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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 1-8611
U S WEST, Inc.
A Delaware Corporation IRS Employer No. 84-0926774
7800 East Orchard Road, Englewood, Colorado 80111-2526
Telephone Number 303-793-6500
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X_ No __
The number of shares of U S WEST, Inc.'s common stock outstanding (net of
shares held in treasury), at April 30, 1996, was:
U S WEST Communications Group Common Stock - 476,130,720 shares;
U S WEST Media Group Common Stock - 473,507,158 shares.
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U S WEST, Inc.
Form 10-Q
TABLE OF CONTENTS
Item Page
- --------------------------------------------------------------------- ----
PART I - FINANCIAL INFORMATION
1. U S WEST, Inc. Financial Information
Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995 3
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 5
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
2. U S WEST, Inc. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
1. U S WEST Communications Group Financial Information
Combined Statements of Operations -
Three Months Ended March 31, 1996 and 1995 25
Combined Balance Sheets -
March 31, 1996 and December 31, 1995 26
Combined Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 28
Notes to Combined Financial Statements 29
2. U S WEST Communications Group Management's Discussion and
Analysis of Financial Condition and Results of Operations 32
1. U S WEST Media Group Financial Information
Combined Statements of Operations -
Three Months Ended March 31, 1996 and 1995 39
Combined Balance Sheets -
March 31, 1996 and December 31, 1995 40
Combined Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 42
Notes to Combined Financial Statements 43
2. U S WEST Media Group Management's Discussion and Analysis of
Financial Condition and Results of Operations 48
PART II - OTHER INFORMATION
1. Legal Proceedings 56
6. Exhibits and Reports on Form 8-K 57
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS U S WEST, Inc.
(Unaudited)
Three Months Ended March 31, 1996 1995
Dollars in millions
Sales and other revenues $3,050 $2,828
Operating expenses:
Employee-related expenses 1,043 978
Other operating expenses 591 510
Taxes other than income taxes 107 114
Depreciation and amortization 584 560
------ ------
Total operating expenses 2,325 2,162
Income from operations 725 666
Interest expense 135 128
Equity losses in unconsolidated ventures 66 57
Gain on sales of rural telephone exchanges - 63
Guaranteed minority interest expense 12 -
Other expense - net 23 6
------ ------
Income before income taxes and cumulative effect
of change in accounting principle 489 538
Provision for income taxes 192 208
------ ------
Income before cumulative effect of change in
accounting principle 297 330
Cumulative effect of change in accounting
principle - net of tax 34 -
------ ------
NET INCOME $ 331 $ 330
Dividends on preferred stock 1 -
------ ------
EARNINGS AVAILABLE FOR COMMON STOCK $ 330 $ 330
====== ======
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited), continued U S WEST, Inc.
Three Months Ended March 31, 1996 1995
In thousands (except per share amounts)
COMMUNICATIONS GROUP EARNINGS PER
COMMON SHARE:
Income before cumulative effect of change in
accounting principles $ 0.62 $ 0.67
Cumulative effect of change in accounting principles 0.07 -
-------- --------
COMMUNICATIONS GROUP EARNINGS PER
COMMON SHARE $ 0.69 $ 0.67
======== ========
COMMUNICATIONS GROUP DIVIDENDS PER
COMMON SHARE $ 0.535 $ 0.535
======== ========
COMMUNICATIONS GROUP AVERAGE
COMMON SHARES OUTSTANDING 475,056 468,557
======== ========
MEDIA GROUP EARNINGS PER COMMON
SHARE $ - $ 0.03
======== ========
MEDIA GROUP AVERAGE COMMON SHARES
OUTSTANDING 473,003 468,557
======== ========
U S WEST, Inc. EARNINGS PER COMMON SHARE $ - $ 0.70
======== ========
U S WEST, Inc. AVERAGE COMMON SHARES
OUTSTANDING - 468,557
======== ========
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Unaudited) U S WEST, Inc.
March 31, December 31,
Dollars in millions 1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 70 $ 192
Accounts and notes receivable - net 1,794 1,886
Inventories and supplies 237 227
Deferred tax asset 270 282
Prepaid and other 382 322
---------- -------------
Total current assets 2,753 2,909
---------- -------------
Gross property, plant and equipment 33,453 32,884
Accumulated depreciation 18,489 18,207
---------- -------------
Property, plant and equipment - net 14,964 14,677
Investment in Time Warner Entertainment 2,492 2,483
Intangible assets - net 1,779 1,798
Investments in international ventures 1,440 1,511
Net investment in assets held for sale 424 429
Other assets 1,293 1,264
---------- -------------
Total assets $ 25,145 $ 25,071
========== =============
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED BALANCE SHEETS
(Unaudited), continued U S WEST, Inc.
March 31, December 31,
Dollars in millions 1996 1995
- --------------------------------------------------------- ----------- --------------
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term debt $ 1,769 $ 1,901
Accounts payable 866 975
Employee compensation 341 385
Dividends payable 255 254
Current portion of restructuring charge 209 282
Other 1,460 1,255
----------- --------------
Total current liabilities 4,900 5,052
----------- --------------
Long-term debt 7,024 6,954
Postretirement and other postemployment benefit
obligations 2,403 2,433
Deferred taxes, credits and other 2,056 2,033
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company-
guaranteed debentures 600 600
Preferred stock subject to mandatory redemption 51 51
Common shareowners' equity:
Common shares 8,320 8,228
Cumulative deficit (44) (115)
LESOP guarantee (127) (127)
Foreign currency translation adjustments (38) (38)
----------- --------------
Total common shareowners' equity 8,111 7,948
----------- --------------
Total liabilities and shareowners' equity $ 25,145 $ 25,071
=========== ==============
Contingencies (See Note D to the Consolidated Financial Statements.)
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) U S WEST, Inc.
Three Months Ended March 31, 1996 1995
- --------------------------------------------------------- ------ ------
Dollars in millions
OPERATING ACTIVITIES
Net income $ 331 $ 330
Adjustments to net income:
Depreciation and amortization 584 560
Equity losses in unconsolidated ventures 66 57
Gain on sales of rural telephone exchanges - (63)
Cumulative effect of change in accounting principle (34) -
Deferred income taxes and amortization
of investment tax credits 7 20
Changes in operating assets and liabilities:
Restructuring payments (46) (82)
Postretirement medical and life costs - net of
cash fundings (34) (174)
Accounts and notes receivable 92 32
Inventories, supplies and other (60) (43)
Accounts payable and accrued liabilities 31 (103)
Other - net (22) 7
------ ------
Cash provided by operating activities 915 541
------ ------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (757) (617)
Investment in international ventures (104) (182)
Proceeds from (payments on) disposals of property,
plant and equipment (7) 92
Cash (to) from net investment in assets held for sale 3 (60)
Other - net (24) (63)
------ ------
Cash (used for) investing activities (889) (830)
------ ------
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 60 678
Proceeds from issuance of long-term debt 76 -
Repayments of long-term debt (121) (168)
Dividends paid on common stock (234) (230)
Proceeds from issuance of common stock 71 11
Purchases of treasury stock - (63)
------ ------
Cash (used for) provided by financing activities (148) 228
------ ------
CASH AND CASH EQUIVALENTS
Decrease (122) (61)
Beginning balance 192 209
------ ------
Ending balance $ 70 $ 148
======
See Notes to Consolidated Financial Statements.
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements have been prepared by U S WEST, Inc.
("U S WEST" or the "Company") pursuant to the interim reporting rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally accompanying financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. In the opinion of U S WEST's management, the Consolidated
Financial Statements include all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the financial information
set forth therein. It is suggested that these Consolidated Financial
Statements be read in conjunction with the 1995 U S WEST Consolidated
Financial Statements and notes thereto included in U S WEST's proxy statement
mailed to all shareowners on April 8, 1996.
Earnings Per Common Share
U S WEST Communications Group earnings per common share and dividends per
common share and U S WEST Media Group earnings per common share for 1995 have
been presented on a pro forma basis to reflect the Communications Group's and
the Media Group's stock as if it had been outstanding since January 1, 1995.
For periods prior to the November 1, 1995 recapitalization, the average common
shares outstanding are assumed to be equal to the average common shares
outstanding for U S WEST.
New Accounting Standard
Effective January 1, 1996, U S WEST adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires
that long-lived assets and associated intangibles be written down to fair
value whenever an impairment review indicates that the carrying value cannot
be recovered on an undiscounted cash flow basis. SFAS No. 121 also requires
that a company no longer record depreciation expense on assets held for sale.
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions, except per share amounts)
(Unaudited)
Adoption of SFAS No. 121 resulted in income of $34 (net of tax of $22) from
the cumulative effect of reversing depreciation expense recorded in prior
years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date the Company formally committed to a plan to
dispose of the rural exchange assets through January 1, 1996. The income has
been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying value of the rural exchange assets
was approximately $338 at December 31, 1995. As a result of adopting SFAS No.
121, first-quarter depreciation expense was reduced by $8 ($5 after tax, or
$0.01 per share). In 1996, depreciation expense will decrease approximately
$30 as a result of adopting SFAS No. 121. The combined effects of lower
depreciation expense and the cumulative effect of adoption of the new standard
will be directly offset by lower recognized gains on future rural exchange
sales.
B. Investment in Time Warner Entertainment
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, 1996 1995
- ------------------------------ ------ ------
Revenues $2,485 $2,046
Operating expenses*<F1> 2,217 1,855
Interest and other - net**<F2> 156 176
------ ------
Income before income taxes $ 112 $ 15
Net income $ 94 $ 4
====== ======
<FN>
<F1>
* Includes depreciation and amortization of $288 and $226 for the three
months ended March 31, 1996 and 1995, respectively.
<F2>
** Includes corporate services of $17 and $15 for the three months ended
March 31, 1996 and 1995, respectively.
</FN>
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 the fair market value over the book value of the partnership net assets.
The Company's recorded share of TWE operating results was $9 and $(13) for the
three months ended March 31, 1996 and 1995, respectively.
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
C. AirTouch Joint Venture
In July 1994, U S WEST signed an agreement with AirTouch Communications, Inc.
