1
_____________________________________________________________________________
_____________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
____________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 1-8611
U S WEST, Inc.
A Colorado Corporation IRS Employer No. 84-0926774
7800 East Orchard Road, Englewood, Colorado 80111-2526
Telephone Number 303-793-6500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No__
At October 31, 1994, 455,922,889 shares were outstanding.
_____________________________________________________________________________
_____________________________________________________________________________
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U S WEST, Inc.
Form 10-Q
TABLE OF CONTENTS
Item Page
PART I - FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Operations -
Three and nine months ended September 30, 1994 and 1993 . . .3
Consolidated Balance Sheets -
September 30, 1994 and December 31, 1993. . . . . . . . . .4
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1994 and 1993 . . . . . . . .6
Consolidated Statements of Shareowners' Equity -
Nine months ended September 30, 1994 and 1993 . . . . . . . .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 . . . . . . . . . . . . . . . . .23
6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . 23
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Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) U S WEST, Inc.
____________________________________________________________________________
Three Months Ended Nine Months Ended
Dollars in millions September 30, September 30,
(except per share amounts) 1994 1993 1994 1993
_____________________________________________________________________________
Sales and other revenues $2,765 $2,577 $8,114 $7,628
Employee-related costs 968 912 2,822 2,665
Other operating expenses 532 514 1,527 1,481
Taxes other than income taxes 109 107 322 317
Depreciation and amortization 509 477 1,519 1,465
Restructuring charge - 1,000 - 1,000
Interest expense 104 101 323 314
Other income (expense) - net (29) - 44 (35)
------- ------- ------- -------
Income (loss) from continuing
operations before income taxes
and extraordinary items 514 (534) 1,645 351
Provision (benefit) for income taxes 196 (159) 628 139
------- ------- ------- -------
Income (loss) from continuing
operations before extraordinary
items 318 (375) 1,017 212
Discontinued operations:
Income to June 1, 1993, net of tax - - - 38
Estimated loss from June 1, 1993
through disposal, net of tax - - - (100)
Income tax rate change - (20) - (20)
------- ------- ------- -------
Income (loss) before extraordinary
items 318 (395) 1,017 130
Extraordinary items:
Discontinuance of SFAS No. 71,
net of tax - (3,123) - (3,123)
Early extinguishment of debt,
net of tax - (27) - (77)
------- ------- ------- -------
NET INCOME (LOSS) $318 ($3,545) $1,017 ($3,070)
======= ======= ======= =======
Earnings (loss) per common share:
Continuing operations $0.70 ($0.90) $2.25 $0.51
Discontinued operations:
Income to June 1, 1993 - - - 0.09
Estimated loss from June 1, 1993
through disposal - - - (0.24)
Income tax rate change - (0.05) - (0.05)
------- ------- ------- -------
Income (loss) before extraordinary
items 0.70 (0.95) 2.25 0.31
Extraordinary items:
Discontinuance of SFAS No. 71,
net of tax - (7.49) - (7.51)
Early extinguishment of debt,
net of tax - (0.06) - (0.18)
------- ------- ------- -------
EARNINGS (LOSS) PER COMMON SHARE $0.70 ($8.50) $2.25 ($7.38)
======= ======= ======= =======
DIVIDENDS PER COMMON SHARE $0.535 $0.535 1.605 1.605
======= ======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING
(thousands) 454,997 417,081 451,037 416,052
======= ======= ======= =======
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (Unaudited) U S WEST, Inc.
____________________________________________________________________________
September 30, December 31,
Dollars in millions 1994 1993
____________________________________________________________________________
ASSETS
Current assets
Cash and cash equivalents $298 $128
Accounts and notes receivable 1,755 1,570
Inventories and supplies 242 193
Other 589 609
---------- ----------
Total current assets 2,884 2,500
---------- ----------
Gross property, plant and equipment 30,198 29,161
Accumulated depreciation 16,703 15,929
---------- ----------
Property, plant and equipment - net 13,495 13,232
Investment in Time Warner Entertainment 2,536 2,552
Net assets of discontinued operations 328 554
Other assets 2,145 1,842
---------- ----------
Total assets $21,388 $20,680
========== ==========
See Notes to Consolidated Financial Statements.
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5
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS (Unaudited), Continued U S WEST, Inc.
___________________________________________________________________________
September 30, December 31,
Dollars in millions 1994 1993
___________________________________________________________________________
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Short-term debt $2,026 $1,776
Accounts payable 791 977
Current portion of restructuring charges 389 456
Other 1,945 1,772
---------- ----------
Total current liabilities 5,151 4,981
---------- ----------
Long-term debt 5,225 5,423
Postretirement and other postemployment
benefit obligations 2,472 2,699
Deferred taxes, credits and other 1,765 1,716
Preferred stock subject to mandatory
redemption 51 -
Common shareowners' equity
Common shares - no par, 2,000,000,000
authorized, 455,621,784 and 441,139,829
outstanding, respectively 7,568 6,996
Retained earnings (deficit) (619) (857)
LESOP guarantee (216) (243)
Foreign currency translation adjustments (9) (35)
---------- ----------
Total common shareowners' equity 6,724 5,861
---------- ----------
Total liabilities and shareowners' equity $21,388 $20,680
========== ==========
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) U S WEST, Inc.
