U S WEST Financial Services follows:
- ------------------------------------------------------------------------------ Three Months Ended March 31, 1995 1995 - ------------------------------------------------------------------------------ Operating revenues $10 $17 - ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------ MARCH 31, DECEMBER 31, DOLLARS IN MILLIONS 1995 1994 - ------------------------------------------------------------------------------ Net finance receivables $ 976 $ 981 Total assets 1,338 1,331 Total debt 531 533 Total liabilities 1,268 1,282 Shareowner's equity 70 49 - ------------------------------------------------------------------------------
12 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) RESULTS OF OPERATIONS Comparative details of continuing operations for the three months ended March 31 follow:
- ------------------------------------------------------------------------------ PERCENT THREE MONTHS ENDED MARCH 31, 1995 1994 CHANGE - ------------------------------------------------------------------------------ Sales and other revenues $2,828 $2,641 7.1 Employee-related expenses 978 911 7.4 Other operating expenses 510 477 6.9 Taxes other than income taxes 114 108 5.6 Depreciation and amortization 560 503 11.3 Interest expense 128 109 17.4 Equity losses in unconsolidated ventures 57 35 62.9 Gain on sales of rural telephone exchanges 63 24 -- Other expense - net 6 -- -- Provision for income taxes 208 198 5.1 ------------------------------ Net income $330 $324 1.9 ------------------------------ ------------------------------ Earnings per common share $0.70 $0.73 (4.1) ------------------------------ ------------------------------
U S WEST's first quarter net income was $291, a decrease of $18, or 5.8 percent, over first quarter 1994, excluding the effects of certain rural telephone exchange sales in first quarter 1995 and 1994. After tax gains on the sales of certain rural telephone exchanges were $39 ($.08 per share) and $15 ($.03 per share) in first-quarter 1995 and 1994, respectively. The decrease in net income is primarily attributable to expansion of international ventures, resulting in increased equity losses. First quarter 1995 earnings per common share were $.62 compared with $.70 in 1994, excluding the effects of rural telephone exchange sales. Earnings per share reflects approximately 24 million additional average shares outstanding, of which 12.8 million were issued in connection with the December 1994 purchase of cable television properties in the Atlanta, Georgia area (the "Atlanta Systems"). Increased demand for the Company's services resulted in growth in earnings before interest, taxes, depreciation, amortization and other ("EBITDA") of 7.1 percent. EBITDA also excludes the sales of certain rural telephone exchanges and equity losses. The Company believes EBITDA is an important indicator of the operational strength of its businesses. 13 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED SALES AND OTHER REVENUES An analysis of the change in U S WEST's consolidated sales and other revenues follows:
Lower Price (Higher) Inc (Dec) Changes Refunds Demand Other $ % - --------------------------------------------------------------------------------------------------------- U S WEST Communications: Local service $ 2 $ 9 $ 54 $ -- $ 65 6.6 Interstate access (8) (9) 44 -- 27 4.8 Intrastate access (5) 2 11 6 14 8.0 Long-distance network (9) -- (12) (31) (52) (14.8) Other services -- -- -- 5 5 3.4 ------------------------------------------------------------ $(20) $ 2 $ 97 $(20) 59 2.7 Cellular 34 20.3 Publishing 16 6.7 Domestic cable 54 -- International directories 14 -- Other 10 76.9 - --------------------------------------------------------------------------------------------------------- Increase in Sales and Other Revenues $187 7.1 ------------ ------------
The increase in sales and other revenues was primarily due to increased demand for services at U S WEST Communications, the December 1994 acquisition of the Atlanta Systems and continued subscriber growth in the Company's cellular business. The Company increased its cellular subscriber base by 58 percent, to approximately 1,048,000, during the last 12 months. Local service revenues at U S WEST Communications increased principally as a result of higher demand for services, as evidenced by an increase of 494,000 access lines, or 3.5 percent, during the last 12 months. Access line growth was 4.2 percent as adjusted for the sale of approximately 91,000 rural telephone access lines during the last 12 months. 14 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED Higher revenues from interstate access services resulted from an increase of 9.2 percent in interstate billed access minutes of use, which more than offset the effects of price reductions and refunds. Multiple toll carrier plans ("MTCP") were implemented in Oregon and Washington in May and July 1994, respectively. These regulatory arrangements allow independent telephone companies to act as toll carriers. The impact to U S WEST Communications in the first quarter was a loss of $31 in long-distance revenue, partially offset by an increase of $6 to intrastate access revenue, and a decrease of $21 to other operating expenses (i.e. access expense). In addition to the effects of MTCP, intrastate access charges increased as a result of higher demand, while long-distance network revenues continue to be impacted by competition. Revenues from