("AirTouch") to combine their domestic cellular properties into a partnership
in a multi-phased transaction. During Phase I, which commenced on November 1,
1995, the partners are operating their cellular properties separately. A
Wireless Management Company has been formed and is providing centralized
services to both companies on a contract basis. In Phase II, the partners
will combine their domestic properties into a partnership, subject to
obtaining certain authorizations. The parties are seeking to obtain
regulatory and other approvals precedent to entering into Phase II. The
recent passage of the Telecommunications Act of 1996 has removed significant
regulatory barriers to completion of Phase II. The interests in the
partnership at the commencement of Phase II depend, among other things, on the
timing of the Phase II closing and the ability of the partners to combine
their domestic properties. Currently management expects the interests in the
partnership will adjust from the previously disclosed 70 percent AirTouch and
30 percent U S WEST, to approximately 74 percent AirTouch and 26 percent U S
WEST. This adjustment reflects the planned acquisition of certain cellular
properties by AirTouch. U S WEST's interest in the partnership will further
adjust depending on the timing of the contribution of its PCS investment. The
timing of such contribution is at U S WEST's discretion and will occur either
at the closing of Phase II or a date selected by U S WEST no later than
mid-1998.
D. Contingencies
At U S WEST Communications, Inc. ("U S WEST Communications") there are pending
regulatory actions in local regulatory jurisdictions that call for price
decreases, refunds or both. In one such instance, the Utah Supreme Court has
remanded a Utah Public Service Commission ("PSC") order to the PSC for
reconsideration, thereby establishing two exceptions to the rule against
retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $150.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission" ) acted on U S WEST Communications'
1995 rate request. In February 1995, U S WEST Communications sought to
increase revenues by raising rates for basic residential services over a
four-year period. The two major issues in this proceeding involve U S WEST
Communications' requests for improved capital recovery and elimination of the
imputation of Yellow Pages revenue. Instead of granting U S WEST
Communications' request, the
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Commission ordered approximately $91.5 in annual revenue reductions, effective
May 1, 1996. Based on the above ruling, U S WEST Communications filed a
lawsuit with the King County Superior Court (the "Court") for an appeal of the
order, a temporary stay of the ordered rate reduction and an authorization to
implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST
Communications began collecting revenues subject to refund with interest. U S
WEST Communications expects its appeal to be successful and plans not to
accrue any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on U S WEST Communications' future
results of operations.
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court to
enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against
U S WEST on October 11, 1995, alleging misrepresentation, breach of contract
and other misconduct on the part of U S WEST. Time Warner's countersuit
seeks a reformation of the Time Warner Entertainment partnership agreement, an
order that enjoins U S WEST from breaching the partnership agreement, and
unspecified compensatory damages. U S WEST has denied each of the claims in
Time Warner's countersuit. The trial for this action concluded on March 22,
1996. A ruling by the Delaware Chancery Court is expected in June 1996.
E. Continental Acquisition
On February 27, 1996, U S WEST announced a definitive agreement to merge with
Continental Cablevision, Inc. ("Continental"). Continental is the nation's
third-largest cable operator. U S WEST will purchase all of Continental's
stock for approximately $5.3 billion and will assume Continental's debt and
other obligations, which amounted to approximately $5.5 billion at
announcement date. The transaction, which is expected to close by the end of
1996, is subject to a number of conditions and approvals.
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
F. Debt Exchangeable for Common Stock (Subsequent Event)
On May 13, 1996, U S WEST issued $254 of Debt Exchangeable for Common Stock
("DECS") to Salomon Inc. due May 15, 1999, in the principal amount of $26.63
per note. The notes bear interest at 7.625 percent. Upon maturity, each DECS
will be mandatorily redeemed by U S WEST for shares of Financial Security
Assurance Holdings, Ltd. ("FSA"), held by U S WEST or the cash equivalent, at
U S WEST's option. The number of shares to be delivered at maturity varies
based on the per share market price of FSA. If the market price is $26.63 per
share or less, one share of FSA will be delivered for each note; if the market
price is between $26.63 and $32.48 per share, a fractional share is delivered
so that the value at maturity is equal to $26.63; if the market value is
greater than $32.48 per share, .8197 shares are delivered. The capital assets
segment currently owns approximately 50 percent of the outstanding FSA common
stock. The shares of FSA to be delivered upon maturity of the DECS, combined
with the exercise of outstanding options held by Fund American Enterprises
Holdings, Inc. to purchase FSA shares and the recently announced plans to sell
additional FSA shares would, if consummated, result in a complete disposition
of U S WEST's ownership in FSA.
G. Net Investment in Assets Held for Sale
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
and 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 a "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, charged to continuing
operations. To date, no such adjustment has been required. Prior to January
1, 1995, the entire capital assets segment was accounted for as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30.
Building sales and operating revenues of the capital assets segment were $30
and $75 for the three months ended March 31, 1996 and 1995, respectively.
Form 10-Q - Part I
U S WEST, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
The components of net investment in assets held for sale follow:
March 31, 1996 December 31, 1995
--------------- ------------------
ASSETS
Cash $ 44 $ 38
Finance receivables - net 943 953
Investment in real estate - net of valuation allowance 363 368
Bonds, at market value 146 149
Investment in FSA 388 384
Other assets 171 177
--------------- ------------------
Total assets $ 2,055 $ 2,069
=============== ==================
LIABILITIES
Debt $ 788 $ 796
Deferred income taxes 688 686
Accounts payable, accrued liabilities and other 145 148
Minority interests 10 10
--------------- ------------------
Total liabilities 1,631 1,640
--------------- ------------------
Net investment in assets held for sale $ 424 $ 429
=============== ==================
Revenues of U S WEST Financial Services were $7 and $10 for the three months
ended March 31, 1996 and 1995, respectively. Selected financial data for U S
WEST Financial Services follows:
March 31, 1996 December 31, 1995
--------------- ------------------
Net finance receivables $ 928 $ 931
Total assets 1,074 1,085
Total debt 269 274
Total liabilities 1,015 1,024
Equity 59 61
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts)
RESULTS OF OPERATIONS - FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995
Comparative details of income before cumulative effect of change in accounting
principle for the three months ended March 31 follow:
Three Months Ended March 31, 1996 1995 Percent Change
- ------------------------------------------------------------------- ----- ----- ---------------
Communications Group $ 294 $ 315 (6.7)
Media Group 3 15 (80.0)
----- ----- ---------------
Income before cumulative effect of change in accounting principle $ 297 $ 330 (10.0)
===== ===== ===============
Earnings per common share before cumulative effect of change in
accounting principle:
Communications Group $0.62 $0.67 (7.5)
Media Group - 0.03 -
Communications Group
Adjusted to exclude nonrecurring items, the Communications Group's
first-quarter 1996 income before cumulative effect of change in accounting
principle was $289, an increase of $13, or 4.7 percent, compared with first
quarter 1995. The nonrecurring items include the 1996 current year, after-tax
impact of $5 from adopting SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and an
after-tax gain of $39 on the sales of rural telephone exchanges in first
quarter 1995.
Adjusted to exclude nonrecurring items, first-quarter 1996 earnings per
Communications Group common share before cumulative effect of change in
accounting principle ("earnings per share") was $0.61, compared with $0.59 in
1995. The nonrecurring items include the current year effect of adopting SFAS
No. 121 ($0.01 per share) and the gain on the sale of rural telephone
exchanges in 1995 ($0.08 per share).
Effective January 1, 1996, the Communications Group adopted SFAS No. 121,
which among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121
resulted in a one-time gain of $34, or $0.07 per Communications Group share,
related to the cumulative effect of change in accounting principle. The
first-quarter, pretax effect of the SFAS No. 121 adoption resulted in a
decrease to depreciation expense of $8 ($5 after tax).
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 income at the Communications Group is attributable to higher demand
for services. Partially offsetting the effects of higher demand was an
increase in operating costs to address customer service issues, expenditures
related to development of new products and services, flood conditions in the
Pacific Northwest, increased depreciation expense and higher interest expense.
Media Group
Net income of the Media Group decreased $12, or 80 percent in 1996. The
decrease is due primarily to increased guaranteed minority interest expense
associated with the 1995 issuance of Company-obligated mandatorily redeemable
preferred securities of a subsidiary trust holding solely Company-guaranteed
debentures ("Preferred Securities") to finance expansion in domestic and
international investments, increased equity losses associated with
unconsolidated international ventures and the effect of foreign exchange
losses. These decreases in net income were partially offset by improvement in
the wireless communications business.
Sales and Other Revenues
An analysis of the change in U S WEST's consolidated sales and other revenues
follows:
Three Months Ended March 31, 1996 1995 Percent Change
- ---------------------------- ------- ------- --------------
Communications Group $2,465 $2,318 6.3
Media Group 613 536 14.4
Intergroup eliminations (28) (26) 7.7
------- ------- --------------
Total $3,050 $2,828 7.9
======= ======= ==============
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
Communications Group Operating Revenues
An analysis of changes in the Communications Group's operating revenues
follows:
Higher (Higher) Indrease Increase
---------
Three Months Ended (Lower) Lower (Decrease) (Decrease)
- ---------------------
March 31, 1996 1995 Prices Refunds Demand Other Dollars Percent
- --------------------- ------ ------ -------- --------- -------- ------- ----------- ----------
Local service $1,145 $1,050 $ 7 $ (4) $ 97 $ (5) $ 95 9.0
Interstate access 622 589 (16) - 55 (6) 33 5.6
Intrastate access 190 188 (7) - 11 (2) 2 1.1
Long-distance network 290 299 (3) - (5) (1) (9) (3.0)
Other services 218 192 - - - 26 26 13.5
------ ------ -------- --------- -------- ------- ----------- ----------
Total $2,465 $2,318 $ (19) $ (4) $ 158 $ 12 $ 147 6.3
====== ====== ======== ========= ======== ======= =========== ==========
Local service revenues increased principally as a result of higher demand for
services. Total reported access lines increased 647,000, or 4.5 percent
during the last 12 months, of which 202,000 was attributed to second lines.
Second line installations increased 30 percent during the past year. Access
line growth was 4.8 percent when adjusted for sales of approximately 45,000
rural telephone access lines during the last 12 months. Also contributing to
the increase in local service revenues was expanded growth in new product and
service offerings such as caller identification and call waiting. Local
service revenues from new product and service offerings were approximately $40
for first quarter 1996, an increase of approximately 120 percent compared to
the same period last year.
Higher revenues from interstate access services resulted from an increase of
9.5 percent in interstate billed access minutes of use, which more than offset
the effects of price reductions. Intrastate access revenues increased
slightly as higher demand was largely offset by the effects of price
reductions.