__________________________________________________________________________
Nine Months Ended
September 30,
Dollars in millions 1994 1993
___________________________________________________________________________
OPERATING ACTIVITIES
Net income (loss) $1,017 ($3,070)
Adjustments to net income (loss):
Discontinuance of SFAS No. 71 - 3,123
Restructuring charge - 1,000
Depreciation and amortization 1,519 1,465
Discontinued operations - 82
Deferred income taxes and amortization
of investment tax credits 181 (270)
Changes in operating assets and liabilities:
Accounts and notes receivable (173) (153)
Inventories, supplies and other (42) (79)
Accounts payable and accrued liabilities 111 186
Restructuring payments (167) (77)
Other adjustments - net (112) 80
---------- ----------
Cash provided by operating activities 2,334 2,287
---------- ----------
INVESTING ACTIVITIES
Expenditures for property, plant
and equipment (1,948) (1,714)
Investment in Time Warner Entertainment - (1,531)
Proceeds from disposals of property, plant
and equipment 49 29
Proceeds from sale of assets 143 -
Other - net (311) (179)
---------- ----------
Cash (used) for investing activities (2,067) (3,395)
---------- ----------
FINANCING ACTIVITIES
Net proceeds from short-term debt 403 2,535
Proceeds from issuance of long-term debt 251 1,794
Repayments of long-term debt (408) (1,878)
Dividends paid on common stock (663) (608)
Proceeds from issuance of common stock 329 80
Proceeds from issuance of preferred stock 50 -
---------- ----------
Cash provided by (used for) financing
activities (38) 1,923
---------- ----------
Cash provided by continuing operations 229 815
---------- ----------
Cash (used for) discontinued operations (59) (152)
---------- ----------
CASH AND CASH EQUIVALENTS
Increase 170 663
Beginning balance 128 159
---------- ----------
Ending balance $298 $822
========== ==========
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF SHAREOWNERS' EQUITY U S WEST, Inc.
(Unaudited)
__________________________________________________________________________
Nine Months Ended
September 30,
Dollars in millions 1994 1993
__________________________________________________________________________
COMMON SHARES
Balance at beginning of period $6,996 $5,770
Issuance of common stock 387 131
Issuance of treasury stock - 6
OPEB trust contribution 185 -
Other - (3)
---------- ----------
Balance at end of period 7,568 5,904
---------- ----------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period (857) 2,826
Net income (loss) 1,017 (3,070)
Dividends declared (730) (669)
Market value adjustment for debt
securities (49) -
---------- ----------
Balance at end of period (619) (913)
---------- ----------
LESOP GUARANTEE
Balance at beginning of period (243) (294)
Activity 27 25
---------- ----------
Balance at end of period (216) (269)
---------- ----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS
Balance at beginning of period (35) (34)
Activity 26 (9)
---------- ----------
Balance at end of period (9) (43)
---------- ----------
TOTAL SHAREOWNERS' EQUITY $6,724 $4,679
========== ==========
See Notes to Consolidated Financial Statements.
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Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Consolidated Financial Statements
The consolidated financial statements have been prepared by
U S WEST, Inc. ("U S WEST" or "Company"), pursuant to the rules and
regulations of the SEC (Securities and Exchange Commission). Certain
information and footnote disclosures normally accompanying financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules
and regulations. In the opinion of the Company's management, the
consolidated financial statements include all adjustments, consisting
of only normal recurring adjustments, necessary to present fairly the
financial information set forth therein. It is suggested that these
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report for the year ended December 31, 1993.
Certain reclassifications within the consolidated financial
statements have been made to conform to the current year presentation.
Computer Software
The cost of computer software, whether purchased or developed
internally, is charged to expense with two exceptions. Initial operating
system software is capitalized and amortized over the life of the related
hardware, and initial network applications software is capitalized and
amortized over three years. Subsequent upgrades to capitalized software
are expensed.
Research and Development
The Company recognized $47, $61, and $60 for research and
development expense in 1993, 1992 and 1991, respectively. Approximately
half of this activity was conducted at Bell Communications Research,
Inc., one-seventh of which is owned by U S WEST Communications, Inc.
("USWC").