other services increased primarily as a result of continued market penetration in voice messaging services. COSTS AND EXPENSES Consolidated employee-related expenses increased by $67, or 7.4 percent, for the first quarter as compared with the same period last year. Approximately $45 of this increase is a result of overtime payments and contract labor related to customer service and streamlining initiatives at U S WEST Communications, partially offset by lower health-care and other employee benefit costs. The remainder of the increase is primarily attributable to the 1994 purchases of the Atlanta Systems and U S WEST's purchase of Thomson Directories in the United Kingdom. Consolidated other operating expenses increased by $33, or 6.9 percent, for the first quarter as compared with the same period last year. The 1994 purchases of the Atlanta Systems and Thomson Directories increased other operating expenses by $31. An increase in selling costs of $13 related to expansion of the cellular customer base also contributed to the increase in other operating expenses. Partially offsetting these cost increases were the MTCP effects on other operating expenses at U S WEST Communications. Increased depreciation and amortization expense was attributable to the effects of a higher depreciable asset base at U S WEST Communications and the purchase of the Atlanta Systems. 15 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED Equity losses in unconsolidated ventures increased primarily due to increased network expansion costs at Mercury One-2-One. Interest expense increased as a result of higher rates on short term commercial paper at U S WEST Communications and the purchase of the Atlanta Systems, partially financed through the issuance of short-term debt. The effective tax rate was 38.7 percent in the first quarter compared with 37.9 percent in the same period last year. The increase is primarily attributable to the effects of the amortization of intangible assets and goodwill associated with the Atlanta Systems acquisition. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operations decreased by $216 compared with the first quarter of 1994, primarily due to an increase of $94 in postretirement benefit funding and an increase of $60 in Restructuring Plan expenditures. The Company from time to time engages in discussions regarding acquisitions. The Company may fund such acquisitions with internally generated funds, debt or equity. The incurrence of indebtedness to fund such acquisitions and/or the assumption of indebtedness in connection with acquisitions, if significant, could result in a downgrading of the credit rating of the Company or U S WEST Communications. U S WEST invested approximately $182 in international businesses in the first quarter of 1995, primarily in Malaysia and the Czech Republic. In the first quarter of 1995, U S WEST received cash proceeds of $88 from the sale of certain rural telephone exchanges. During the first quarter, debt increased by $764 and the debt-to-capital ratio increased from 51.8 percent at December 31, 1994, to 53.6 percent at March 31, 1995. The increase in debt and the debt-to-capital ratio was primarily related to the cash funding of a portion of the Company's postretirement benefit obligation, the funding of international investments and the reclassification of certain debt from net assets held for sale to continuing operations. In the first quarter of 1995, U S WEST purchased 1,702,200 shares of U S WEST Common Stock for $63, at an average price of $37.02 per share. 16 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED RESTRUCTURING The Company's 1993 results reflected a $1 billion restructuring charge (pretax). The related restructuring plan (the "Restructuring Plan") is designed to provide faster, more responsive customer services while reducing the costs of providing these services. As part of the Restructuring Plan, the Company is developing new systems that will enable it to monitor networks to reduce the risk of service interruptions, activate telephone service on demand, provide automated inventory systems and centralize its service centers so that customers can have their telecommunications needs resolved with one phone call. The Company is consolidating its 560 customer service centers into 26 centers in 10 cities and reducing its total work force by approximately 9,000 employees (including the remaining employee reductions associated with the restructuring plan announced in 1991). Following is a schedule of the costs included in the Restructuring Plan:
Actual Estimate ------------------------------- 1993 1994 1995 1996 1997 Total - --------------------------------------------------------------------------- Cash expenditures: Employee separation $-- $ 19 $ 62 $ 75 $ 74 $ 230 Systems development -- 127 144 129 -- 400 Real estate -- 50 80 -- -- 130 Relocation -- 21 54 4 31 110 Retraining and other -- 16 19 10 20 65 ---------------------------------------- Total cash expenditures -- 233 359 218 125 935 Asset write-down 65 -- -- -- -- 65 ---------------------------------------- Total Plan 65 233 359 218 125 1,000 Remaining 1991 plan employee costs -- 56 -- -- -- 56 ---------------------------------------- Total (1) $65 $289 $359 $218 $125 $1,056 ---------------------------------------- ---------------------------------------- (1) The Restructuring Plan also provides for capital expenditures of $490 over the life of the Restructuring Plan.