Long-distance network revenues decreased primarily due to the effects of
competition and rate reductions. Erosion of long-distance revenue will
continue due to the loss of 1+ dialing in Minnesota, which became effective in
February 1996, and in Arizona, effective in April 1996.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services, increases in inside wire
services and sales of customer premise equipment projects, partially offset by
decreases in billing and collection revenues.
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
Media Group Sales and Other Revenues
An analysis of the Media Group's sales and other revenues follows:
Three Months Ended March 31, 1996 1995 Percent
- ----------------------------------- ----- -----
Change
--------
Directory and information services:
Domestic $ 271 $ 258 5.0
International 17 14 21.4
----- ----- --------
288 272 5.9
Wireless communications:
Cellular service 239 186 28.5
Cellular equipment 25 16 56.3
----- ----- --------
264 202 30.7
Cable and telecommunications 57 54 5.6
Other 4 8 (50.0)
----- ----- --------
Total $ 613 $ 536 14.4
===== ===== ========
Media Group sales and other revenues increased 14.4 percent to $613 in 1996.
The increase was primarily due to strong growth in cellular service revenue.
Directory and Information Services Revenues related to Yellow Pages directory
advertising increased approximately $15, or 6.1 percent, in the first quarter
compared with 1995 due to price increases of 4.0 percent, higher revenue per
advertiser and an increase in Yellow Pages advertising volume.
International directory publishing revenues increased $3 in 1996, primarily
due to an increase in the number of directories published and increased
advertisers.
Wireless Communications Cellular service revenues increased $53, or 28.5
percent in 1996. This increase is due to a 50 percent increase in subscribers
during the last twelve months, partially offset by a 14 percent drop in
average revenue per subscriber to $53.00 per month. The increase in
subscribers relates to continued growth in demand for wireless services.
Cellular equipment revenues increased $9, or 56.3 percent in 1996. This
increase is primarily due to a significant increase in unit sales associated
with a 50 percent increase in gross customer additions, partially offset by a
decrease in selling price per unit.
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
Cable and Telecommunications Cable and telecommunications revenues increased
$5, or 10.2 percent in 1996. This percent increase gives affect to a change
in the method of recording franchise fees implemented in late 1995 as if it
was in effect throughout 1995. The increase is primarily a result of a 6.7
percent increase in subscribers and price increases.
Costs and Expenses
Three Months Ended March 31, 1996 1995 Percent
- ---------------------------------------- ------ -----
Change
--------
Employee-related expenses $1,043 $ 978 6.6
Other operating expenses 591 510 15.9
Taxes other than income taxes 107 114 (6.1)
Depreciation and amortization 584 560 4.3
Interest expense 135 128 5.5
Equity losses in unconsolidated ventures 66 57 15.8
Guaranteed minority interest expense 12 - -
Other expense - net 23 6 -
Employee-related expenses at the Communications Group increased $54 compared
to the prior year. The increase is attributable to continued efforts to
improve customer service and to address business growth through expenditures
on overtime, contract labor and workforce additions. Costs related to
workforce additions will partially offset the benefits of employee separations
achieved through restructuring.
Salaries and wages, overtime payments and contract labor at the Communications
Group increased employee-related expenses by approximately $50 for the first
quarter as compared with the same period last year. Approximately $15 of the
overtime and contract labor increase was attributed to severe flooding in
Washington and Oregon. Partially offsetting these increases was a reduction
in the postretirement benefits accrual and lower travel and conference
expenses.
Employee-related expenses also increased due to growth initiatives in the
Media Group's wireless communications and directory and information services
segments.
Other operating expenses at the Communications Group increased $39 primarily
due to increased uncollectibles, costs related to customer premise equipment
projects and higher advertising costs. Other operating expenses at the Media
Group increased $42. This increase is primarily due to expansion of the Media
Group's cellular customer base.
Taxes other than income taxes decreased $7 over the prior year primarily as a
result of lower than expected tax assessments and mill levies.
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 depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base at the Communications Group and
expansion of the Media Group's domestic cellular network, partially offset by
the effects of 1995 sales of rural telephone exchanges and the adoption of
SFAS No. 121.
Interest expense increased primarily due to higher interest rates associated
with refinancing commercial paper at the Communications Group in the latter
part of 1995. Slightly higher debt levels at the Communications Group also
contributed to the increase. Partially offsetting these increases were
decreases in debt related to the investment in TWE and a refinancing of
commercial paper by issuing Preferred Securities. U S WEST issued $600 of
Preferred Securities in the third quarter of 1995.
Equity losses increased $9 in 1996, primarily due to increased financing costs
associated with expansion of the network at TeleWest and start-up and other
costs associated with new international investments and the domestic PCS
PrimeCo investment. The Media Group expects losses related to international
ventures will be significant in 1996. Increased losses related to
international investments were partially offset by increased earnings related
to the investment in TWE. The increase in TWE earnings is a result of
improved results from the filmed entertainment, cable and programming-HBO
divisions. Cable subscribers served by TWE increased 6.5 percent compared to
a year ago, excluding the impact of 1995 cable transactions.
Guaranteed minority interest expense reflects the issuance of Preferred
Securities in the third quarter of 1995.
Other expense increased $17 in 1996, compared with 1995, partially due to
foreign exchange losses of $7.
Liquidity and Capital Resources
Operating Activities
Cash provided by operations increased $374 in the first quarter of 1996
compared with 1995. Business growth in the Communications Group and the Media
Group's cellular operations contributed to the increase in cash provided by
operations. The increase was also a result of decreases in the cash funding
of postretirement benefits, lower restructuring expenditures and lower federal
income tax payments.
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
Investing Activities
Investments by the Media Group in international ventures were $104 for the
first quarter of 1996. Significant 1996 investments include additional
capital contributions to the PCS investment in the United Kingdom, Mercury One
2 One and the purchase of a 23 percent interest in a venture to provide
wireless service in Poland.
Financing Activities
During the first quarter, debt decreased by $62 compared with December 31,
1995. The decrease was a result of increased operating cash flow at the
Communications Group and reductions in debt related to a Media Group
investment in a cable television venture in the Netherlands and the investment
in TWE. Partially offsetting the decrease were increases in commercial paper.
Excluding debt associated with the capital assets segment, the Company's
percentage of debt to total capital at March 31, 1996, was 50.1 percent
compared with 50.7 percent at December 31, 1995. Including debt associated
with the capital assets segment, Preferred Securities and other preferred
stock, the Company's percentage of debt to total capital was 55.8 percent at
March 31, 1996, compared with 56.4 percent at December 31, 1995.
At March 31, 1996, U S WEST guaranteed debt associated with its international
investments in the principal amount of approximately $144.
In connection with U S WEST's announcement on February 27, 1996 of a planned
merger with Continental, U S WEST, Inc.'s credit rating is being reviewed by
credit rating agencies, which may result in a downgrading.
In connection with the Washington State Utilities and Transportation
Commission's $91.5 rate reduction order (See "Contingencies"), U S WEST
Communications' debt securities have been placed on rating watch by Duff &
Phelps. The credit rating of U S WEST Communications' debt securities was not
placed under review by Moody's and is under review by Fitch and Standard &
Poors.
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
Following are schedules of the costs and planned workforce reductions included
in the Restructuring Plan:
Actual Actual Actual Estimate Estimate
------- ------- ------- ---------
Restructuring Plan Costs 1993 1994 1995 1996 1997 Total
- -------------------------------------- ------- ------- ------- --------- --------- ------
Cash expenditures:
Employee separation (1)<F1> $ - $ 19 $ 76 $ 36 $ 129 $ 260
Systems development - 127 145 128 - 400
Real estate - 50 66 14 - 130
Relocation - 21 24 20 15 80
Retraining and other - 16 23 22 4 65
------- ------- ------- --------- --------- ------
Total cash expenditures - 233 334 220 148 935
Asset write-down 65 - - 65
------- ------- ------- ------
Total 1993 Restructuring Plan 65 233 334 220 148 1,000
Remaining 1991 plan employee costs (1) - 56 - - - 56
------- ------- ------- --------- --------- ------
Total $ 65 $ 289 $ 334 $ 220 $ 148 $1,056
======= ======= ======= ========= ========= ======
<FN>
<F1>
(1) Employee separation costs, including the balance of the 1991 restructuring reserve at
December 31, 1993, aggregate $316.
</FN>
Actual Actual Estimate (1) Estimate (1)
------ ------ ------------ ------------
Workforce Reductions 1994 1995 1996 1997 Total
- -------------------- ------ ------ ------------ ------------ ------
Employee separations
Managerial 497 682 202 1,357 2,738
Occupational 1,683 1,643 798 3,138 7,262
------ ------ ------------ ------------ ------
Total 2,180 2,325 1,000 4,495 10,000
====== ====== ============ ============ ======
<FN>
<F1>
(1) A significant number of the employee reductions originally scheduled for
1996 will be delayed while the Communications Group focuses on overtime and
contract-labor expenses. The Restructuring Plan is expected to be
substantially complete by the end of 1997.
</FN>
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 associated with the planned reduction of
10,000 employees. System development costs include new systems and the
application of enhanced system functionality to existing single-purpose
systems to provide integrated, end-to-end customer service. Real estate costs
include preparation costs for the new service centers. The Communications
Group has consolidated its 560 customer service centers into 26 centers in 10
cities. The relocation and retraining costs are related to moving employees
to the new service centers and retraining employees on the methods and systems
required in the new, restructured mode of operation.