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Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
B. Investment in Time Warner Entertainment
On September 15, 1993, U S WEST acquired 25.51 percent pro-rata
priority capital and residual equity interests in Time Warner
Entertainment Company L.P. ("TWE"). Summarized operating results for
TWE follow:
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Revenues $2,203 $2,174 $6,177 $5,796
Operating expenses* 1,968 1,895 5,512 5,074
Interest and other - net** 170 167 480 455
----- ----- ----- -----
Income before income taxes $65 $112 $185 $267
===== ===== ===== =====
Net Income*** $41 $76 $145 $209
===== ===== ===== =====
<FN>
* Includes 1994 and 1993 depreciation and amortization of $254
and $238 for the three months ended and $707 and $671 for the
nine months ended, respectively.
** 1994 and 1993 include corporate services of $15 and $45 for the
three and nine months ended, respectively.
*** 1993 includes an extraordinary loss on the early retirement of
debt of $8 and $10 for the three and nine months ended,
respectively.
</FN>
The Company accounts for its investment in TWE under the equity
method of accounting. U S WEST's recorded share of TWE's operating
results is based on (1) TWE allocated net income or loss adjusted for
the amortization of the excess of fair market value over the book value
of the partnership assets; and (2) special income allocations as defined
in the TWE Partnership Agreement.
C. Preferred Stock
On September 2, 1994, U S WEST issued to Fund American Enterprises
Holdings, Inc. ("FFC") 50,000 shares of a class of newly created 7
percent Series B Cumulative Redeemable Preferred Stock for a total of
$50. (See Note F - Discontinued Operations.)
D. Contingencies
At USWC, there are pending regulatory actions in local regulatory
jurisdictions that call for price decreases, refunds or both. In one
such instance, the Utah Supreme Court has remanded a Utah Public Service
Commission ("PSC") order to the PSC for reconsideration, thereby
establishing two exceptions to the rule against retroactive ratemaking:
1) unforeseen and extraordinary events, and 2) misconduct. The
Commission's initial order denied a refund request from interexchange
carriers and other parties related to the Tax Reform Act of 1986. At
the current time, this case is still in the discovery process. If a
formal filing, to be made in accordance with the remand from the Supreme
Court, alleges that the exceptions apply, the range of possible risk is
$0 to $140.
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Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
E. Extraordinary Items
During third quarter 1993, U S WEST incurred extraordinary charges
totaling $3.2 billion. U S WEST incurred a $3.1 billion non-cash,
extraordinary charge, net of an income tax benefit of $2.3 billion, in
conjunction with its decision to discontinue accounting for the
operations of USWC in accordance with Statement of Financial Accounting
Standard ("SFAS") No. 71, "Accounting for the Effects of Certain Types
of Regulation."
In 1993 USWC called for early redemption of nineteen long-term debt
issues totaling $2.7 billion in par value. These early redemptions
allowed the Company to take advantage of favorable interest rates.
One-time costs associated with the redemptions reduced third quarter and
nine months 1993 net income by $27 and $77, net of income tax benefits
of $17 and $48, respectively.
F. Discontinued Operations
During second quarter 1993, the U S WEST Board of Directors
approved a plan to dispose of the Capital Assets segment. Discontinued
operations include activities related to real estate, financial services
and financial guarantee insurance operations. The Company's
consolidated financial statements reflect the operating results of the
Capital Assets segment separately from continuing operations. As a
result of the discontinued operations, in second quarter 1993 the
Company recorded a provision for estimated loss on disposal of $100,
net of $61 in income taxes. During third quarter 1993, an additional
provision of $20 was recorded to reflect the 1993 federally mandated
increase in income tax rates associated with discontinued operations.
Income from discontinued operations to June 1, 1993 was $38, net of $15
in income taxes.
On May 6, 1994, U S WEST sold 7.5 million shares of Financial
Security Assurance ("FSA"), a member of the Capital Assets Segment,
including 2 million shares sold to FFC, in an initial public offering
of FSA common stock at $20 per share. In June 1994, an additional
.6 million shares were issued at $20 per share in connection with an
over-allotment option. U S WEST received $154 in net proceeds from
the offering. Pursuant to the sale and offering, U S WEST reduced its
ownership interest in FSA to 60.5 percent. FFC owns 7.6 percent and
Tokio Marine and Fire Insurance Co., Ltd. owns 7.4 percent of the
outstanding common shares. The remaining shares are owned by the
public and FSA employees.
On September 2, 1994, U S WEST issued to FFC 50,000 shares of a
class of newly created 7 percent Series B Cumulative Redeemable
Preferred Stock for a total of $50. FFC's voting rights in FSA
increased to 20.9 percent through a combination of direct share
ownership of common and preferred FSA shares and a voting trust
agreement with U S WEST. U S WEST's voting rights are 49.51 percent.
U S WEST accounts for its remaining interest in FSA under the equity
method.