17 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED Employee separation costs include severance payments, health-care coverage and postemployment education benefits. Systems development costs include the replacement of existing, single-purpose systems with new systems designed to provide integrated, end-to-end customer service. The work-force reductions would not be possible without the development and installation of the new systems, which will eliminate the current, labor-intensive interfaces between existing processes. Real estate costs include preparation costs for the new service centers. The relocation and retraining costs are related to moving employees to the new service centers and retraining employees on the new methods and systems required in the new, restructured mode of operation. The Company estimates that full implementation of the Restructuring Plan will reduce employee-related expenses by approximately $400 per year. These savings are expected to be offset by the effects of inflation. PROGRESS UNDER THE RESTRUCTURING PLAN: Following is a reconciliation of restructuring reserve activity during first quarter 1995:
- -------------------------------------------------------------------------------- RESERVE BALANCE RESERVE BALANCE DECEMBER 31, 1994 1995 ACTIVITY MARCH 31, 1995 - -------------------------------------------------------------------------------- Employee separations Managerial $75 $4 $71 Occupational 136 9 127 ----------------------------------------------------- Total separations 211 13 198 Systems Development Service delivery 52 3 49 Service assurance 52 7 45 Capacity provisioning 122 24 98 All other 47 3 44 ----------------------------------------------------- Total systems 273 37 236 Real estate 80 22 58 Relocation 89 5 84 Retraining and other 49 5 44 ----------------------------------------------------- Total $702 $82 $620 ----------------------------------------------------- ----------------------------------------------------- 1994 SEPARATIONS 1995 SEPARATIONS TOTAL SEPARATIONS ----------------------------------------------------- Employee separations Managerial 497 125 622 Occupational 1,683 491 2,174 ----------------------------------------------------- Total 2,180 616 2,796 ----------------------------------------------------- -----------------------------------------------------
18 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED RECAPITALIZATION PROPOSAL The Board of Directors of U S WEST has adopted a proposal that would change the state of incorporation of U S WEST from Colorado to Delaware and create two classes of common stock, the Communications Stock and the Media Stock, which are intended to reflect separately the performance of the communications and multimedia businesses. A preliminary proxy statement on the Recapitalization Proposal was filed with the Securities and Exchange Commission on May 12, 1995. For a more complete discussion on the Recapitalization Proposal see Footnote B in the Notes to the Consolidated Financial Statements. AIRTOUCH COMMUNICATIONS JOINT VENTURE On July 25, 1994, AirTouch and U S WEST announced a definitive agreement to combine their domestic wireless operations. The initial equity ownership of the wireless joint venture will be approximately 70 percent by AirTouch and approximately 30 percent by U S West. The transaction is expected to close in the third quarter of 1995 upon obtaining federal and state regulatory approvals. After closing, the earnings of the Company will reflect its 30 percent interest in the joint venture. The wireless operations of both parties will initially continue operating as separate entities owned by the individual partners, but will receive support services on a contract basis from a joint wireless management company. PERSONAL COMMUNICATIONS SERVICES ("PCS") ALLIANCE In October 1994, AirTouch and U S WEST agreed to form a strategic wireless alliance with Bell Atlantic and NYNEX. As part of this alliance, the AirTouch-U S WEST PCS Partnership and a partnership formed between Bell Atlantic and NYNEX formed PCS Primeco, L.P. ("PCS Primeco") for the purpose of bidding on PCS licenses being auctioned by the FCC. The objective of PCS Primeco is to build and operate PCS networks where its partners do not operate cellular networks, thus enabling them to establish a national wireless alliance. In the FCC auction, which concluded in March 1995, PCS Primeco was awarded PCS licenses in 11 markets covering 57 million POPs including licenses in Chicago, Dallas, Tampa, Houston, Miami and New Orleans. PCS Primeco will be governed by an executive committee made up of three Bell Atlantic-NYNEX representatives and three AirTouch-U S WEST representatives. 