Progress Under the Restructuring Plan:
Following is a reconciliation of restructuring reserve activity during first
quarter 1996:
Reserve Balance Reserve Balance
December 31, 1995 1996 Activity March 31, 1996
------------------ -------------- ----------------
Employee separations
Managerial $ 68 $ 7 $ 61
Occupational 97 6 91
------------------ -------------- ----------------
Total separations 165 13 152
Systems development
Service delivery 44 8 36
Service assurance 26 1 25
Capacity provisioning 42 11 31
All other 16 5 11
------------------ -------------- ----------------
Total systems 128 25 103
Real estate 14 2 12
Relocation 35 1 34
Retraining and other 26 5 21
------------------ -------------- ----------------
Total $ 368 $ 46 $ 322
================== ============== ================
Cumulative
1994 1995 First Quarter Separations At
Separations Separations 1996 Separations March 31, 1996
----------- ----------- ---------------- --------------
Employee separations
Managerial 497 682 107 1,286
Occupational 1,683 1,643 142 3,468
----------- ----------- ---------------- --------------
Total 2,180 2,325 249 4,754
=========== =========== ================ ==============
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts),
continued
Contingencies
At U S WEST Communications, Inc. ("U S WEST Communications") there are pending
regulatory actions in local regulatory jurisdictions that call for price
decreases, refunds or both. In one such instance, the Utah Supreme Court has
remanded a Utah Public Service Commission ("PSC") order to the PSC for
reconsideration, thereby establishing two exceptions to the rule against
retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $150.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission" ) acted on U S WEST Communications'
1995 rate request. In February 1995, U S WEST Communications sought to
increase revenues by raising rates for basic residential services over a
four-year period. The two major issues in this proceeding involve U S WEST
Communications' requests for improved capital recovery and elimination of the
imputation of Yellow Pages revenue. Instead of granting U S WEST
Communications' request, the Commission ordered approximately $91.5 in annual
revenue reductions, effective May 1, 1996. Based on the above ruling, U S
WEST Communications filed a lawsuit with the King County Superior Court (the
"Court") for an appeal of the order, a temporary stay of the ordered rate
reduction and an authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST
Communications began collecting revenues subject to refund with interest. U S
WEST Communications expects its appeal to be successful and plans not to
accrue any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on U S WEST Communications' future
results of operations.
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 September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court to
enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against
U S WEST on October 11, 1995, alleging misrepresentation, breach of contract
and other misconduct on the part of U S WEST. Time Warner's countersuit
seeks a reformation of the Time Warner Entertainment partnership agreement, an
order that enjoins U S WEST from breaching the partnership agreement, and
unspecified compensatory damages. U S WEST has denied each of the claims in
Time Warner's countersuit. The trial for this action concluded on March 22,
1996. A ruling by the Delaware Chancery Court is expected in June 1996.
Form 10-Q - Part I
COMBINED STATEMENTS OF OPERATIONS
(Unaudited) U S WEST COMMUNICATIONS GROUP
Three Months Ended March 31, 1996 1995
- ----------------------------------------------------------------------------------- -------- --------
Dollars in millions (except per share amounts)
- -----------------------------------------------------------------------------------
Operating revenues:
Local service $ 1,145 $ 1,050
Interstate access service 622 589
Intrastate access service 190 188
Long-distance network services 290 299
Other services 218 192
-------- --------
Total operating revenues 2,465 2,318
Operating expenses:
Employee-related expenses 867 813
Other operating expenses 388 349
Taxes other than income taxes 97 106
Depreciation and amortization 517 499
-------- --------
Total operating expenses 1,869 1,767
-------- --------
Income from operations 596 551
Interest expense 111 101
Gain on sales of rural telephone exchanges - 63
Other expense - net 16 13
-------- --------
Income before income taxes and cumulative effect of change in accounting principle 469 500
Provision for income taxes 175 185
-------- --------
Income before cumulative effect of change in accounting principle 294 315
Cumulative effect of change in accounting principle - net of tax 34 -
-------- --------
NET INCOME $ 328 $ 315
======== ========
Earnings per common share:
Income before cumulative effect of change in accounting principle $ 0.62 $ 0.67
Cumulative effect of change in accounting principle 0.07 -
-------- --------
Earnings per common share $ 0.69 $ 0.67
======== ========
DIVIDENDS PER COMMON SHARE $ 0.535 $ 0.535
AVERAGE COMMON SHARES OUTSTANDING (thousands)
475,056 468,557
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED BALANCE SHEETS
(Unaudited) U S WEST COMMUNICATIONS GROUP
Dollars in millions March 31, 1996 December 31, 1995
- ---------------------------------------- --------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 43 $ 172
Accounts and notes receivable - net 1,508 1,617
Inventories and supplies 211 193
Deferred tax asset 249 259
Prepaid and other 91 51
--------------- ------------------
Total current assets 2,102 2,292
--------------- ------------------
Gross property, plant and equipment 31,657 31,178
Accumulated depreciation 17,886 17,649
--------------- ------------------
Property, plant and equipment - net 13,771 13,529
Other assets 769 764
--------------- ------------------
Total assets $ 16,642 $ 16,585
=============== ==================
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED BALANCE SHEETS
(Unaudited), continued U S WEST COMMUNICATIONS GROUP
Dollars in millions March 31, 1996 December 31, 1995
- ----------------------------------------------- --------------- ------------------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 995 $ 1,065
Accounts payable 783 851
Employee compensation 287 316
Dividends payable 255 254
Current portion of restructuring charge 202 270
Other 997 851
--------------- ------------------
Total current liabilities 3,519 3,607
--------------- ------------------
Long-term debt 5,679 5,689
Postretirement and other postemployment benefit
obligations 2,319 2,351
Deferred taxes, credits and other 1,506 1,462
Communications Group equity 3,619 3,476
--------------- ------------------
Total liabilities and equity $ 16,642 $ 16,585
=============== ==================
Contingencies (See Note B to the Combined Financial Statements.)
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED STATEMENTS OF
CASH FLOWS (Unaudited) U S WEST COMMUNICATIONS GROUP
Three Months Ended March 31, 1996 1995
- --------------------------------------------------------- ------ ------
Dollard in millions
OPERATING ACTIVITIES
Net income $ 328 $ 315
Adjustments to net income:
Depreciation and amortization 517 499
Gain on sales of rural telephone exchanges - (63)
Cumulative effect of change in accounting principle (34) -
Deferred income taxes and amortization
of investment tax credits 24 47
Changes in operating assets and liabilities:
Restructuring payments (42) (77)
Postretirement medical and life costs - net of
cash fundings (34) (238)
Accounts and notes receivable 109 28
Inventories, supplies and other (48) (34)
Accounts payable and accrued liabilities 4 (4)
Other - net (19) (73)
------ ------
Cash provided by operating activities 805 400
------ ------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (640) (541)
Proceeds from sales of rural telephone exchanges - 88
Proceeds from (payments on) disposals of property,
plant and equipment (7) 4
------ ------
Cash (used for) investing activities (647) (449)
------ ------
FINANCING ACTIVITIES
Net (repayments of) proceeds from issuance
of short-term debt (79) 242
Repayments of long-term debt (24) (18)
Dividends paid on common stock (234) (231)
Proceeds from issuance of common stock 50 -
Advance to Media Group - (23)
------ ------
Cash (used for) financing activities (287) (30)
------ ------
CASH AND CASH EQUIVALENTS
Decrease (129) (79)
Beginning balance 172 116
------ ------
Ending balance $ 43 $ 37
====== ======
See Notes to Combined Financial Statements.
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
For the Three Months Ended March 31, 1996 and 1995
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
The Combined Financial Statements have been prepared by U S WEST, Inc. ("U S
WEST" or the "Company") pursuant to the interim reporting rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally accompanying financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. In the opinion of U S WEST's management, the Combined Financial
Statements include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial information set forth
therein. It is suggested that these Combined Financial Statements be read in
conjunction with the 1995 U S WEST Consolidated Financial Statements, the U S
WEST Communications Group Combined Financial Statements and the U S WEST Media
Group Combined Financial Statements and notes thereto included in U S WEST's
proxy statement mailed to all shareowners on April 8, 1996.
Earnings Per Common Share
Earnings per common share and dividends per common share for 1995 have been
presented on a pro forma basis to reflect the Communications Group's stock as
if it had been outstanding since January 1, 1995. For periods prior to the
November 1, 1995 recapitalization, the average common shares outstanding are
assumed to be equal to the average common shares outstanding for U S WEST.
New Accounting Standard
Effective January 1, 1996, U S WEST adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires
that long-lived assets and associated intangibles be written down to fair
value whenever an impairment review indicates that the carrying value cannot
be recovered on an undiscounted cash flow basis. SFAS No. 121 also requires
that a company no longer record depreciation expense on assets held for sale.
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Adoption of SFAS No. 121 resulted in income of $34 (net of tax of $22) from
the cumulative effect of reversing depreciation expense recorded in prior
years related to rural telephone exchanges held for sale. Depreciation
expense was reversed from the date the Company formally committed to a plan to
dispose of the rural exchange assets through January 1, 1996. The income has
been recorded as a cumulative effect of change in accounting principle in
accordance with SFAS No. 121. The carrying value of the rural exchange assets
was approximately $338 at December 31, 1995. As a result of adopting SFAS No.
121, first-quarter depreciation expense was reduced by $8 ($5 after tax, or
$0.01 per share). In 1996, depreciation expense will decrease approximately
$30 as a result of adopting SFAS No. 121. The combined effects of lower
depreciation expense and the cumulative effect of adoption of the new standard
will be directly offset by lower recognized gains on future rural exchange
sales.
B. Contingencies
At U S WEST Communications, Inc. ("U S WEST Communications") there are pending
regulatory actions in local regulatory jurisdictions that call for price
decreases, refunds or both. In one such instance, the Utah Supreme Court has
remanded a Utah Public Service Commission ("PSC") order to the PSC for
reconsideration, thereby establishing two exceptions to the rule against
retroactive ratemaking: 1) unforeseen and extraordinary events, and 2)
misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $150.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission" ) acted on U S WEST Communications'
1995 rate request. In February 1995, U S WEST Communications sought to
increase revenues by raising rates for basic residential services over a
four-year period. The two major issues in this proceeding involve U S WEST
Communications' requests for improved capital recovery and elimination of the
imputation of Yellow Pages revenue. Instead of granting U S WEST
Communications' request, the Commission ordered approximately $91.5 in annual
revenue reductions, effective May 1, 1996. Based on the above ruling, U S
WEST Communications filed a lawsuit with the King County Superior Court (the
"Court") for an appeal of the order, a temporary stay of the ordered rate
reduction and an authorization to implement a revenue increase.
Form 10-Q - Part I
U S WEST COMMUNICATIONS GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST
Communications began collecting revenues subject to refund with interest. U S
WEST Communications expects its appeal to be successful and plans not to
accrue any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on U S WEST Communications' future
results of operations.