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Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Sales and other revenues of discontinued operations follow:
1994 1993
----- -----
Sales and other revenues:
Third quarter $64 $142
Nine months 425 423
Sales and other revenues of discontinued operations include the
sale of two properties for approximately $230 during the first quarter
of 1994. The sales were in line with Company estimates. Revenues and
operating expenses of discontinued operations subsequent to June 1,
1993, are being deferred and charged against the related reserves.
The assets and liabilities of the Capital Assets segment have been
classified on the balance sheet as "net assets of discontinued
operations". Following is a summary of the "net assets of discontinued
operations":
-----------------------------------------------------------------------
September 30, December 31,
Dollars in millions 1994 1993
-----------------------------------------------------------------------
ASSETS
Cash and cash equivalents $8 $24
Finance receivables - net 1,080 1,131
Investment in real estate - net 537 711
Bonds, at market value 165 894
Investment in FSA 339 -
Other assets 361 600
-------- --------
Total assets $2,490 $3,360
======== ========
LIABILITIES
Debt $1,356 $1,496
Deferred income taxes 691 681
Unearned premiums - 346
Accounts payable and accrued liabilities 103 243
Minority interests 12 40
-------- --------
Total liabilities $2,162 $2,806
======== ========
Net assets of discontinued operations $328 $554
======== ========
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Form 10-Q - Part I
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
The net finance receivables remaining in discontinued operations
largely consist of contractual obligations under long-term leases at
U S WEST Financial Services, Inc., a wholly-owned subsidiary of
U S WEST, which the Company intends to let run off. (In December
1993, U S WEST sold $2 billion of finance receivables and the business
of U S WEST Financial Services to NationsBank Corporation.) Selected
financial data for U S WEST Financial Services follows.
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
---- ---- ---- ----
Operating revenues $15 $67 $45 $210
As of
September 30, December 31,
1994 1993
---- ----
Net finance receivables $994 $1,020
Total assets 1,363 1,784
Total debt 575 957
Total liabilities 1,314 1,735
Shareowner's equity 49 49
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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 Results of Operations Comparative details of
continuing operations for the three and nine months ended September
30 follow:
Three Nine
Dollars in millions Months Ended Months Ended
(except per share September 30, % September 30, %
amounts) 1994 1993 Change 1994 1993 Change
---------------------------------------------------------------------
Sales and other
revenues $2,765 $2,577 7.3 $8,114 $7,628 6.4
Employee-related costs 968 912 6.1 2,822 2,665 5.9
Other operating expenses 532 514 3.5 1,527 1,481 3.1
Taxes other than income
taxes 109 107 1.9 322 317 1.6
Depreciation and
amortization 509 477 6.7 1,519 1,465 3.7
Restructuring charge - 1,000 - - 1,000 -
Interest expense 104 101 3.0 323 314 2.9
Other income (expense)
- net (29) - - 44 (35) -
Provision (benefit) for
income taxes 196 (159) - 628 139 -
------- ------- ------ -------
Income (loss) from
continuing operations $318 ($375) - $1,017 $212 -
======= ======= ======= =======
Earnings (loss) per
common share from
continuing operations $0.70 ($0.90) - $2.25 $0.51 -
======= ======= ======= =======
U S WEST's third quarter income from continuing operations was
$318, an increase of $24, or 8.2 percent, over third quarter 1993,
excluding the effects of one-time items. In 1993, third quarter income
from continuing operations included a restructuring charge of $610
(after tax), or $1.46 per share, and a 1993 federally-mandated
increase in income tax rates which increased the provision for income
taxes by $59, or $.14 per share. Third quarter 1994 earnings per
share from continuing operations were $0.70, unchanged from the
same period last year (excluding the effects of the 1993 items
mentioned above) due to the issuance of 38 million additional common
shares during the last twelve months.
During third quarter 1993, U S WEST incurred extraordinary
charges totaling $3.2 billion, or $7.55 per share, of which $3,123,
or $7.49 per share, relates to the discontinuance of SFAS No. 71 and
$27, or $.06 per share, relates to debt refinancing charges. During
third quarter 1993 U S WEST also recorded an additional provision of
$20, or $.05 per share, to reflect the 1993 federally mandated income
tax increase associated with discontinued operations.
For the nine months ended September 30, income from continuing
operations increased by $73, or 8.4 percent, excluding 1994 gains of
$32 on the sale of certain rural telephone exchanges and $41 on the
sale of U S WEST's paging unit and the 1993 one-time items mentioned
above.
Increased demand for the Company's services resulted in growth
in earnings before interest, taxes, depreciation, amortization and
other ("EBITDA") of 10.7 and 8.8 percent for the third quarter and
nine months, respectively, excluding the 1993 $1,000 restructuring
charge. The Company believes EBITDA is an important indicator of
the operational strength of its businesses.