19 Form 10-Q - Part I Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED REGULATORY On April 28, 1995, the D.C. District Court, which has jurisdiction over construction, implementation, modification and enforcement of the modified final judgment ("MFJ"), waived the MFJ's restriction on the regional Bell operating companies' ("RBOCs") provision of wireless long-distance service. The ruling contained a number of provisions, including a requirement that local cellular markets be competitive before long-distance services can be offered. The ruling positions U S WEST to begin offering long-distance network services through its cellular subsidiary. On April 24, 1995, the RBOCs also asked the D.C. District Court for a waiver of the MFJ's restriction on the provision by the RBOC's of information services on an interexchange basis. These requests for waivers follow recommendations by the Department of Justice that the RBOCs be allowed to provide wireless long-distance services and information services on an interexchange basis. In January 1995, the 9th U.S. Circuit Court of Appeals in San Francisco upheld the June 15, 1994, Seattle Federal District Court ruling that affirmed U S WEST's challenge to the constitutionality of the telephone company video programming restriction in the 1984 Cable Act. The Act prevents telephone companies from providing video programming within their regions. U S WEST argued and the courts agreed, that the restriction violates its First Amendment right to free speech. The decision would allow the Company to provide video programming directly to its regional telephone subscribers. The Federal Government can appeal to the U. S. Supreme Court. U S WEST Communications is evaluating its options in light of this ruling. In January 1995, the Federal Communications Commission ("FCC") instituted a proceeding to modify and promulgate rules on the provision of video programming. In March 1995, the FCC announced that it would not enforce its cross-ownership ban on local exchange carriers providing video programming directly to subscribers in their local telephone exchange service areas. The Company's interstate services have been subject to price cap regulation since January 1991. Price caps are an alternative form of regulation designed to limit prices rather than profits. However, the FCC's price cap plan includes sharing of earnings in excess of authorized levels. In March 1995, the FCC issued an interim order on price cap regulation. This order increases the productivity factor used in the price cap index, thus reducing the access prices paid by interexchange carriers to local telephone companies. The interim order also provides for a no-sharing productivity factor option and for increased flexibility for adjusting prices downward in response to competition. During the past several years the Company has used the higher productivity factor in determining its access prices. Consequently, no significant impact is expected in 1995 as a result of the interim order. 20 Form 10-Q - Part I Item 2. Management's' Discussion and Analysis of Financial Condition and Results of Operations (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS), CONTINUED Though Congress failed to pass telecommunications reform legislation in 1994, new telecommunications legislation has been introduced in 1995. The thrust of this legislation is to open up the network of local exchange carriers to further competition, and to eliminate certain prohibitions upon local exchange carriers entering into other lines of business. The proposed legislation would (i) open local exchange service to competition and preempt states from imposing barriers preventing such competition, (ii) impose new unbundling and interconnection requirements on local exchange carrier networks, (iii) remove the MFJ prohibitions on interLATA services and manufacturing if certain competitive conditions are met, (iv) transfer any remaining MFJ requirements (including the MFJ's nondiscrimination provisions) to the FCC's jurisdiction and (v) eliminate any remaining cable and telephone company cross-ownership restrictions. There is, however, uncertainty concerning the outcome of such legislation. The passing of such legislation would significantly change the competitive landscape of the telecommunications industry as a whole. CONTINGENCIES At U S WEST Communications, there are pending regulatory actions in local regulatory jurisdictions that call for price decreases, refunds or both. In one such instance, the Utah Supreme Court has remanded a Utah Public Service Commission ("PSC") order to the PSC for reconsideration, thereby establishing certain exceptions to the rule against retroactive ratemaking: 1) unforeseen and extraordinary events, and 2) misconduct. The Commission's initial order denied a refund request from an interexchange carrier and other parties that relates to the Tax Reform Act of 1986. This action is still in the discovery process. If a formal filing - made in accordance with the remand from the Supreme Court - alleges that the exceptions apply, the range of possible risk is $0 to $140. 