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 - FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995
Comparative details of income before cumulative effect of change in accounting
principle for the three months ended March 31 follow:
Three Months Ended March 31, 1996 1995 Percent Change
- --------------------------------------------- ----- ----- ---------------
Income before cumulative effect of change in
accounting principle $ 294 $ 315 (6.7)
===== ===== ===============
Earnings per common share before cumulative
effect of change in accounting principle $0.62 $0.67 (7.5)
===== ===== ===============
Adjusted to exclude nonrecurring items, the Communications Group's
first-quarter 1996 income before cumulative effect of change in accounting
principle was $289, an increase of $13, or 4.7 percent, compared with first
quarter 1995. The nonrecurring items include the 1996 current year, after-tax
impact of $5 from adopting SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and an
after-tax gain of $39 on the sales of rural telephone exchanges in first
quarter 1995.
Adjusted to exclude nonrecurring items, first-quarter 1996 earnings per common
share before cumulative effect of change in accounting principle ("earnings
per share") was $0.61, compared with $0.59 in 1995. The nonrecurring items
include the current year effect of adopting SFAS No. 121 ($0.01 per share) and
the gain on the sale of rural telephone exchanges in 1995 ($0.08 per share).
Effective January 1, 1996, the Communications Group adopted SFAS No. 121,
which among other things, requires that companies no longer record
depreciation expense on assets held for sale. Adoption of SFAS No. 121
resulted in a one-time gain of $34, or $0.07 per share, related to the
cumulative effect of change in accounting principle. The first-quarter,
pretax effect of the SFAS No. 121 adoption resulted in a decrease to
depreciation expense of $8 ($5 after tax).
Increased income at the Communications Group is attributable to higher demand
for services. Partially offsetting the effects of higher demand was an
increase in operating costs to address customer service issues, expenditures
related to development of new products and services, flood conditions in the
Pacific Northwest, increased depreciation expense and higher interest expense.
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 the Communications Group's services resulted in growth in
earnings before interest, taxes, depreciation, amortization and other
("EBITDA") of 6.0 percent for first quarter 1996. EBITDA also excludes the
gain on sales of certain rural telephone exchanges in 1995. The
Communications Group believes EBITDA is an important indicator of the
operational strength of its businesses. EBITDA, however, should not be
considered as an alternative to operating or net income as an indicator of the
performance or as an alternative to cash flows from operating activities as a
measure of liquidity, in each case determined in accordance with generally
accepted accounting principles ("GAAP").
Operating Revenues
An analysis of changes in the Communications Group's operating revenues
follows:
Higher (Higher Increase Increase
Three Months Ended (Lower) Lower (Decrease) (Decrease)
- ---------------------
March 31, 1996 1995 Prices Refunds Demand Other Dollars Percent
- --------------------- ------ ------ -------- --------- -------- ------- ----------- ----------
Local service $1,145 $1,050 $ 7 $ (4) $ 97 $ (5) $ 95 9.0
Interstate access 622 589 (16) - 55 (6) 33 5.6
Intrastate access 190 188 (7) - 11 (2) 2 1.1
Long-distance network 290 299 (3) - (5) (1) (9) (3.0)
Other services 218 192 - - - 26 26 13.5
------ ------ -------- --------- -------- ------- ----------- ----------
Total $2,465 $2,318 $ (19) $ (4) $ 158 $ 12 $ 147 6.3
====== ====== ======== ========= ======== ======= =========== ==========
Local service revenues increased principally as a result of higher demand for
services. Total reported access lines increased 647,000, or 4.5 percent
during the last 12 months, of which 202,000 was attributed to second lines.
Second line installations increased 30 percent during the past year. Access
line growth was 4.8 percent when adjusted for sales of approximately 45,000
rural telephone access lines during the last 12 months. Also contributing to
the increase in local service revenues was expanded growth in new product and
service offerings such as caller identification and call waiting. Local
service revenues from new product and service offerings were approximately $40
for first quarter 1996, an increase of approximately 120 percent compared to
the same period last year.
Higher revenues from interstate access services resulted from an increase of
9.5 percent in interstate billed access minutes of use, which more than offset
the effects of price reductions. Intrastate access revenues increased
slightly as higher demand was largely offset by the effects of price
reductions.
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
Long-distance network revenues decreased primarily due to the effects of
competition and rate reductions. Erosion of long-distance revenue will
continue due to the loss of 1+ dialing in Minnesota, which became effective in
February 1996, and in Arizona, effective in April 1996.
Revenues from other services increased primarily as a result of continued
market penetration in voice messaging services, increases in inside wire
services and sales of customer premise equipment projects, partially offset by
decreases in billing and collection revenues.
Costs and Expenses
Three Months Ended March 31, 1996 1995 Percent Change
- ----------------------------- ----- ----- ---------------
Employee-related expenses $ 867 $ 813 6.6
Other operating expenses 388 349 11.2
Taxes other than income taxes 97 106 (8.5)
Depreciation and amortization 517 499 3.6
Interest expense 111 101 9.9
Other expense - net 16 13 23.1
Employee-related expenses increased $54 compared to the prior year. The
increase is attributable to continued efforts to improve customer service and
to address business growth through expenditures on overtime, contract labor
and workforce additions. Costs related to workforce additions will partially
offset the benefits of employee separations achieved through restructuring.
Salaries and wages, overtime payments and contract labor increased
employee-related expenses by approximately $50 for the first quarter as
compared with the same period last year. Approximately $15 of the overtime
and contract labor increase was attributed to severe flooding in Washington
and Oregon. Partially offsetting these increases was a reduction in the
postretirement benefits accrual and lower travel and conference expenses.
The increase in other operating expenses of $39 is primarily due to increased
uncollectibles, costs related to customer premise equipment projects and
higher advertising costs. Taxes other than income taxes decreased $9 compared
to the prior year primarily as a result of lower than expected tax assessments
and mill levies.
Increased depreciation and amortization expense was attributable to the
effects of a higher depreciable asset base, partially offset by the effects of
1995 sales of rural telephone exchanges and the adoption of SFAS No. 121.
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
Interest expense increased primarily due to higher interest rates associated
with refinancing commercial paper in the latter part of 1995. Slightly higher
debt levels also contributed to the increase in interest expense.
Liquidity and Capital Resources
Cash provided by operations increased by $405 in 1996 to $805. The increase
is primarily due to growth in EBITDA, decreases in the cash funding of
postretirement benefits and lower restructuring expenditures.
During the first quarter, debt decreased by $80 and the percentage of debt to
total capital decreased from 66.0 percent at December 31, 1995, to 64.8
percent at March 31, 1996. The reduction of debt since year end was achieved
through increased operating cash flow.
In connection with the Washington State Utilities and Transportation
Commission's $91.5 rate reduction order (See "Contingencies"), U S WEST
Communications debt securities have been placed on rating watch by Duff &
Phelps. The credit rating of U S WEST Communications' debt securities was not
placed under review by Moody's and is under review by Fitch and Standard &
Poors.
Restructuring
The Communications Group's 1993 results reflected an $880 restructuring charge
(pretax). The related restructuring plan (the "Restructuring Plan") is
designed to provide faster, more responsive customer services while reducing
the costs of providing these services.
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
Following are schedules of the costs and planned workforce reductions included
in the Restructuring Plan:
Actual Actual Estimate Estimate
------- ------- --------- ---------
Restructuring Plan Costs 1994 1995 1996 1997 Total
- -------------------------------------- ------- ------- --------- --------- ------
Cash expenditures:
Employee separation (1)<F1> $ 19 $ 76 $ 33 $ 127 $ 255
Systems development 118 129 113 - 360
Real estate 50 66 14 - 130
Relocation 21 21 20 13 75
Retraining and other 8 23 22 7 60
------- ------- --------- --------- ------
Total cash expenditures 216 315 202 147 880
Remaining 1991 plan employee costs (1) 56 - - - 56
------- ------- --------- --------- ------
Total $ 272 $ 315 $ 202 $ 147 $ 936
======= ======= ========= ========= ======
<FN>
<F1>
(1) Employee separation costs, including the balance of the 1991 restructuring reserve
at December 31, 1993, aggregate $311.
</FN>
Actual Actual Estimate Estimate
------ ------ -------- --------
Workforce Reductions 1994 1995 (1) 1996 (1) 1997 Total
- -------------------- ------ ------ -------- -------- ------
Employee separations
Managerial 497 682 202 1,357 2,738
Occupational 1,683 1,643 798 3,138 7,262
------ ------ -------- -------- ------
Total 2,180 2,325 1,000 4,495 10,000
====== ====== ======== ======== ======
<FN>
<F1>
(1) A significant number of the employee reductions originally scheduled for
1996 will be delayed while the Communications Group focuses on overtime and
contract-labor expenses. The Restructuring Plan is expected to be
substantially complete by the end of 1997.
</FN>
Employee separation costs include severance payments, health-care coverage and
postemployment education benefits associated with the planned reduction of
10,000 employees. System development costs include new systems and the
application of enhanced system functionality to existing single-purpose
systems to provide integrated, end-to-end customer service. Real estate costs
include preparation costs for the new service centers. The Communications
Group has consolidated its 560 customer service centers into 26 centers in 10
cities. The relocation and retraining costs are related to moving employees
to the new service centers and retraining employees on the methods and systems
required in the new, restructured mode of operation.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts),
continued
Progress Under the Restructuring Plan:
Following is a reconciliation of restructuring reserve activity during first
quarter 1996:
Reserve Balance Reserve Balance
------------------ ----------------
December 31, 1995 1996 Activity March 31, 1996
------------------ -------------- ----------------
Employee separations
Managerial $ 63 $ 7 $ 56
Occupational 97 6 91
------------------ -------------- ----------------
Total separations 160 13 147
Systems development
Service delivery 44 8 36
Service assurance 26 1 25
Capacity provisioning 42 11 31
All other 1 1 -
------------------ -------------- ----------------
Total systems 113 21 92
Real estate 14 2 12
Relocation 33 1 32
Retraining and other 29 5 24
------------------ -------------- ----------------
Total $ 349 $ 42 $ 307
================== ============== ================
1994 1995 First-Quarter Cumulative
Separations Separations 1996 Separations Separations At
------------ ------------ ----------------
March 31,1996
--------------
Employee separations
Managerial 497 682 107 1,286
Occupational 1,683 1,643 142 3,468
------------ ------------ ---------------- --------------
Total 2,180 2,325 249 4,754
============ ============ ================ ==============
Form 10-Q - Part I
Item 2. Management's' Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions, except per share amounts),
continued
Contingencies
There are pending regulatory actions in local regulatory jurisdictions that
call for price decreases, refunds or both. In one such instance, the Utah
Supreme Court has remanded a Utah Public Service Commission ("PSC") order to
the PSC for reconsideration, thereby establishing two exceptions to the rule
against retroactive ratemaking: 1) unforeseen and extraordinary events, and
2) misconduct. The PSC's initial order denied a refund request from
interexchange carriers and other parties related to the Tax Reform Act of
1986. This action is still in the discovery process. If a formal filing -
made in accordance with the remand from the Supreme Court - alleges that the
exceptions apply, the range of possible risk is $0 to $150.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission") acted on U S WEST Communications' 1995
rate request. In February 1995, U S WEST Communications sought to increase
revenues by raising rates for basic residential services over a four-year
period. The two major issues in this proceeding involve U S WEST
Communications' requests for improved capital recovery and elimination of the
imputation of Yellow Pages revenue. Instead of granting U S WEST
Communications' request, the Commission ordered approximately $91.5 in annual
revenue reductions, effective May 1, 1996. Based on the above ruling, U S
WEST Communications filed a lawsuit with the King County Superior Court (the
"Court") for an appeal of the order, a temporary stay of the ordered rate
reduction and an authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST
Communications began collecting revenues subject to refund with interest. U S
WEST Communications expects its appeal to be successful and plans not to
accrue any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on U S WEST Communications' future
results of operations.