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Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Sales and Other Revenues
An analysis of the change in revenues follows:
Lower
Price (Higher) Inc(Dec)
Decreases Refunds Demand Other $ %
----------------------------------------------------------------------
USWC:
Local service
Third quarter ($ 4) $38 $ 57 1 $ 92 9.8
Nine months ( 7) 35 164 1 193 6.8
Interstate access
Third quarter ( 9) 12 42 - 45 8.5
Nine months ( 31) 17 117 (5) 98 6.2
Intrastate access
Third quarter - (2) 14 3 15 8.7
Nine months ( 3) (7) 34 4 28 5.5
Long distance
Third quarter ( 2) - (16) (30) (48) (12.9)
Nine months ( 5) 1 (26) (33) (63) (5.8)
Other services
Third quarter 15 15 11.2
Nine months 32 32 7.8
-----------------------------------------------------------------------
USWC Total
Third quarter ($15) $ 48 $ 97 ($11) $119 5.5
Nine months ( 46) 46 289 (1) 288 4.5
Cellular
Third quarter 51 34.8
Nine months 165 41.4
Publishing
Third quarter 12 5.3
Nine months 30 4.2
Other
Third quarter 6 -
Nine months 3 -
----------------------------------------------------------------------
U S WEST Consolidated
Third quarter $188 7.3
Nine months 486 6.4
----------------------------------------------------------------------
The increase in revenues for the third quarter and nine months was
largely due to increased demand for services at USWC. Continued
subscriber growth in the Company's cellular business also contributed
to revenue growth. The Company increased its cellular subscriber base
by 59 percent, to approximately 821,000, during the last 12 months.
Local service revenues at USWC increased principally as a result
of higher demand for services, as evidenced by an increase of 480,000
access lines, or 3.5 percent, during the last 12 months. Access line
growth was 3.8 percent as adjusted for the sale of approximately
38,000 rural telephone access lines.
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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
Increased demand for access services more than offset the effects
of rate reductions. Billed access minutes of use increased by 8.5 and
8.6 percent over the third quarter and nine months of last year,
respectively.
Long distance network revenues decreased principally due to the
effects of multiple toll calling plans ("MTCP") in the states of
Washington and Oregon. These regulatory arrangements allow independent
telephone companies to act as toll carriers. The impact to USWC in
the third quarter was a loss of $31 in long distance revenue,
partially offset by an increase of $4 to intrastate access revenue,
and a decrease of $19 to other operating expenses (i.e. access
expense). In addition to the effects of MTCP, competition continues
to impact long distance network revenues.
Revenues from other services increased primarily as a result of
continued market penetration in voice messaging services.
Costs and Expenses
Consolidated employee-related costs increased by $56, or 6.1
percent, for the third quarter and $157, or 5.9 percent, for the
nine months as compared to the same periods last year. A reduction
in the pension credit of approximately $20 and $60 for the third
quarter and nine months, respectively, contributed to the increase.
Actuarial assumptions, which included decreases in the discount
rate and the expected long term rate of return on plan assets,
contributed to the pension credit reduction. The balance of the
increase in employee-related costs primarily consists of the effects
of salary and wage increases and customer service initiatives,
partially offset by employee reductions.
Consolidated other operating expenses increased by $18, or 3.5
percent, for the third quarter and $46, or 3.1 percent, for the nine
months as compared to the same periods last year. Selling costs
related to growth in the cellular subscriber base increased
approximately $30 and $100 for the third quarter and nine months,
respectively. Partially offsetting this increase was the $19
decrease in access expense related to the effects of MTCP mentioned
above and lower other operating expenses.
Increased depreciation and amortization expense was attributable
to the aggregrate effects of a higher depreciable asset base and the
discontinuance of Statement of Financial Accounting Standards ("SFAS")
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Interest expense increased primarily as a result of the financing
costs associated with the TWE investment. This increase was largely
offset by the effects of USWC's refinancing of debt in the prior year
to take advantage of lower interest rates, in addition to this year's
reclassification of capitalized interest from other income (expense).
Pursuant to the discontinuance of SFAS No. 71, interest capitalized
as a component of plant construction is now being offset against
interest expense rather than other income (expense).
15
16
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Other expense increased during the third quarter as compared to
the same period last year due to a $13 increase in losses associated
with developing businesses and $5 for the reclassification of
capitalized interest to interest expense. Other income increased
during the first nine months primarily due to pretax gains of $50 on
the sale of certain rural telephone exchanges by USWC and a pretax
gain of $68 for the sale of U S WEST's paging unit. Partially
offseting these gains was a $44 increase in losses associated with
developing businesses and $15 associated with the reclassification
of capitalized interest.
The effective tax rate was 38.2 percent for the nine months
ended September 30, 1994 compared to 35.4 percent in the same period
last year, excluding the effects of the 1993 restructuring charge and
the one-time effects of the 1993 federally-mandated increase in
income tax rates. This increase is primarily a result of the
effects of discontinuing SFAS No. 71, the on-going effects of the
1993 federally-mandated increase in income tax rates, and an
increase in income before income taxes.