21 Form 10-Q - Part II PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 6. Exhibits and Reports on Form 8-K (A) EXHIBITS EXHIBIT NO. 11 Statement regarding computation of earnings per share of U S WEST, Inc. 12 Statement regarding computation of earnings to fixed charges ratio of U S WEST, Inc. 27 Financial Data Schedule (B) REPORTS ON FORM 8-K FILED DURING THE FIRST QUARTER: (i) report dated January 19, 1995 concerning the release of earnings for the fourth quarter ended December 31, 1994, and related exhibits. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /S/ James M. Osterhoff ----------------------- May 15, 1995 U S WEST, Inc. James M. Osterhoff Executive Vice President and Chief Financial Officer 23 EX-11 2 EXHIBIT 11 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
Three Months Ended EARNINGS PER COMMON SHARE: March 31, 1995 1994 ---------- ---------- Net income 329,636 323,723 Less preferred dividends 827 -- Net income available for ---------- ---------- common share calculation $328,809 $323,723 ========== ========== Weighted average common shares 468,557 444,378 outstanding ========== ========== Earnings per common share $0.70 $0.73 ========== ==========
1 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
EARNINGS PER COMMON AND COMMON Three Months Ended EQUIVALENT SHARE: March 31, 1995 1994 ---------- ---------- Net income 329,636 323,723 Less preferred dividends 827 -- Net income available for ---------- ---------- common share calculation $328,809 $323,723 ========== ========== Weighted average common shares 468,557 444,378 outstanding Incremental shares from assumed exercise of stock options 461 391 ---------- ---------- Total common shares 469,018 444,769 ========== ========== Earnings per common and $0.70 $0.73 common equivalent share ========== ==========
2 EXHIBIT 11 U S WEST, Inc. Computation of Earnings Per Common Share (In Thousands, Except Per Share Amounts)
EARNINGS PER COMMON SHARE - ASSUMING Three Months Ended FULL DILUTION: March 31, 1995 1994 ---------- ---------- Net income $329,636 $323,723 Interest on Convertible Liquid Yield Option Notes (LYONS) 5,578 5,441 ---------- ---------- Adjusted income 335,214 329,164 Less preferred dividends 827 - ---------- ---------- Adjusted net income available for common share calculations $334,387 $329,164 ========== ========== Weighted average common shares outstanding 468,557 444,378 Incremental shares from assumed exercise of stock options 600 391 Shares issued upon conversion of LYONS 9,894 10,230 ---------- ---------- Total common shares 479,051 454,999 ========== ========== ---------- ---------- Earnings per common share - $0.70 $0.72 assuming full dilution ========== ========== * Amounts are excluded from fully diluted earnings (loss) per common share calculation due to their anti-dilutive effect.
3 EX-12 3 EXHIBIT 12 EXHIBIT 12 U S WEST, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Quarter Ended 3/31/95 3/31/94 - ---------------------------------------------- --------- --------- Income before income taxes $538 $522 Interest expense (net of amounts capitalized) 128 109 Interest factor on rentals (1/3) 22 23 --------- --------- Earnings $688 $654 Interest expense 139 116 Interest factor on rentals (1/3) 22 23 --------- --------- Fixed charges $161 $139 Ratio of earnings to fixed charges 4.27 4.71 - ---------------------------------------------- --------- ---------
U S WEST Financial Services, Inc. RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Thousands)
Quarter Ended 3/31/95 3/31/94 - ---------------------------------------------- --------- --------- Income before income taxes $813 $1,127 Interest expense 9,150 12,724 Interest factor on rentals (1/3) 17 41 --------- --------- Earnings $9,980 $13,892 Interest expense 9,150 12,724 Interest factor on rentals (1/3) 17 41 --------- --------- Fixed charges $9,167 $12,765 Ratio of earnings to fixed charges 1.09 1.09 - ---------------------------------------------- --------- ---------
Note: A Termination Agreement and Guarantee was entered into on June 24, 1994 between U S WEST, Inc., 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 1,000,000 3-MOS DEC-31-1995 MAR-31-1995 148 0 1,663 0 199 2,689 31,248 17,318 23,599 6,585 8,702 8,092 51 0 (560) 23,599 2,828 2,828 0 0 2,162 0 128 538 208 330 0 0 0 330 .70 .70
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