Form 10-Q - Part I
COMBINED STATEMENTS OF OPERATIONS U S WEST MEDIA GROUP
(Unaudited)
Three Months Ended March 31, 1996 1995
- --------------------------------------------------- --------- --------
Dollars in millions (except per share amounts)
Sales and other revenues:
Directory and information services $ 288 $ 272
Wireless communications 264 202
Cable and telecommunications 57 54
Other 4 8
--------- --------
Total sales and other revenues 613 536
Operating expenses:
Cost of sales and other revenues 199 163
Selling, general and administrative expenses 218 197
Depreciation and amortization 67 61
--------- --------
Total operating expenses 484 421
Income from operations 129 115
Interest expense 24 27
Equity losses in unconsolidated ventures 66 57
Guaranteed minority interest expense 12 -
Other income (expense) - net (7) 7
--------- --------
Income before income taxes 20 38
Provision for income taxes 17 23
--------- --------
NET INCOME $ 3 $ 15
========= ========
Dividends on preferred stock 1 1
--------- --------
EARNINGS AVAILABLE FOR COMMON STOCK $ 2 $ 14
--------- --------
EARNINGS PER COMMON SHARE $ - $ 0.03
AVERAGE COMMON SHARES OUTSTANDING (thousands)
473,003 468,557
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED BALANCE SHEETS U S WEST MEDIA GROUP
Unaudited)
Dollars in millions March 31, 1996 December 31, 1995
- ----------------------------------------- --------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 27 $ 20
Accounts and notes receivable - net 296 287
Deferred directory costs 251 247
Receivable from Communications Group 93 106
Other 87 81
--------------- ------------------
Total current assets 754 741
--------------- ------------------
Gross property, plant and equipment 1,796 1,706
Accumulated depreciation 603 558
--------------- ------------------
Property, plant and equipment - net 1,193 1,148
Investment in Time Warner Entertainment 2,492 2,483
Intangible assets - net 1,779 1,798
Investments in international ventures 1,440 1,511
Net investment in assets held for sale 424 429
Other assets 529 505
--------------- ------------------
Total assets $ 8,611 $ 8,615
=============== ==================
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED BALANCE SHEETS
(Unaudited), continued U S WEST MEDIA GROUP
March 31, December 31,
----------- --------------
Dollars in millions 1996 1995
- --------------------------------------------------------- ----------- --------------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt $ 774 $ 836
Accounts payable 181 235
Deferred revenue and customer deposits 81 87
Other 448 411
----------- --------------
Total current liabilities 1,484 1,569
----------- --------------
Long-term debt 1,345 1,265
Deferred taxes, credits and other 639 658
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company-
guaranteed debentures 600 600
Preferred stock subject to mandatory redemption 51 51
Media Group equity 4,657 4,637
Company LESOP guarantee (127) (127)
Foreign currency translation adjustments (38) (38)
----------- --------------
Total equity 4,492 4,472
----------- --------------
Total liabilities and equity $ 8,611 $ 8,615
=========== ==============
Contingencies (See Note D to the Combined Financial Statements)
See Notes to Combined Financial Statements.
Form 10-Q - Part I
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited) U S WEST MEDIA GROUP
Three Months Ended March 31, 1996 1995
- -------------------------------------------------------- ------ ------
Dollars in millions
OPERATING ACTIVITIES
Net income $ 3 $ 15
Adjustments to net income:
Depreciation and amortization 67 61
Equity losses in unconsolidated ventures 66 57
Deferred income taxes and amortization
of investment tax credits (17) (27)
Provision for uncollectibles 14 13
Changes in operating assets and liabilities:
Accounts and notes receivable (10) (9)
Deferred directory costs, prepaid and other (12) (9)
Accounts payable and accrued liabilities 6 (96)
Other - net (7) 75
------ ------
Cash provided by operating activities 110 80
------ ------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (117) (76)
Investment in international ventures (104) (182)
Cash (to) from net investment in assets held for sale 3 (60)
Other - net (24) (63)
------ ------
Cash (used for) investing activities (242) (381)
------ ------
FINANCING ACTIVITIES
Net proceeds from issuance of short-term debt 139 435
Repayments of long-term debt (97) (150)
Proceeds from issuance of long-term debt 76 -
Proceeds from issuance of common stock 21 11
Advance from Communications Group - 23
------ ------
Cash provided by financing activities 139 319
------ ------
CASH AND CASH EQUIVALENTS
Increase 7 18
Beginning balance 20 93
------ ------
Ending balance $ 27 $ 111
====== ======
See Notes to Combined Financial Statements
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in millions)
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
The Combined Financial Statements have been prepared by U S WEST, Inc. ("U S
WEST" or the "Company") pursuant to the interim reporting rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally accompanying financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such SEC rules and
regulations. In the opinion of U S WEST's management, the Combined Financial
Statements include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the financial information set forth
therein. It is suggested that these Combined Financial Statements be read in
conjunction with the 1995 U S WEST Consolidated Financial Statements, the U S
WEST Media Group Combined Financial Statements and the U S WEST Communications
Group Combined Financial Statements and notes thereto included in U S WEST's
proxy statement mailed to all shareowners on April 8, 1996.
Earnings Per Common Share
Earnings per common share for 1995 has been presented on a pro forma basis to
reflect the Media Group's stock as if it had been outstanding since January 1,
1995. For periods prior to the November 1, 1995 recapitalization, the average
common shares outstanding are assumed to be equal to the average common shares
outstanding for U S WEST.
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, 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 March 31 1996 March 31, 1995
- ------------------------------ -------------- ---------------
Revenues $ 2,485 $ 2,046
Operating expenses*<F1> 2,217 1,855
Interest and other - net**<F2> 156 176
-------------- ---------------
Income before income taxes $ 112 $ 15
Net income $ 94 $ 4
============== ===============
<FN>
<F1>
* Includes depreciation and amortization of $288 and $226 for the three
months ended March 31, 1996 and 1995, respectively.
<F2>
** Includes corporate services of $17 and $15 for the three months ended
March 31, 1996 and 1995, respectively.
</FN
U S WEST accounts for its investment in TWE under the equity method of
accounting. U S WEST's recorded share of TWE operating results represents
allocated TWE net income or loss adjusted for the amortization of the excess
of the fair market value over the book value of the partnership net assets.
The Company's recorded share of TWE operating results was $9 and $(13) for the
three months ended March 31, 1996 and 1995, respectively.
C. AirTouch Joint Venture
In July 1994, U S WEST signed an agreement with AirTouch Communications, Inc.
("AirTouch") to combine their domestic cellular properties into a partnership
in a multi-phased transaction. During Phase I, which commenced on November 1,
1995, the partners are operating their cellular properties separately. A
Wireless Management Company has been formed and is providing centralized
services to both companies on a contract basis. In Phase II, the partners
will combine their domestic properties into a partnership, subject to
obtaining certain authorizations. The parties are seeking to obtain
regulatory and other approvals precedent to entering into Phase II. The
recent passage of the Telecommunications Act of 1996 has removed significant
regulatory barriers to completion of Phase II. The interests in the
partnership at the commencement of Phase II depend, among other things, on the
timing of the Phase II closing and the ability of the partners to combine
their domestic properties. Currently management expects the interests in the
partnership will adjust from the previously disclosed 70 percent AirTouch and
30 percent U S WEST, to approximately 74 percent AirTouch and 26 percent U S
WEST. This adjustment reflects the planned acquisition of certain cellular
properties by AirTouch. U S WEST's interest in the
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
partnership will further adjust depending on the timing of the contribution of
its PCS investment. The timing of such contribution is at U S WEST's
discretion and will occur either at the closing of Phase II or a date selected
by U S WEST, no later than mid-1998.
D. Contingencies
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court to
enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against
U S WEST on October 11, 1995, alleging misrepresentation, breach of contract
and other misconduct on the part of U S WEST. Time Warner's countersuit
seeks a reformation of the Time Warner Entertainment partnership agreement, an
order that enjoins U S WEST from breaching the partnership agreement, and
unspecified compensatory damages. U S WEST has denied each of the claims in
Time Warner's countersuit. The trial for this action concluded on March 22,
1996. A ruling by the Delaware Chancery Court is expected in June 1996.
E. Continental Acquisition
On February 27, 1996, U S WEST announced a definitive agreement to merge with
Continental Cablevision, Inc. ("Continental"). Continental is the nation's
third-largest cable operator. U S WEST will purchase all of Continental's
stock for approximately $5.3 billion and will assume Continental's debt and
other obligations, which amounted to approximately $5.5 billion at
announcement date. The transaction, which is expected to close by the end of
1996, is subject to a number of conditions and approvals.