Restructuring Charges
The Company's 1993 third-quarter results included a $1 billion
restructuring charge (pretax). The related restructuring plan is
designed to provide faster, more responsive customer services while
reducing the costs of providing these services. As part of the plan,
the Company is developing new systems that will enable it to monitor
networks to reduce the risk of service interruptions, activate
telephone service on demand, provide automated inventory systems and
centralize its service centers so that customers can have their
telecommunications needs resolved with one phone call. The Company
will also reduce its work force by approximately 9,000 employees
(including the remaining employee reductions pursuant to the
restructuring plan announced in 1991) over the life of the plan.
Following is a schedule of the costs included in the original
restructuring charge:
Employee separation $230
Real estate 130
Relocation 110
Retraining and other 65
Systems development 400
Asset write-downs 65
----------
Total $1,000
==========
Employee separation costs include severance payments, health
care coverage and postemployment education benefits. Real estate
costs include preparation costs for the new service centers. The
relocation and retraining costs are related to moving employees to
the sites of the new service centers and retraining employees on the
new methods and systems required in the new, restructured mode of
operation. Systems development costs include the replacement of
existing, single-purpose systems with new systems designed to
provide integrated, end-to-end customer service. The work-force
reductions would not be possible without the development and
installation of the new systems, which will eliminate the current,
labor-intensive interfaces between existing systems.
16
17
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Due to Company concerns associated with maintaining quality
customer service while at the same time reengineering its business,
the 1993 restructuring plan is expected to extend into 1997,
rather than being completed by 1996 as originally contemplated.
The total cash expenditures for the plan of $935 remain unchanged.
Expenditures in 1994 related to the 1993 restructuring plan are
estimated at $240 as compared to $390 as originally planned.
Originally estimated expenditures of $315 for 1995 and $230 for 1996
are also being revised.
The Company anticipates incremental capital expenditures related
to the restructuring plan of $490 over the life of the plan.
Management will continue to carefully monitor and evaluate the
progress of the restructuring plan.
Employee Separation:
The original restructuring plan provided for annual employee
reductions and separation amounts as follows:
Employee Reductions: 1994* 1995 1996 Total
------- ------- ------- -------
Network - managerial 602 1,095 977 2,674
Network - occupational 865 1,227 978 3,070
All other - managerial 459 335 323 1,117
All other - occupational 1,022 812 322 2,156
------- ------- ------- -------
Total 2,948 3,469 2,600 9,017
======= ======= ======= =======
Employee Separation
Amounts: 1994* 1995 1996 Total
------- ------ ------- -------
Network - managerial $22 $42 $40 $104
Network - occupational 14 28 25 67
All other - managerial 3 14 14 31
All other - occupational 1 19 8 28
------- ------- ------- -------
Subtotal 40 103 87 230
Remaining 1991 reserve 56 - - 56
------- ------- ------- -------
Total $96 $103 $87 $286
======= ======= ======= =======
<FN>
* 1994 includes the remaining employees and the separation amounts
associated with the balance of the 1991 restructuring reserve at
12/31/93.
</FN>
While restructuring plans are being revised to reflect the
extension of employee reductions into 1997, the total work-force
reduction of approximately 9,000 employees under the plan remains
unchanged. Approximately 2,000 employees are expected to leave the
Company in 1994 in conjunction with the restructuring plan.
17
18
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
Systems Development:
USWC's existing information management systems were largely
developed to support analog technology in a monopoly environment.
These systems are increasingly inadequate due to the effects of
increased competition, new forms of regulation and changing
technology which has driven consumer demand for new services which
can be delivered quickly, reliably and economically. The sequential
systems currently in place are slow, labor intensive and costly to
maintain, and often cannot be adapted to support new product and
service offerings, including future multimedia services envisioned
by U S WEST.
The systems rengineering program in place involves development
of new systems around the following core processes:
Service Delivery- to support faster and more accurate delivery
of all products and services, including repair. These systems will
permit one customer service representative to handle all facets of a
customer's requirements as contrasted to the numerous points of
customer interface required today.
Service Assurance- for automation and centralization of the
network, including earlier identification and more rapid resolution
of network problems.
Capacity Provisioning- for integrated planning of future network
capacity, including the installation of software-controllable service
components.
The direct, incremental and nonrecurring systems development
costs contained in the restructuring plan are comprised of the
following amounts:
1994 1995 1996 Total
------- ------- ------- -------
Service delivery $35 $45 $20 $100
Service assurance 45 40 30 115
All other 45 65 75 185
------- ------- ------- -------
Total $125 $150 $125 $400
======= ======= ======= =======
The majority of systems development labor will be supplied
through the use of temporary employees, contractors and new
employees with special skills. While it is likely that a number of
the new employees will be retained after completion of the
restructuring plan due to their specialized skills, it is planned
that any related increase in headcount will be offset through other
employee reductions.
Systems expenses charged to current operations at USWC consist
of all costs associated with the information management function,
including planning, developing, testing and maintaining data bases
for general purpose computers, in addition to systems costs related
to maintenance of telephone network applications. Key related
administrative (i.e. general purpose) systems include customer
service, order entry, billing and collection, accounts payable,
payroll, human resources and property records.
18
19
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
On-going systems costs comprised approximately six, six and
five percent of total operating expenses at USWC in 1993, 1992 and
1991, respectively, and are expected to be approximately six percent
in 1994. USWC expects systems costs charged to current operations
as a percent of total operating expenses to approximate the current
level throughout the life of the restructuring plan. However,
systems costs could increase relative to other operating costs as
USWC becomes more technology-dependent.
Progress Under the Plan:
For the third quarter and nine months ended September 30, 1994,
the following amounts have been charged against the restructuring
reserve:
Third Quarter Nine-Months
Employee Separations: Number Amount Number Amount
------ ------ ------ ------
Network - managerial 95 $4 150 $6
Network - occupational 543 22 798 27
All other - managerial 79 1 212 7
All other - occupational 281 5 526 14
------ ------ ------ ------
Total 998 $32 1,686 $54
====== ====== ====== ======
Third Quarter Nine-Months
Systems Development Costs: ------ ------
Service delivery $6 $11
Service assurance 9 18
All other 17 26
------ ------
Total $32 $55
====== ======
Third Quarter Nine-Months
Other Costs: ------ ------
Real Estate $23 $37
Relocation 4 6
Retraining and other 13 15
------ ------
Total $40 $58
====== ======
1994 Restructuring Reserve
Activity $104 $167
====== ======
The rate of spending for systems costs was slower than
anticipated during the first nine months of 1994. While the
original estimate for 1994 may not be fully realized, there are
no significant changes to the systems plan in total.
Relocation costs are dependent upon employee acceptance of
assignments to the new service centers. It is possible that shifts
in reserve categories may occur due to factors beyond the Company's
control, e.g. higher terminations due to employee unwillingness to
relocate.
19
20
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Dollars in millions, except per share
amounts), Continued
The Company's 1991 restructuring plan included a pretax charge
of $364 for planned work-force reductions and the write-off of
certain intangible and other assets. The plan reflected a work-force
reduction of approximately 6,000 employees. The portion of the
restructuring charge related to work-force reductions was $240, of
which approximately $2 was unused at September 30, 1994, as compared
to $56 remaining at December 31, 1993. The remaining balance of
this reserve will be expended in the fourth quarter of 1994.
Liquidity and Capital Resources
Operating Activities:
Cash provided by operations increased by $47, or 2 percent,
over the first nine months of 1993, primarily due to increased
demand for the Company's services and a decrease in cash funding
related to postretirement benefits. In 1994, the funding for
postretirement benefits was $288, of which approximately $185 was
in the form of a stock contribution, compared to cash funding of
$246 last year. Cash payments for restructuring charges increased
during the first nine months of 1994 to $167 as compared to $77 the
same period a year ago. Further details of cash provided by
operating activities are provided in the Consolidated Statements of
Cash Flows.
Investing Activities:
U S WEST received $143 in connection with the 1994 sale of its
paging unit. The Company also received $154 in net proceeds in
connection with the sale of 7.5 million shares of FSA (See Note F
- Discontinued Operations) which is included in the Consolidated
Statements of Cash Flows with the cash from discontinued operations.
Financing Activities:
In March 1994, approximately 5.5 million shares of common stock
were issued in connection with the settlement of shareholder
litigation ("Rosenbaum v. U S WEST Inc. et al.") for proceeds of
approximately $210.
On September 2, 1994, U S WEST issued to FFC 50,000 shares of a
class of newly created 7 percent Series B Cumulative Redeemable
Preferred Stock for a total of $50. (See Note F - Discontinued
Operations.)
Other Items:
U S WEST filed a registration statement in September 1994 to
offer up to 12,210,339 shares of U S WEST Common Stock to be issued
to, or in the name of, the holders of Wometco Corp. pursuant to a
merger agreement (see Acquisitions).
TeleWest Communications plc ("TeleWest"), the U.K. cable/
telephony joint venture owned by U S WEST and Tele-Communications,
Inc. ("TCI"), intends to make an initial public offering of its
ordinary shares by year end. U S WEST and TCI will each own
approximately 37 percent of TeleWest's ordinary shares
(approximately 38 percent of TeleWest on a fully diluted basis)
following the offering. Proceeds will be used by TeleWest to
finance construction and operations costs, invest in affiliated
companies and repay debt.