F. Debt Exchangeable for Common Stock (Subsequent Event)
On May 13, 1996, U S WEST issued $254 of Debt Exchangeable for Common Stock
("DECS") to Salomon Inc due May 15, 1999, in the principal amount of $26.63
per note. The notes bear interest at 7.625 percent. Upon maturity, each DECS
will be mandatorily redeemed by U S WEST for shares of Financial Security
Assurance Holdings Ltd. ("FSA"), held by U S WEST or the cash equivalent, at U
S WEST's option. The number of shares to be delivered at maturity varies
based on the per share market price of FSA. If the market price is $26.63 per
share or less, one share of FSA will be delivered for each note; if the market
price is between $26.63 and $32.48 per share, a fractional share is delivered
so that the value at maturity is equal to $26.63; if the market value is
greater than $32.48 per share, .8197 shares are delivered. The capital assets
segment currently owns approximately 50 percent of the outstanding FSA common
stock. The shares of FSA to be delivered upon maturity of the DECS, combined
with the exercise of outstanding options held by Fund American Enterprises
Holdings, Inc. to purchase
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
FSA shares and the recently announced plans to sell additional FSA shares
would, if consummated, result in a complete disposition of U S WEST's
ownership in FSA.
G. Net Investment in Assets Held for Sale
Effective January 1, 1995, the capital assets segment has been accounted for
in accordance with Staff Accounting Bulletin No. 93, issued by the Securities
Exchange Commission, which requires discontinued operations not disposed of
within one year of the measurement date to be accounted for prospectively in
continuing operations as a "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, charged to continuing operations.
To date, no such adjustment has been required. Prior to January 1, 1995, the
entire capital assets segment was accounted for as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30.
Building sales and operating revenues of the capital assets segment were $30
and $75 for the three months ended March 31, 1996 and 1995, respectively.
The components of net investment in assets held for sale follow:
March 31, December 31,
---------- -------------
1996 1995
---------- -------------
ASSETS
Cash $ 44 $ 38
Finance receivables - net 943 953
Investment in real estate - net of valuation allowance 363 368
Bonds, at market value 146 149
Investment in FSA 388 384
Other assets 171 177
---------- -------------
Total assets $ 2,055 $ 2,069
---------- -------------
LIABILITIES
Debt $ 788 $ 796
Deferred income taxes 688 686
Accounts payable, accrued liabilities and other 145 148
Minority interests 10 10
---------- -------------
Total liabilities 1,631 1,640
---------- -------------
Net investment in assets held for sale $ 424 $ 429
---------- -------------
Form 10-Q - Part I
U S WEST MEDIA GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS, continued
(Dollars in millions)
(Unaudited)
Revenues of U S WEST Financial Services were $7 and $10 for the three months
ended March 31, 1996 and 1995, respectively. Selected financial data for U S
WEST Financial Services follows:
March 31, 1996 December 31, 1995
--------------- ------------------
Net finance receivables $ 928 $ 931
Total assets 1,074 1,085
Total debt 269 274
Total liabilities 1,015 1,024
Equity 59 61
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions)
The following discussion is based on the U S WEST Media Group Combined
Financial Statements prepared in accordance with GAAP. The discussion should
be read in conjunction with the U S WEST, Inc. Consolidated Financial
Statements. A discussion of the Media Group's operations on a proportionate
basis follows the GAAP discussion.
RESULTS OF OPERATIONS - FIRST QUARTER 1996 COMPARED WITH FIRST QUARTER 1995
Sales and Other Revenues
Three Months Ended March 31, 1996 1995 Percent Change
- ----------------------------------- ----- ----- ---------------
Directory and information services:
Domestic $ 271 $ 258 5.0
International 17 14 21.4
----- ----- ---------------
288 272 5.9
Wireless communications:
Cellular service 239 186 28.5
Cellular equipment 25 16 56.3
----- ----- ---------------
264 202 30.7
Cable and telecommunications 57 54 5.6
Other 4 8 (50.0)
----- ----- ---------------
Sales and other revenues $ 613 $ 536 14.4
===== ===== ===============
Media Group sales and other revenues increased 14.4 percent to $613 in 1996.
The increase was primarily due to strong growth in cellular service revenue.
Directory and Information Services Revenues related to Yellow Pages directory
advertising increased approximately $15, or 6.1 percent, in the first quarter
compared with 1995 due to price increases of 4.0 percent, higher revenue per
advertiser and an increase in Yellow Pages advertising volume.
International directory publishing revenues increased $3 in 1996, primarily
due to an increase in the number of directories published and increased
advertisers.
Wireless Communications Cellular service revenues increased $53, or 28.5
percent in 1996. This increase is due to a 50 percent increase in subscribers
during the last twelve months, partially offset by a 14 percent drop in
average revenue per subscriber to $53.00 per month. The increase in
subscribers relates to continued growth in demand for wireless services.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Cellular equipment revenues increased $9, or 56.3 percent in 1996. This
increase is primarily due to a significant increase in unit sales associated
with a 50 percent increase in gross customer additions, partially offset by a
decrease in selling price per unit.
Cable and Telecommunications Cable and telecommunications revenues increased
$5, or 10.2 percent in 1996. This percent increase gives effect to a change
in the method of recording franchise fees implemented in late 1995 as if it
was in effect throughout 1995. The increase is primarily a result of a 6.7
percent increase in subscribers and price increases.
Income from Operations
Three Months Ended March 31, 1996 1995 Percent Change
- ----------------------------------- ------ ------ ---------------
Directory and information services:
Domestic $ 110 $ 104 5.8
International (8) (5) (60.0)
------ ------ ---------------
102 99 3.0
Wireless communications 50 33 51.5
Cable and telecommunications 8 4 100.0
Other (31) (21) (47.6)
------ ------ ---------------
Income from operations $ 129 $ 115 12.2
====== ====== ===============
During 1996, Media Group operating income increased 12.2 percent, to $129, and
EBITDA increased 11.4 percent, to $196. The increases were primarily due to
strong growth in wireless communications operations. The Media Group
considers EBITDA an important indicator of the operational strength and
performance of its businesses. EBITDA, however, should not be considered as
an alternative to operating or net income as an indicator of the performance
of the Media Group's businesses or as an alternative to cash flows from
operating activities as a measure of liquidity, in each case determined in
accordance with GAAP.
Directory and Information Services During 1996, operating income related to
domestic Yellow Pages directory advertising increased $3, or 2.4 percent, and
EBITDA increased 3.1 percent, to $133. These percent increases give effect to
a 1996 change in the amount of Media Group corporate costs allocated to the
Yellow Pages directory business as if it were in effect throughout 1995.
Revenue increases of $15 were partially offset by operating cost increases of
$12, primarily due to an approximate 11 percent increase in paper, printing,
delivery and distribution costs. New product development activities reduced
domestic directory and information services operating income by $18 in 1996,
compared with $19 in 1995. Increased operating costs led to an EBITDA margin
related to the Yellow Pages operations of 50 percent in 1996, compared with
51.7 percent in 1995, on a comparable basis.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Operating income for international directory publishing operations decreased
$3 in 1996 due to increased operating expenses.
Wireless Communications Cellular operating income increased 39 percent, to
$50, and cellular EBITDA increased 33 percent, to $84 in 1996. These percent
increases give effect to a 1996 change in the amount of Media Group corporate
costs allocated to the cellular business as if it were in effect throughout
1995. The increase in operating income is a result of revenue increases
associated with the rapidly expanding subscriber base combined with efficiency
gains. The 1996 decline in revenue per subscriber of 14 percent has been more
than offset by decreases in the cost incurred to acquire a customer and the
cost to support a customer. Support costs per subscriber decreased 23 percent
and acquisition cost per subscriber added decreased 8 percent in 1996.
The cellular communications business is realizing operating scale efficiencies
that have resulted in an increase in 1996 cellular service EBITDA margin to
35.1 percent, as compared with 33.8 percent in 1995, on a comparable basis.
Cable and Telecommunications Cable and telecommunications operating income
increased $4 in 1996. The increase in operating income is a result of revenue
increases associated with expansion of the subscriber base and price
increases.
Other Other operating income decreased primarily due to a decrease in the
amount of Media Group corporate costs allocated to the Yellow Pages and
cellular businesses and an increase in the amount of U S WEST corporate costs
allocated to the Media Group.
Interest Expense and Other
Three Months Ended March 31, 1996 1995 Percent Change
- ---------------------------------------- ------ ----- ---------------
Interest expense $ 24 $ 27 (11.1)
Equity losses in unconsolidated ventures 66 57 15.8
Guaranteed minority interest expense 12 - -
Other income (expense) - net (7) 7 -
Interest expense decreased $3 in 1996, due primarily to decreases in debt
related to the investment in TWE and a refinancing of commercial paper by
issuing Company-obligated mandatorily redeemable preferred securities of a
subsidiary trust holding solely Company-guaranteed debentures ("Preferred
Securities"). U S WEST issued $600 of Preferred Securities in the third
quarter of 1995.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Equity losses increased $9 in 1996, primarily due to increased financing costs
associated with expansion of the network at TeleWest and start-up and other
costs associated with new international investments and the domestic PCS
PrimeCo investment. The Media Group expects losses related to international
ventures will be significant in 1996. Increased losses related to
international investments were partially offset by increased earnings related
to the investment in TWE. The increase in TWE earnings is a result of
improved results from the filmed entertainment, cable and programming-HBO
divisions. Cable subscribers served by TWE increased 6.5 percent compared to
a year ago excluding the impact of 1995 cable transactions.
Guaranteed minority interest expense reflects the issuance of Preferred
Securities in the third quarter of 1995.
Other income (expense) decreased $14 in 1996, compared with 1995, partially
due to foreign exchange losses of $7.
Provision for Income Taxes
Three Months Ended March 31, 1996 1995 Percent Change
- ---------------------------- ------ ------ ---------------
Provision for income taxes $ 17 $ 23 (26.1)
Effective tax rate 85.0% 60.5% -
The increase in the effective tax rate reflects the impact of lower pretax
income in relationship to goodwill amortization, primarily related to the
acquisition of the Atlanta Systems, and foreign income taxes. These
relationships could vary significantly during the year depending on the level
of pretax income.
Net Income
Net income of the Media Group decreased $12, or 80 percent in 1996. The
decrease is due primarily to increased guaranteed minority interest expense
associated with the 1995 issuance of Preferred Securities to finance expansion
in domestic and international investments, increased equity losses associated
with unconsolidated international ventures and the effect of foreign exchange
losses. These decreases in net income were partially offset by improvement in
the wireless communications business.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities of the Media Group increased $30 in the
first quarter of 1996, as compared with 1995. Growth in operating cash flow
from the cellular operations and lower federal income tax payments contributed
to the increase.