20
21
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
U S WEST expects to continue to employ strategic alliances in
new and developing businesses and will also make direct investments
in assets or businesses that are consistent with the Company's
business strategies. Financing for new investments in these types
of activities will primarily come from a combination of new debt and
equity. In connection with any such new investment of substantial
magnitude, the Company may also reevaluate its use of internally
generated cash, the feasibility of further acquisitions, the
possibility of sales of assets and the capital structure.
Acquisitions
On July 15, 1994, U S WEST signed an agreement to acquire
Wometco Corp. and the assets of Georgia Cable Television (the "Cable
Properties") for $1.2 billion, of which approximately $490 will be
in newly issued U S WEST common stock and the remainder will be in
cash and assumed debt. The Company's 1995 earnings per share will
be diluted by approximately 5 to 6 percent as a result of this
transaction. The purchase includes Access Telecommunications
Interconnect, which provides competitive telephone services to
business customers in the Atlanta area. The Cable Properties
serve about 65 percent of the cable customers in the Atlanta
metropolitan statistical area. The transaction is expected to
close in the fourth quarter of this year.
U S WEST and AirTouch Joint Venture
On July 25, 1994, AirTouch Communications ("AirTouch") and
U S WEST announced an agreement to combine their domestic cellular
operations. The initial equity ownership of the cellular joint
venture will be approximately 70 percent AirTouch and approximately
30 percent U S WEST.
To allow AirTouch to continue providing interLATA wireless
services free of Modification of Final Judgment ("MFJ") constraints,
each Company's cellular operations initially will continue operating
as separate entities owned by the individual partners, but will
report to a joint Wireless Management Company, which will provide
support services. U S WEST remains subject to MFJ restrictions and
cannot offer wireless interLATA services.
A merger of the two companies' cellular operations will take
place upon the earlier of four years from July 25, 1994, the lifting
of certain MFJ restrictions, or at AirTouch's option. The
agreement gives U S WEST strategic flexibility, including the right
to exchange its interest in the joint venture for up to 19.9 percent
of AirTouch's common stock, with any excess amounts to be received
in the form of AirTouch non-voting preferred stock.
A Partnership Committee, led by the president and chief
operating officer of AirTouch and three other AirTouch
representatives, three U S WEST representatives and one mutually
agreed upon independent representative will oversee the Companies'
combined domestic cellular operations.
The initial joint venture requires certain federal and state
regulatory approvals. The transaction is tax-free and is expected
to close in second quarter 1995. Between closing and the actual
merger, an agreement exists which allows the companies to
effectively share operations based on their relative ownership.
21
22
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
U S WEST/AirTouch and Bell Atlantic/NYNEX Partnership
On October 20, 1994 U S WEST and AirTouch announced a definitive
agreement with Bell Atlantic and NYNEX to provide wireless
communications. The four companies own cellular licenses in 15 of
the top 20 cities and serve nearly four million cellular customers.
The companies have formed a partnership to bid for licenses in the
Federal Communications Commission's upcoming Personal Communication
Services ("PCS") auction. This entity will be governed by a board
made up of three members from the Bell Atlantic/NYNEX partnership
(announced in June, 1994) and three members from the AirTouch/
U S WEST joint venture.
A second partnership will develop a national branding and
marketing strategy and a common "look and feel" for both cellular
and PCS customers. This entity will be governed by a board made up
of three members from the Bell Atlantic/NYNEX partnership, three
from the AirTouch/U S WEST joint venture and one independent board
member. The cellular properties of Bell Atlantic/NYNEX will not
be merged with AirTouch/U S WEST.
Contingencies
At USWC, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or
both. In one such instance, the Utah Supreme Court has remanded a
Utah Public Service Commission ("PSC") order to the PSC for
reconsideration, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary
events, and 2) misconduct. The Commission's initial order denied
a refund request from interexchange carriers and other parties
related to the Tax Reform Act of 1986. At the current time, this
case 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.
22
23
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
Exhibits identified in parentheses below, on file with the
Securities and Exchange Commission, are incorporated by
reference as exhibits hereto.
Exhibit No.
11 Statement regarding computation of earnings per share of
U S WEST, Inc.
12 Statement regarding computation of earnings to fixed
charges ratio of U S WEST, Inc.
(b) Reports on Form 8-K filed during the third quarter
(i) report dated July 15, 1994, concerning U S WEST's
announcement with respect to its plans to acquire
Atlanta Cable Systems;
(ii) report dated July 18, 1994, concerning the release of
earnings for the second quarter ended June 30, 1994,
and related exhibits; and
(iii) report dated July 25, 1994, concerning U S WEST's
announcement with respect to its plans to merge its
cellular operations and form a wireless joint venture
with AirTouch Communications.
23
24
Form 10-Q U S WEST, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/ James M. Osterhoff
----------------------
November 14, 1994 U S WEST, Inc.
James M. Osterhoff
Executive Vice President
and Chief Financial Officer
24