Investing Activities
Capital expenditures of the Media Group were $117 for the first quarter of
1996. The majority of expenditures in 1996 were devoted to the enhancement
and expansion of the cellular network and upgrade of the Atlanta cable systems
to 750 megahertz capacity.
Investments in international ventures were $104 for the first quarter of 1996.
Significant 1996 investments include additional capital contributions to the
PCS investment in the United Kingdom, Mercury One 2 One ("One 2 One") and the
purchase of a 23 percent interest in a venture to provide wireless service in
Poland.
Financing Activities
Debt increased $18 at March 31, 1996, as compared with December 31, 1995.
Increases in commercial paper were partially offset by reductions in debt
related to an investment in a cable television venture in the Netherlands and
the investment in TWE.
At March 31, 1996, U S WEST guaranteed debt associated with its international
investments in the principal amount of approximately $144.
Excluding debt associated with the capital assets segment, the Media Group's
percentage of debt to total capital at March 31, 1996, was 29.2 percent
compared with 29.1 percent at December 31, 1995. Including debt associated
with the capital assets segment, Preferred Securities and other preferred
stock, the Media Group's percentage of debt to total capital was 44.2 percent
at March 31, 1996, and December 31, 1995.
In connection with U S WEST's announcement on February 27, 1996 of a planned
merger with Continental, U S WEST, Inc.'s credit rating is being reviewed by
credit rating agencies, which may result in a downgrading.
The Media group expects that cash from operations will not be adequate to fund
expected cash requirements in the foreseeable future. Additional financing
will come primarily from new debt. See "Note E - Continental Acquisition" to
the U S WEST Media Group Combined Financial Statements.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Selected Proportionate Data
The following table and discussion is not required by GAAP or intended to
replace the Combined Financial Statements prepared in accordance with GAAP.
It is presented supplementally because the Media Group believes that
proportionate financial and operating data facilitate the understanding and
assessment of its Combined Financial Statements. The table does not reflect
financial data of the capital assets segment. The financial information
included below departs materially from GAAP because it aggregates the revenues
and operating income of entities not controlled by the Media Group with those
of the consolidated operations of the Media group.
Cable & Cable & Wireless Wireless Directory & Info
Telecom-munications Telecom- Com- Com-munications Services
Dom. (1)<F1> munications munications Int'l Dom.
--------------------- ----------------- -----------------
Int'l Dom.
------------- ------------
Three Months Ended
March 31, 1996
Revenues $ 691 $ 61 $ 240 $ 88 $ 271
Operating income (loss) 58 (31) 38 (22) 110
Net income (loss) (3) (37) 17 (24) 66
EBITDA (2)<F2> $ 165 $ (9) $ 69 $ 1 $ 117
Subscribers (thousands) 2,929 625 1,437 334 482
THREE MONTHS ENDED
MARCH 31, 1995 (3)<F3>
Revenues $ 576 $ 24 $ 167 $ 60 $ 258
Operating income (loss) 31 (21) 27 (21) 103
Net income (loss) (18) (11) 15 (28) 62
EBITDA (2) $ 124 $ (11) $ 51 $ (12) $ 109
Subscribers (thousands) 2,422 231 885 205 470
Directory & Info.
Services Corp.
Int'l and
-------------------
Other Total
------- ------
Three Months Ended
March 31, 1996
Revenues $ 32 $ 3 $1,386
Operating income (loss) (7) (12) 134
Net income (loss) (7) (9) 3
EBITDA (2)<F2> $ (4) $ (9) $ 330
Subscribers (thousands) 282 - 6,089
THREE MONTHS ENDED
MARCH 31, 1995 (3)<F3>
Revenues $ 14 $ 8 $1,107
Operating income (loss) (7) 3 115
Net income (loss) (4) (1) 15
EBITDA (2) $ (4) $ 6 $ 263
Subscribers (thousands) 150 - 4,363
<FN>
<F1>
(1) The proportionate results are based on the Media Group's 25.51 percent pro rata priority and residual equity
interests in reported TWE results. The reported TWE results are prepared in accordance with GAAP and have
not been adjusted to report TWE results on a proportionate basis.
<F2>
(2) Proportionate EBITDA represents the Media Group's equity interest in the entities multiplied by the entity's
EBITDA. As such, proportionate EBITDA does not represent cash available to the Media Group.
<F3>
(3) Previously reported amounts have been reclassified to conform to the current presentation.
</FN>
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
PROPORTIONATE RESULTS OF OPERATIONS - FIRST QUARTER 1996 COMPARED WITH FIRST
QUARTER 1995
Proportionate Media Group revenues increased 25 percent, to $1.4 billion,
EBITDA increased 25 percent, to $330, and subscribers/advertisers increased 40
percent to 6.1 million. Strong growth in both domestic cable and
telecommunications and wireless communications contributed to the increases.
Cable and Telecommunications During 1996, proportionate revenues for the
domestic cable and telecommunications operations increased 20 percent, to
$691, and proportionate EBITDA increased 13 percent, excluding the one-time
impact of 1995 TWE cable transactions and the change in corporate costs
allocated by the Media Group. Proportionate revenue and EBITDA growth is
primarily due to TWE cable, programming and filmed entertainment operations.
Cable growth is attributed to subscriber growth of 6.5 percent, excluding the
impact of 1995 TWE cable transactions.
During 1996, international cable and telecommunications proportionate revenues
increased $37, to $61, and proportionate EBITDA increased $1 to ($9), on a
comparable basis. New investments in the Netherlands, Czech Republic and
Indonesia contributed significantly to the increase in proportionate revenues.
Proportionate subscribers to the international cable joint ventures in the
United Kingdom, Norway, Sweden, Hungary and Japan grew to 272,000, a 17.7
percent increase from a year ago. Including the recent acquisitions in the
Czech Republic and Netherlands, proportionate international cable subscribers
total approximately 625,000 at March 31, 1996, a 171 percent increase.
Wireless Communications During 1996, proportionate revenues for the domestic
cellular operations increased 44 percent, to $240, and proportionate EBITDA
increased 40 percent, to $76, excluding the one-time impact of the change in
Media Group cost allocations. Proportionate cellular service revenues
increased 41 percent, to $217, in 1996. This increase is due to a 50 percent
increase in proportionate subscribers, on a same property basis, partially
offset by a decrease in average revenue per subscriber.
During 1996, proportionate revenues for the international wireless operations
increased 47 percent, to $88, and proportionate EBITDA increased $13 to $1.
Strong results from One 2 One and Hungarian cellular contributed to the
increases in proportionate revenues and EBITDA.
Proportionate subscribers to international wireless joint ventures in the
United Kingdom, Hungary, the Czech Republic, Slovakia, Russia and Malaysia
grew to 334,000 at March 31, 1996, a 61 percent increase from a year ago. One
2 One added 76,000 proportionate customers, a 58 percent increase.
Form 10-Q - Part I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollars in millions), continued
Directory and Information Services Proportionate revenues for domestic
directory and information services increased 5 percent, to $271 in 1996, and
proportionate EBITDA increased 5 percent, to $117, excluding the one-time
impact of the change in Media Group cost allocations. The increases are due
to price and volume increases.
Proportionate revenues for international directories businesses increased $18,
to $32 in 1996, and proportionate EBITDA was unchanged at ($4). A new
investment in a Brazilian directories operation contributed to the increase in
proportionate revenues.
Form 10-Q - Part II
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
U S WEST and its subsidiaries are subject to claims and proceedings arising in
the ordinary course of business. While complete assurance cannot be given as
to the outcome of any contingent liabilities, in the opinion of U S WEST, any
financial impact to which U S WEST and its subsidiaries are subject is not
expected to be material in amount to U S WEST's operating results or its
financial position.
On April 11, 1996, the Washington State Utilities and Transportation
Commission ("WUTC" or the "Commission" ) acted on U S WEST Communications'
1995 rate request. In February 1995, U S WEST Communications sought to
increase revenues by raising rates for basic residential services over a
four-year period. The two major issues in this proceeding involve U S WEST
Communications' requests for improved capital recovery and elimination of the
imputation of Yellow Pages revenue. Instead of granting U S WEST
Communications' request, the Commission ordered approximately $91.5 in annual
revenue reductions, effective May 1, 1996. Based on the above ruling, U S
WEST Communications filed a lawsuit with the King County Superior Court (the
"Court") for an appeal of the order, a temporary stay of the ordered rate
reduction and an authorization to implement a revenue increase.
On April 29, 1996, the Court stayed the rate decreases ordered by the WUTC.
The Court granted the stay for a period of six months or until a decision is
made on U S WEST Communications' appeal. Effective May 1, 1996, U S WEST
Communications began collecting revenues subject to refund with interest. U S
WEST Communications expects its appeal to be successful and plans not to
accrue any of the amounts subject to refund. However, an adverse judgment on
the appeal would have a significant impact on U S WEST Communications' future
results of operations.
On September 22, 1995, U S WEST filed a lawsuit in Delaware Chancery Court to
enjoin the proposed merger of Time Warner and Turner Broadcasting. U S WEST
has alleged breaches of contract and fiduciary duties by Time Warner in
connection with this proposed merger. Time Warner filed a countersuit against
U S WEST on October 11, 1995, alleging misrepresentation, breach of contract
and other misconduct on the part of U S WEST. Time Warner's countersuit
seeks a reformation of the Time Warner Entertainment partnership agreement, an
order that enjoins U S WEST from breaching the partnership agreement, and
unspecified compensatory damages. U S WEST has denied each of the claims in
Time Warner's countersuit. The trial for this action concluded on March 22,
1996. A ruling by the Delaware Chancery Court is expected in June 1996.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
11 Statement regarding computation of earnings per share of U S WEST,
Inc.
12 Statement regarding computation of earnings to fixed charges ratio of U
S WEST, Inc.
(b) Reports on Form 8-K filed during the first quarter
(i) Form 8-K report dated February 12, 1996, concerning the release
of earnings for the year ended December 31, 1995; and
(ii) Form 8-K report dated February 28, 1996, concerning U S WEST 's
press release entitled "U S WEST Media Group Announces Continental Cablevision
Has Agreed To a Merger, Creating a World Leader in Cable Communications."
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.
U S WEST, Inc.
/S/ Michael P. Glinsky
________________________________
Michael P. Glinsky
Executive Vice President and
Chief Financial Officer
May 14, 1996